Joint Development Agreements (‘JDA’) are normally entered into either on revenue sharing basis or area sharing basis. In area sharing agreement, Landowners enter into an agreement with the Developer, whereby, the Landowner gives development rights to construct or develop a complex to the developer. In return, developer agrees to assign a portion of the constructed area in the form of flats. Both the parties have liberty to sale the under-construction area from their own share to the prospective buyers as well.
Under GST law, to levy the GST on any of the activity, the activity should falls under the definition of the “supply” which defined under the Section 7 of the Central Goods and Services Tax Act, 2017 (‘CGST Act, 2017’) which inter-alia includes all the forms of the supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental or lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of the business. The definition of the supply covers all the forms of the supply including the transfer of the land.
Transfer of Land
It is pertinent to note that CGST Act, 2017 includes the Schedule III which includes some specific transactions or activities which shall not be treated neither a supply of the goods nor a supply of the services.
Para 5/Entry No. 5 of this schedule specifically includes the sale of the land. Therefore, the sale of the land will not subject to GST and there is no question of the ascertainment of the rate of GST on it.
Transfer of Development Rights (‘TDR’)
But, under JDA arrangement there is a transaction for transferring the development right to the builder from the Landowner. Therefore, it is important to know first whether GST on JDA is liable or not. The main point is that the transfer of development rights is similar to the sale of immovable property and hence must be in the purview of GST.
There was certain ambiguity regarding taxability of transfer of development rights under JDA, as to whether the same are liable to GST or not. However, the Notification No. 4/2018, clarifies that the transfer of development rights from the landowner to a developer is taxable.
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 Siddharthbhai v. CIT [1985 (9) TMI 7 – SUPREME COURT] TDR under JDA is also neither ‘lease’ not ‘license’ as mentioned in the scope of supply under Section 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. 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. Therefore, TDR is nothing but rights arising out of land and thus an Immovable property.
It is pertinent to mention that TDR is an immovable property inasmuch as TDR is connected with land and it is a benefit arising out of land. But, the Government has considered TDR as a service under GST law and collecting tax on it. [NOTIFICATION NO- 04/2018-Central Tax and M/S. VILAS CHANDANMAL GANDHI 2020 (2) TMI 554 – AUTHORITY FOR ADVANCE RULING, MAHARASHTRA and MAARQ SPACES 2019 (11) TMI 994 – AUTHORITY FOR ADVANCE RULING, KARNATAKA].
Recently, the Authority for Advance Ruling, Karnataka, in the case of Maarq Spaces Pvt. Ltd. (Order No. KAR ADRG/199/2019) has said that the activities envisaged under the JDA between a developer and land owner amounts to a supply of service to the latter and is therefore liable to be taxed under GST at 18%. [Please see our Article on Land Development is Supply of Service -GST AAR Karnataka published on 29th June, 2020 at www.Taxguru.in]
Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.