Development rights mean the right to construct and own the superstructure of the land. Due to the increasing land prices, nowadays Joint development agreements (JDAs) are most prevalent form of land development in the real estate segment. Purchase of land makes it uneconomic for the developers to block huge capital in the initial stages of the project. JDAs benefit both the developer and the landowner.
For the developer, there is no initial heavy investment and payment to the landowner can be made as and when collections are made and for the landowner, it is increased value of consideration.
Though JDAs may vary based on the intent of the parties, a standard JDA shall operate on principal to principal basis and the landowner shall transfer the development rights in the property by execution of a permanent & irrevocable power of attorney. The consideration to the landowner for the development rights shall take any of the following forms:
1) Monetary Consideration:
Upon entering into JDA, the developer gives a lump sum to the landowner as refundable security deposit. As and when the collections from the customers are received, the developer gives specified share of the sale consideration of the project to the landowner.
2) Non Monetary Consideration:
Upon entering into JDA, the developer gives a lump sum to the landowner as refundable security deposit and upon completion of construction, a specified percentage of the built up area is given to the landowner.
The taxable event under GST is supply. As per Section 9 of CGST Act, 2017, the levy of tax is on ‘supply’ of goods or services or both. Thus for levy of GST, the transaction shall fall within the scope of supply as given under Section 7 of CGST Act, 2017. Section 7 can be broken into two parts:
A) Inclusive Part:
a. all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
b. import of services for a consideration whether or not in the course or furtherance of business;
c. the activities specified in Schedule I, made or agreed to be made without a consideration; and
d. the activities to be treated as supply of goods or supply of services as referred to in Schedule II.
B) Exclusive Part:
a. activities or transactions specified in Schedule III; or
b. such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services.
On the basis of the above scope, the following are relevant for the development rights, to be regarded as supply:
THERE SHALL BE SALE, TRANSFER, BARTER, EXCHANGE, LICENSE, RENTAL, LEASE OR DISPOSAL:
There is a permanent and irrevocable transfer of development rights by the landowner to the developer
THERE SHALL BE A CONSIDERATION FOR SUCH TRANSACTION:
The term consideration has been defined as “any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government ……….”
In the case of transfer of development rights there is a consideration involved, monetary or non monetary or both as discussed earlier.
THE TRANSACTION SHALL BE IN THE COURSE OR FURTHERANCE OF BUSINESS:
The term business has been defined as
a. any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
b. any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
c. any activity or transaction in the nature of sub-clause (a),
d. whether or not there is volume, frequency, continuity or regularity of such transaction;…………”
Most often the landowners are mere investors and such activity is not conducted in a regular or recognisable continuity and hence it may not fall under “activity in course or furtherance of business” in most cases.
THE TRANSACTION IS NOT FALLING UNDER SCHEDULE III:
Schedule III amongst other things includes “Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building”. Clause (b) of paragraph 5 of Schedule II means “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier”
The land owner is not undertaking any construction activity. Hence to fall under this exclusion, the development rights shall fall under the “sale of land”. The term “land” has not been defined under the GST law.
As per Sec. 3(a) of Land Acquisition Act (1 of 1894) the expression ‘land’ includes benefits to arise out of land and things attached to earth or permanently fastened to anything attached to the earth.
As per Section 3(26) of General Clauses Act, 1897 the term ‘immovable property’ includes:
(b) benefits to arise out of land and
(c) things attached to the earth or permanently fastened to anything to the earth.
The term “benefits to arise out of land” has been dealt with by various courts:-
In Shakti Insulated Wires Limited v. JCIT, 2003 (87) 56 ITD (Mum), Hon’ble Court held that the developmental rights are embedded in the ownership of land only. These were valuable rights inherent in the ownership of land.
In the case of Safiya Bee v. Mohd. Vajahath Hussain Alias Fasi  2 SCC 94, Apex Court held that ‘land’ includes rights in or over land, benefits to arise out of land.
In Jitendra Shah v. Mulji Narpar Dedhia, the Hon’ble Bombay High Court held that TDRs are benefits arising out of land and thus their transfer can be affected only by way of a registered instrument under the Registration Act.
Apex Court in the case of Pradeep Oil Corpn. v. Municipal Corporation of Delhi  5 SCC 270 observed that land includes benefits to arise out of land.
In Chheda Housing Development Corporation v. Bibijan Shaikh Farid, Chamber Summons No. 321 OF 2007 in Suit No.567 of 2007, the Hon’ble Bombay High Court observed that Transferable Development Rights (TDR) being a benefit arising from the land must be held to be an immovable property.
Based on the above precedents, it can be concluded that the development rights, are “benefits arising out of land” and thus are falling under the definition of immovable property. The transfer of such development rights, is in the nature of transfer of immovable property and not liable to GST.
However, CBEC has vide Notification No. 4/2018 – Central Tax (Rate) dated 25.01.2018 has notified the time of supply in case of development rights where consideration is received by way of built-up area.
As per the notification a registered person who supplies development rights to a developer, builder, construction company etc. against consideration, wholly or partly, in the form of construction service of complex, building or civil structure shall be the liable to pay central tax on supply of the said services at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter).
However, when the activity itself may not fall in the scope of supply, whether time of supply can be prescribed by way of a notification is in itself a question.
Thus it is possible that the same can be litigated by the department and a demand for GST on development rights can be made.