GST on Real Estate Transactions, Transfer of Developments Rights and Joint Development Agreements (JDAs)
Construction and Real Estate is a complex business with multiple stakeholders involved in it. It has been a growing sector in India, but ironically has been riddled with litigation owing to multiplicity of taxes and dual administration mechanism; thereby exposing it to the conundrums of both Central and State level complex indirect taxation levy prior to GST regime.
Lets now understand the various parties that could possibly be involved in a typical real estate transaction end-to-end and the implications of GST on each of these transactions.
Typically, any real estate transaction starts with Developer acquiring land for constructing a building (Residential/Commercial) upon it. Land is either purchased outright from the Landowner, or the Developer enters in to “Joint Development Agreement” (JDA) with the Landowner, whereby
So in a nutshell, there are 5 parties typically involved in a Real Estate transaction, which has an impact of GST – Landowner, Developer, Supplier, Works Contractor and Buyer.
Various Transactions in a JDA type of agreement and its GST Impact:
We will consider the below 4 points with respect to each of the transactions:
1. Supply definition,
2. Type of transactions and its taxability,
3. Allowability of Input Tax Credit (ITC),
4. Valuation of Supply
1. Supply Definition:
As per para 5(b) of Schedule II of CGST Act, the following is ‘supply of service“:
As per para 6(a) of Schedule II of CGST Act, the following composite supplies shall be treated as a supply of services, namely:
2. Type of transactions and its taxability
Transaction 1: Landowner – Developer: Transfer of development rights by Landowner to Developer is treated as Supply** in which Development Rights are transferred in return for consideration that involves in kind by way of wholly or partly, in the form of Construction Service of Complex, Building or Civil Structure.
Notification No. 4/2018-Central Tax (Rate), dated 25th January, 2018 which reads as follows, establishes liability of payment of GST by the Landowner for Transfer of Development Rights in consideration of receiving Construction Services from the Developer:
..(a) registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure;
as the registered persons in whose case the liability to pay central tax on supply of the said services, on the consideration received in the form of construction service referred to in clause (a) above………. …… ……shall arise 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)
From the above Notification, it can be deduced that:
Bigger question which arises here is – How do you arrive at the value of supply of Construction Services in this case? This is answered in the section 4 below.
Since there is Supply with Consideration being Construction Service, the transaction of Transfer of Development Rights is treated as Supply as per Sec 7 (1)(a) of CGST Act and therefore GST is payable by the Landowner @ 18% (SAC Code: 999799) at the time when the Developer transfers possession or the right through a conveyance deed or similar instrument like allotment letter.
Transaction 2: Developer – Landowner: Developer provides Construction service to Landowner over a period. The Developer hands over the Qwnership Rights of certain percentage of the developed area ie. Super Structures like complex, building or civil structure or flats to the landowner (in Area Sharing JDA).
Again referring to the Notification No. 4/2018-Central Tax (Rate), dated 25th January, 2018, establishes liability of payment of GST by the Developer for receiving Consideration in the form of Development rights from the Landowner for providing Construction Services to the Landowner.
..(b) registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights, as the registered persons in whose case the liability to pay central tax on supply of the said services ….. ….. in the form of development rights ….. …..shall arise 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).
From the above Notification it can be deduced that:
To conclude from the above, it is clear that Supply of Construction Services by the Developer to Landowner (supplier of Development Rights) is a Supply for a consideration in the form of Transfer of Development Rights and therefore GST is payable by the Developer when he transfers possession of flats to the Landowner.
Again, bigger question which arises here and in previous case – How do you arrive at the value of supply of Construction Services and Development Rights in this case? Refer section 4 below.
Transaction 3: Supplier – Developer: Supplier provides various material and labour services to Developer where Developer on his provides Construction service. Supplies attract GST and Developer gets Input Tax Credit (ITC) for the same (refer next section for details). This is a simple GST transaction and hence not covered in details hereunder.
Transaction 4: Works Contractor – Developer: Works contract is treated as supply of service and GST would be charged accordingly (not as goods or part goods/part services). Developer gets Input Tax Credit (ITC) for the same (refer next section for details). This is a simple GST transaction and hence not covered in details hereunder.
Transaction 5: Developer/Landowner – Buyer: Sells Flats to Buyers. In this transaction, either the Developer and/or Landowner sells flats/shops/offices to the Buyer. This is a simple transaction with the Buyer and GST would be leviable as below:
1. If the consideration is received (property is sold) before receipt of Completion Certificate or before its first occupation, GST is leviable at 18% of the Value of property as per agreement of sale, as reduced by the value of land. However, in case of construction of complex, the builder charges an amount which is inclusive of land or undivided share of land. In that case, as per para 2 of Notification No. 11/2017-CT Rate) and No. 8/2017-IT (Rate) both dated 28-6-2017, the land value will be deemed to be one third (33.33%) of total amount (i.e. value including land value) and GST is payable on balance amount. Thus, effectively GST rate is 12% (6% CGST plus 6% SGST/UTGST). Note that GST rate continues to be 18% only. The effective rate comes to 12% only because value of construction is reduced by deducting land value from total amount charged by builder/developer to buyer.
2. If the entire consideration for the property is recived after receipt of Completion Certificate or before its first occupation, then it is not considered as a Supply and hence GST is not applicable in such transaction. In this case, proportionate ITC availavle by the Developer/Landowner would need to be reversed at the time of supply of such service tio the buyer
Time of Supply – Continuous supply as per %Completion/Invoicing or payments received.
3. Allowability of Input Tax Credit (ITC)
♦ ITC for GST paid on Works Contract
Generally, at the time of taking credit, the Developer / Landowner, may not know whether the flats will be sold out before or after the receipt of Completion Certificate, therefore they avail total eligible credit and in case they sell any flats after the completion certificate or decided to retain for own use, then the corresponding credit should be reversed at the time of such sales or decision to use on their own.
4. Valuation of Consideration
The valuation of Construction Services (referred to in Trasaction 1 above) or Development rights (referred to in Trasaction 2 above) for the purpose of GST will be the value of free flats/shops given to the Landowner.
** Though there is clarity vide Notification No. 4/2018-Central Tax (Rate), dated 25th January, 2018, many experts and real estate industry questioning the applicability of tax on mere transfer of land development rights by owner to a real estate developer. Some builders have dragged the GST Council, Central and Maharashtra governments, to court for including such transactions under the GST framework, citing such transactions were exempt under the previous service tax regime and the notification goes against the essence of GST framework that excludes sale of land and building from tax ambit. Also there is certain apprehensions and confusions regarding valuation of Development Rights passed on by the Landowner to Developer and Construction Services for the free flats/offices/shops provided by the Developer to the Landowner.
Disclaimer: The views, opinions and arguments presented in this article are those of the author and may not necessarily reflect legal standing.
Author: CA Rahul Jain can be reached at [email protected] More details on http://rahuljainassociates.in