GST: Mystery of Time of supply under JDA Unveiled!

1.  Introduction:

Real Estate is an important part of the economy and is accountable for extensive part of its development investment, advancement of the nation’s infrastructure. The taxation of the real estate segment has also been challenging and litigated in many aspects. There are many open issues in relation to the determination of point of taxation and valuation under both direct and indirect taxes. 

2. Joint Development Agreement:

In a joint Development Agreement (JDA) , the land owner gives development rights to the developer/builder to develop the land owned by the landowner. The built up area of the complex shall be shared by the land owner and the builder upon an agreed ratio. The developer/builder shall in consideration for the built up area given to the landowner receive the proportionate land. The builder generally does not register the land received in his name but gets the same directly registered in the name of the buyers.

There are two dimensions  of Time of Supply in case of  Joint Agreement Development . First is the time when land owner  transfers  development right ( TDR)  to the builder and second is when builder pay consideration either in cash or by way of  development of land owner’s share of flats

3 Point of Taxation under Service Tax:  

Under the pre GST regime, Service Tax on services provided by the builder to the landowner were stalled with a lot of confusions and disputes with respect to the point in time when the service tax was payable and the value on which such tax was payable. The various aspects were dealt with bycirculars and education guide. Reference may be drawn to the Circular No. 354/311/2015 Dt. 20.01.2016 read with Circular No. 151/2/2012-ST dated 10.2.2012, wherein it was clarified that, “Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the units to be given to the land owner, at the time when the possession or right in the property of the said units are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter)”.

3. Time of Supply under GST:

Section 13 of the CGST Act, 2017 deals with the provisions relating to the determination of time of supply of services. The time of supply shall be

1. Date of issue of invoice or the date of receipt of payment whichever isearlier

2. In cases where the invoice is not issued within 30 days of completion of service, it shallbe the date of completion of service or the date of receipt of payment whichever is

3. In cases where the time of supply cannot be determined as per the above two clauses, thenit shall be the date on which the recipient shows the receipt of services in his books of accounts.

Further it is also relevant to refer to the following definition of “continuous supply of service” under Section 2 (33) of the Act and Section 31 (5) dealing with issue of invoices.

“continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify; 

31(5) Subject to the provisions of clause (d) of sub-section (3), in case of continuous supply of services, —

 (a) where the due date of payment is ascertainable from the contract, the invoice shall be issuedon or before the due date of payment; 

(b) where the due date of payment is not ascertainable from the contract, the invoice shallbe issued before or at the time when the supplier of service receives the payment;

(c) where the payment is linked to the completion of an event, the invoice shall be issued onor before the date of completion of that event”

It may be observed that the builder would not be raising any invoice and would not claim any payment from the landowner. The service being provided by the builder is a continuous supply of service. It may be observed that clauses (a) and (b) of sub section (2) of section 13 are not applicable in this case, as neither any invoice is raised by the builder on landowner, nor any payment received. As per clause (c) the time at which the landowner shows the receipt of service in his books of accounts would be the time of supply. If the landowner is retaining such units for his own use, he would recognise the same as his capital assets and if the landowner is going to again sell such units, he would recognise the same as his stock in trade. So it can be taken that the builder would be liable to pay GST at the time, when the landowner recognises the receipt of units from the builder. However from builder’s point of view it would be very difficult to conclude when the landowner recognizes receipt of service. Thus the determination of time of supply was no less than a mystery.

4 Notification for time of supply

 Notification No. 4/2018-Central Tax (Rate) dated 25th January, 2019 has been issued in order to resolve the conflicts. . The clarification brought out in this notification is similar to what existed in the Pre GST Era. As per the notification, the time of supply in case of issue of development rights and construction services in its consideration shall rise 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).

5 Recent  Notifications & Changes  :-

GST Council in the 34th meeting held on 19th March, 2019 at New Delhi discussed the issues and to  give effects to the recommendations of the Council, Central Government has issued various Notifications on 29th March, 2019.

In this article ,an attempt has been made to simplify the points covered in the said notifications related to time of supply for  transactions under JDA

6. Taxability on transfer of Development Rights on construction of Residential Apartments (Notification No- 04/2019- Central Tax dated 29.03.2019) ,

The promoter (developer)  needs to pay tax ( RCM ) on or after 01.04.2019 on un-booked  residential flats @ 1% in case of affordable housing and 5% in case of residential apartments other than affordable housing .

7. Point of time when promoter should discharge its Tax liability on TDR:-

The liability to pay GST on development rights arises on the date of completion or first occupation of the project , whichever is earlier .

8. Taxation on Development Rights / Long Term Lease (Notification No- 06/2019- Central Tax Rate dated 29.03.2019)

(a) Notification No. 06/2019 –CT dated 29.03.2019 applicable to both the Residential & Commercial projects . It is also applicable to both ongoing project as on 31.03.2019 and project which would commence on or after 01.04.2019

(b) The promoter on receipt of  Development Rights or FSI on or after 01 April 2019  pays consideration in form of  construction services of residential or COMMERCIAL apartments in project or in any other form ( including cash ).

(c ) Another form of consideration by promoter on receipt of long term lease of Land for construction of RESIDENTIAL project is upfront amount called as Premium , Salami , Cost price , Development Charges or by any other name.

(d)  Supply of development Rights are taxable under Reverse charge u/s 9(3) as notified vide notification No. 05/2019 – Central Tax dated 29.03.2019 irrespective of the fact whether Landowner is registered or unregistered .

(e) Agreement executed on or before 31.03.2019 for transfer of development Rights are also be subject to Reverse Charge in respect of projects whose completion certificate will be issued on or after 01.04.2019

9.Point of Taxation for Development Rights /  Long Term Lease –  Date of issuance of completion certificate by competent Authority or first occupation whichever is earlier

10. FAQ dt 07 May / 14 May 2019 issued by Government of India (TRU)

(Article is republished with amendments by Taxguru Team &  CA Anita Bhadra)