A. Introduction:
> With respect to owning a land, land-owner enjoys different types of rights on the same like cultivation right, easement right etc. One of such rights is develop such land for agriculture, commercial, residential, industrial or any other purpose. Thus, possessing various rights to modify an immovable property is known as development rights.
> Once the rights transferred; the developer possesses exclusive, irrevocable and permanent right for the development and landowner cannot transfer the rights further; the right to assign or transfer the rights remain with the developer.
> Joint Venture Contracts for transfer of development rights between Landowner and developer can be of two types broadly:
I. Contracts in which after development of property area of built up structure is shared between land owner and the developer.
II. Contracts in which sale proceeds of developed property are shared by the land owner and the developer.
In this article, we would explain current treatment of transfer of development rights under the GST Law and also try to discuss the controversy which establishes that imposing GST on transfer of development rights is illegal, unconstitutional and impractical.
B. Current Position of Transfer of development rights under GST:
I. Fully Residential Projects:
| Particulars | Detail |
| a. Liability | Promoter liable to pay GST under Reverse Charge Mechanism. |
| b. Tax Rate | 18% [SAC Code: 9972] |
| c. Valuation | Value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.
[Para: 1A Notification: 04/2019 Dt. 29th March, 2019] |
| d. Maximum Cap on the Tax Liability | 1% of un-booked value of affordable apartments and 5% of un-booked value of non-affordable apartments.
[Para: 1B – Value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be.] [Notification: 04/2019 Dt. 29th March, 2019] |
| e. Exemption | TDR Value proportionate to flats Sold till the date of 1st Occupation or Completion Certificate whichever is earlier.
[Notification: 04/2019 Dt. 29th March, 2019] |
| f. Time of Supply | Time of supply shall arise on the date of issuance of completion certificate for the project or on its first occupation whichever is earlier.
[(i) r.w. (a) – Notification: 06/2019 Dt. 29th March, 2019] |
| g. ITC Available? | No. |
2. Fully Commercial Projects:
| Particulars | Detail |
| a. Liability | Promoter liable to pay GST under Reverse Charge Mechanism. |
| b. Tax Rate | 18% [SAC Code: 9972] |
| c. Valuation | Value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.
[Para: 1A Notification: 04/2019 Dt. 29th March, 2019] |
| d. Time of Supply | Time of supply shall arise on the date of issuance of completion certificate for the project or on its first occupation whichever is earlier.
[(i) r.w. (a) – Notification: 06/2019 Dt. 29th March, 2019] |
| e. ITC available? | YES. |
3. Residential Cum Commercial Projects:
| Particulars | Detail |
| a. Liability | Promoter liable to pay GST under Reverse Charge Mechanism. |
| b. Tax Rate | 18% [SAC Code: 9972] |
| c. Valuation | Value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.
[Para: 1A Notification: 04/2019 Dt. 29th March, 2019] |
| d. Maximum Cap on the Tax Liability of Residential Apartments | 1% of un-booked value of affordable apartments and 5% of un-booked value of non-affordable apartments.
[Para: 1B – Value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be.] [Notification: 04/2019 Dt. 29th March, 2019] |
| e. Exemption | TDR Value proportionate to Residential Apartments Sold till the date of 1st Occupation or Completion Certificate whichever is earlier.
[Notification: 04/2019 Dt. 29th March, 2019] |
| f. Time of Supply | Time of supply shall arise on the date of issuance of completion certificate for the project or on its first occupation whichever is earlier.
[(i) r.w. (a) – Notification: 06/2019 Dt. 29th March, 2019] |
| g. ITC available? | If Area of Commercial apartment is less than 15% of total carpet area of all the apartments i.e. RREP Project; ITC not available.
In other case ITC of tax paid is available. |
C. Regarding Valuation of the Apartments; Reliance may be placed on Munjaal Manishbhai Bhatt Versus Union of India [2022 (5) Tmi 397 – Gujarat High Court] for deduction of land value where it is pronounced that:
> Land cannot be taxed under the CGST Act, 2017 and hence, if actual value of the land is available then while deriving taxable value of the services the same should be deductible.
>Where exact value of the Land is not ascertainable; than value of the services can derived by adding 10% of the profit in to the cost of provision of the services.
>If valuation in manner is also not feasible, then valuation of the services may be derived by reasonable means consistent with the valuation provisions.
>When the statutory provision requires valuation in accordance with the actual price paid and payable for the service and where such actual price is available, then tax has to be imposed on such actual value. Deeming fiction can be applied only where actual value is not ascertainable – the mandatory application of deeming fiction of 1/3rd of total agreement value towards land even though the actual value of land is ascertainable is clearly contrary to the provisions and scheme of the CGST Act and therefore ultra-vires the statutory provisions.
D. Whether transfer of rights in land/TDR really liable to GST?
1. It is important to consider the judgement pronounced in this regard by Telangana High Court in case of Prahitha Constructions Private Limited [2024 (2) TMI 902] where Notifications imposing tax on transfer of development rights is challenged and petition is held as devoid of merits. Further, on 13th May, 2024 where hearing in response to SLP preferred to Supreme court; The Supreme Court denied to stay the operation of the judgement of the Telangana High Court and there by the petitioner is mandated to pay the tax until the next hearing.
Arguments that Transfer of development rights is right attached to the land and hence GST not leviable:
2. It is a settled legal position that the word ‘land’ not just includes full title in land but also rights which gives benefits associated with it. [Sunil Siddharth bhai v. CIT [1985] SC 156 ITR 509/23 Taxman 1]
3. Transfer of development rights under JDA is also neither ‘lease’ not ‘license’ as mentioned in the scope of supply u/s 7 and Entry sl. 2(a) of Schedule-II. License is a permission to use the land without the right to exclusive possession. Lease means allowing right to enjoy the immovable property for a specified period.
4. So, TDR is not a lease transaction because it is a right to develop a land. As per general clauses Act, 1897 section 3(26) defines -immovable property -shall include land and benefit arises out of land. So, TDR is nothing but rights arising out of land and thus an Immovable property.
5. Under the erstwhile law of Service Tax, the same was not also made liable to tax by the various judicial authorities on the ground that Transfer of Development Ri is nothing but a benefit arising out of land. [DLF Commercial Projects 2019 (27) GSTL 712 (Tri. Chan.)]
6. Transferrable Development Rights is an immovable property in as much as it is connected with land and it is a benefit arising out of land. [Chheda Housing Development Corporation (Bombay HC)]. But unfortunately, the Govt. has considered Transfer of development Right as a service under GST law and collecting tax on it.
Let’s look at the angle of RERA ACT
7. As Joint Development Arrangement is a joint venture, under RERA, the responsibility on the landlord and developer is joint. Section 2(zk) of RERA defines the term ‘promoter’. It does not define or explain, the term ‘developer-promoter’ or ‘landowner-promoter’ as defined in Notifications issued under the GST Law.
8. The sum and substance of the definition of a promoter is that a promoter means a person who constructs or causes to be constructed an apartment for the purpose of selling and therefore the persons covered by clause (v) of the aforesaid Section are also promoter, if they acts as a builder, colonizer, contractor, developer, estate developer, or by any other name or claims to be acting as the holder of power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale.
9. As per explanation to Section 2(zk) of RERA, where a person who constructs/develops apartment or plot etc. for sale and the person who sells the same are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified under this Act or the rules and regulations made thereunder.
10. While amending the Entry, the existence of Joint Venture in the form of JDA is also not taken into account. In case of JDA, the Landlord, by a separate irrevocable Power of Attorney, allows the developer, to usethe development rights, for carrying out the said project.
11. As such there is no transfer of development rights by the landlord to a developer. Had it been so transferred, there was no need of power of attorney, for authorizing the developer to use the development rights. The land and all the rights attached thereto, remains with the landlord, till conveyance deed is executed in favour of buyer/society.
12. As the said rights are not being transferred to a developer, the landlord (not the developer) executes ‘Conveyance Deed’ in favor of buyer of apartment or plot or society. The developer merely signs the conveyance deed on behalf of the landlord as well as in his capacity as a developer, as a confirming party.
13. Allowing the use of development rights is different than permanent transfer or transfer for some period. For all kinds of supply covered by Section 7, transfer of goods or services to other person, permanently or for some period, is obligatory. As there is no transfer of developments rights to a developer, it is not a ‘supply’ within the meaning of Section 7.
14. When the Real Estate Project is carried out by JDA, the allotment of under construction apartments or under developed plots by the developer to the landlord, as landlord’s share, cannot be treated as supply by the developer or by JDA within the meaning of Section 7 of the Central and State GST Act and hence no GST thereon can be levied.
In other words, in case of JDA, there cannot be two sales of under construction apartment or plot; first one by developer to landlord and second one from landlord to outside buyer. There can be only one sale by JDA to outside party. When a developer sells, landlord shall be a confirming party and when landlord sells, developer shall be a confirming party.
E. Conclusion:
Although transfer of development rights is one of the rights attached to the land; because of issuance of notification; taxability of the same may not be justified however decision may be taken considering the materiality, practical challenges and legal aspects.
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