1. Introduction: Urbanisation paved the way towards real estate development around urban areas, may it be frontline metropolis or tier I Tier II semi urban areas. Real estate development may be for residential purpose, industrial activities or commercial purposes. The vertical development by way of high rise buildings is one kind of development. Equally eye catching is in the arena of plotted development of land. The country and town planning related enactments aims at orderly way for development of plots as well. This article is to examine and critically evaluate the GST liability at various stages of plotted development vis-a-vis various forms of activities around such development of plotted land. The popular models are:
a. Development by Owner with his own funds and efforts including engagement of contractors.
b. Development by Owner with advance money collected from prospective buyers.
c. Development thru third party i.e. Developer on area sharing model.
d. Development thru third party i.e. Developer on revenue sharing model.
2. Works contract: Development of plotted land involves deployment of goods and services. Providing basic amenities like black top roads, culverts, drains, sewerage, waterlines, electricity etc., need goods like cement, sand, steel to name a few. The services like landscaping, architecture, legal consultancy, plan sanction are also essentials for carrying out the work. This is in the nature of works contract. Section 2(119) defines as follows:
(119) “works contract” means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract;
3. Role of contractors: If plotted development work is carried on under a contract, the contractor is liable under GST. The transaction will fall under section 2(119) since it is improvement of immovable property and goods like cement, steel, electrical poles, cables, asphalting of road and similar work will be involved. The contractor is eligible to take Input tax credit. The land owner will not be eligible to take input tax credit, because he is in to sale of land as specified under entry 5 of schedule III.
4. Development work by land owner: In case the work is carried on by the owner of land by sourcing materials and labour there is no involvement of contractor. Hence there will not be a works contract. However, if the land owner entered in to agreement with the prospective buyers and collects advance money before completion of necessary works, whether there is works contract and GST liability is to be examined. At the outset it appears that the owner is carrying out works contract in pursuance of agreement with the buyers and on behalf of the buyers. The final documentation for registration will show the sale of land only. There is no sale of building. Entry 5 under schedule III ( Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building) specify these type of transaction is neither supply of goods nor supply of services. Conveyance of developed plotted land sans building is outside the scope of levy under GST. Unlike the vertical development like apartments and buildings, in plotted development, the sale is land only with out building. There may be some indications of construction like a cable duct or sewerage chamber inside the plot, but surely not a building. Under registration law, this is only conveyance of land. There is no liability under GST because of nature of conveyance as land.
5. Development thru third party i.e. Developer:In the model of involvement of third party developer, as first step the land owner gives right of development to the developer, in return of promise to develop the entire land and return agreed share of land to land owner. Both the land owner and developer get agreed portion of land after development work. The further sale to buyers may be done separately by owner and developer. This model is area sharing agreement. The other model is revenue sharing model wherein the developer agrees to sell entire developed land including owners portion and both the parties share the revenue in agreed proportion.
6. Barter transaction: The transaction between land owner and developer amount to barter. Barter means a “thing or commodity” given in ‘in return of’ another. In other words, no value is fixed- viz., barter of wrist watch with a wall clock. Exchange (goods or services) for other goods or services without using money is barter. Land owner relinquishes a portion of land in favour of developer who in turn provide development services to land owner. There is time lag between two activities. Barter is within scope of supply as per section 7 of CGST Act. Between land owner and developer there is inter se transfer. The right to develop land is valuable right. The land owner generally executes power of attorney in favour of developer giving him valuable right. This is one part of transaction in the barter. The other part being developer in turn handing over developed land to owner.
7. Relinquishment of part of land in favour of local authority: Another important point for consideration is the portion of land area that is relinquished in favour of public authority i.e. local area board or municipality. This is pre condition for land development in to plotted area. Under land development regulations, area meant for public parks, roads, utility services are marked in the plan sanctioned. These areas are vested in to public authority. Does this work is within the scope of levy? There is no consideration paid for the same by public authority. But under GST consideration may flow from third party or from any person for that matter. Consideration need not be in terms of money. The plan sanction itself may construed as consideration. The answer is found in the nature of development and value enhancement on account of such orderly development. Because of plan sanction by the authority the value of plotted land increases in valuation. The indirect benefit flow is sufficient to address the absence of consideration.
8. Relevant entries under schedules to CGST Act–
SCHEDULE II -[See section 7]- ACTIVITIES OR TRANSACTIONS TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES:
2. Land and Building
(a) any lease, tenancy, easement, licence to occupy land is a supply of services (this entry is restricted wherever building is involved not land alone, the conjuncture” and” between land and building make it clear)
5. Supply of services:
The following shall be treated as supply of services, namely:—
(a) renting of immovable property:
(b) 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.
Explanation.—For the purposes of this clause—
(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:—
(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or
(ii) a chartered engineer registered with the Institution of Engineers (India); or
(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;
(2) the expression “construction” includes additions, alterations, replacements or remodelling of any existing civil structure
6. Composite supply:
The following composite supplies shall be treated as a supply of services, namely:—
(a) works contract as defined in clause (119) of section 2; and
SCHEDULE III -[See section 7]-ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES
5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.
9. Sale of land is neither sale of goods nor supply of services under schedule III.Clause (b) of paragraph 5 of Schedule III, squarely apply to the type of transactions involved in plotted development of land. Hence we can safely conclude that there is no liability on the end customer, i.e. buyer of plotted land. Whether there was agreement prior to plotted development or otherwise the sale is only of sale of land. The activities like road laying, drainage works, electricity supply facilities are incidental to development and does not change character of sale of land. Even if termed as developed land there is no transfer of building from land owner/developer to end customer. All the work done like roads, drains, electricity supply facilities vest with public authority in terms of plan sanction.
10. Transfer of development works in favour of local authority: The law requires the owner to transfer the ownership on the developmental works such as roads, drains, water supply mains, parks and open spaces, civic amenity areas, in favour of local authority. Therefore the owner cannot have agreement for supply of service but can only enter agreement for sale of land with customer.
11. Developer’s title to the land: Developers generally do not register land or their share under registration Act as conveyance. However, TITLE to land does not necessarily mean of holding registered document. The GPA executed by land owner coupled with MOU for development give sufficient and irrefutable evidence of tittle in favour of developer. Developer enter in to the land, carry out development work and retain possession of land in the course of development. These are sufficient indications of title to the developer.
12. Revenue sharing agreement: Under this model it may be alleged that whatever share the developer collects is equalling to the value of services of development he renders and hence liable for tax under GST. The issue of increase in land value during the development face is not addressed. As a consequence, the land value also indirectly build-up in the service component. Cost plus 10% formula on the development costs may be a fair valuation methodology to adopt to determine GST liability on development services.
13. Area sharing agreement: Under this model the agreement between land owner and developer envisages sharing of developed land in agreed proportion after development. Both the parties are free to sell their respective portion as they feel fit. In this model the rights and responsibilities of the parties are defined in terms of the development agreement. GPA is generally executed empowering developer to enter in to land and carry out development. The barterelement is clearly visible in this model. The valuation of development services may pose considerable constraints since the value of land increases in the development phase and thereafter. It is difficult to capture such increase and any formula that may fit the bill is again cost plus 10% methodology may be suitable to the situation.
14. Authority on Advance Rulings (AAR)in Karnataka considered a situation of revenue sharing agreement for plotted development (Advance Ruling No. KAR ADRG 119/2019 Dated:30thSeptember 2019). The Applicant is engaged in the business of property development. The applicant submitted that he has entered into a Joint Development Agreement on 08/11/2017 with Landowners for development of land into residential layout along with specifications and amenities. The consideration was agreed on revenue sharing basis in the ratio of 75% for Landowner and 25% for applicant developer. Cost of the development shall be borne by applicant. Pursuant to JDA, applicant had entered into an agreement with customers for sale of developed plots for consideration. AAR held that the activities as envisaged in the agreement between the applicant and the landowners amount to supply of service and is liable to be taxed under GST. Rule 31 applies in the instant case and the value of the supply is equal to the total amount received by the applicant, which is equal to 25% of the market value of each plot. Applicant preferred appeal against the ruling. AAAR found no reason to interfere in the order passed by AAR. The rulings under Value Added Tax regime in the case of Continental builders and developers Bengaluru vs. State of Karnataka (2009) 67 KLJ 259 (Tri)(FB) was cited to drive the point that development works vested with the local authority and not transferred to buyers. This did not cut the ice with the AAAR.
15. Valuation of development services: Rule 27 to 30, 31 read with Section 15-The provisions of Rule 27 to 30 do not apply to the plotted development transaction, therefore the value shall be determined as per Rule 31 of CGST Rules, applying the reasonable means and consistent with the principles. The term “reasonable” means having sound judgement, fair and sensible, as much as is appropriate or fair; moderate etc., As per Cambridge Dictionary “reasonable” mean based on or using good judgement and therefore fair and practical. Dictionary meaning of “reasonable” is that which is agreeable to reason not absurd, within the limits of reason. The expression “reasonable” therefore means rational, according to the dictates of reason and not excessive of immoderate. Applying the above principle to the facts of the case, the view is that, in order to comply the provision of section 7 read with entry 5 of Schedule III, exclusion of land value based on market value from total consideration or levy of tax only on the development charges based on the market value or cost plus reasonable profit shall be the reasonable means consistent with the principle.
Rule 27. Value of supply of goods or services where the consideration is not wholly in money
Rule 28. Value of supply of goods or services or both between distinct or related persons, other than through an agent
Rule 29. Value of supply of goods made or received through an agent
Rule 30. Value of supply of goods or services or both based on cost
Rule 31. Residual method for determination of value of supply of goods or services or both .-Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:
Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30.
This valuation concept may be tested in the course of proceedings or questions that may arise before higher judicial forum.
16. Land- whether exempted supply? –Under section 2 (47) “exempt supply” means supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply. Plotted development involves two activities, development activity land and sale of plots. Sale of land is not supply in terms of schedule III entry 5. Activity of sale of land cannot be considered as exempt supply for the reason it is not at all supply hence the question of exemption under section 11 does not apply.
17. Plotted development- is it composite supply- In terms of definition under CGST, the analysis show that the activity of development of land and sale of sites does not fit in to the definition of composite supply because land is not a supply under GST, much less a taxable supply. Two or more taxable supplies to be involved to make it fit in to the definition. Leading an argument that land is predominant supply in plotted development and sale of plots is bound to fail on that count.
Section 2(30) “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.
The plotted land sold to customers is in the nature of composite supply, the main component being land and the development services are only incidental to the same. Land being not with in ambit of GST(neither goods nor services), the related services fall outside the definition and stand isolated. The issue arises whether such services are taxable. Land is not exempted under section 11 of CGST Act. By virtue of inclusion under schedule III, it is outside GST. In such a situation the composite supply concept does not save the development services from tax.The development services are taxable.
18. GST liability on land owner: The land owner is not liable under GST under any circumstances. There is no construction of building is involved. Unless building construction is involved entry no.5(b) under schedule II does not come in to picture in the case of land owner. The construction may be out of own funds or may be out of advance money received and used in development. Schedule III entry 5 mention Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building- is neither supply of goods nor services. Absence of building abundantly covers the transaction falling under schedule III entry 5 as not supply under GST.
19. GST liability on developer: Developer is rendering services in terms of the agreement. The consideration is in the form of portion of developed land. It is not in terms of money. This is barter transaction. Irrespective of the fact that the materials used are part of facilities to be vested with the local authority, in respect of the owner there is rendering of services. The case law rendered under VAT Act in reference to Continental builders and developers Bengaluru vs. State of Karnataka (2009) 67 KLJ 259 (Tri)(FB) may be tested under GST to be applied to claim exemption. Such claim likely to fail since plan sanction is granted to the land owner and developer render services to land owner. There is no privity of contract between developer and public authority.
20. Rights arising out of land are immovable property:The term ‘immovable property’ has not been defined under GST law. The General Clauses Act, 1987 defines “immovable property” as to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. Section 2(6) of the Registration Act, 1908 defines “immovable property” to include land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass. In order to further understand the meaning of the term ‘benefits to arise out of land’, the observations and interpretations of the Hon’ble Supreme Court on the various judicial rulings must be read as under:
a. Anand Behera v. State of Orissa (1955) 2 SCR 919.
b. State of Orissa v. Titagarh Paper Mills Company Limited AIR 1985 SC 1293.
c. Shantabai V. State of Bombay AIR 1958 SC 532.
d. Bibi Sayeeda v. State of Bihar (1996) 9 SCC 516.
e. Further, Hon’ble Mumbai High Court in a case of Chhada Housing Development Corporation v. Bibijan Shaikh Farid reported in 2007 (3) Mah. L.J.P. 402 lay down that “the expression TDR, is transfer of development rights, which enables the FSI to be used on any other plot of land generated from some other plot and can be used in terms of DC Regulations in force. It is the benefit arising out of land and is immovable property.
On an understanding of the law laid down by various Courts, of the term ‘immovable property, it can be safely stated that Development rights are the benefits arising out of the land and the same is an immovable property. However, immovable properties are not liable for GST, as supply of service under GST Law.
21. Title and ownership: The expression ‘title’ in the general proposition means that, when equities are equal that he has the legal title will be preferred, includes in its broadest sense all rights capable of being enjoyed and secured under the law(As per Aiyar’s Law Dictionary) Hon’ble Guwahati High Court in the case of Nagen Hazarika vs Manorama Sharma – AIR 2007 Gau 62 held that the expression ‘title’ is a broad expression in law which cannot always be understood as akin to ownership. It conveys different forms of a right to a property which can include right to possess such property. One holding a legal title of lands is certainly included but rights amounting to less than the full legal title are equally included with it. Title to land is the evidence of his right or the extent of his interest. The apex Court in the case of Sunil Siddhartha Bhai v. CIT – AIR 1986 SC 368 observed that in its general sense, the expression ‘transfer of property’ connotes passing of the entire bundle of rights from the transferor to the transferee. In Syndicate Bank vs Estate Officer – AIR 2007 SC 3169, the Supreme Court held that a jurisprudential title to a property may not be title of an owner. A title which is subordinate to an owner and which need not be created by reason of a registered deed of conveyance may at times create title. As per Section 3(a) of Land Acquisition Act, 1894, the expression ‘land’ includes benefits that arise out of land and things attached to earth or permanently fastened to anything attached to the earth.
a. Contractor is liable for tax under GST.
b. Developer is liable for tax under GST.
c. Land owner is not liable for GST.
d. Buyers of plotted land are not liable for GST.