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.
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)
|(a)||At what point of time, the promoter should discharge its tax liability on TDR.||The liability to pay GST on development rights shall arise on the date of completion or first occupation of the project, whichever is earlier.
Therefore, promoter shall be liable to pay tax on reverse charge basis, on supply of TDR on or after 01-04-2019, which is attributable to the residential apartments that remain un-booked on the date of issuance of completion certificate, or first occupation of the project.
|(b)||At what point of time, the promoter should discharge its tax liability on FSI (including additional FSI).||On FSI received on or after 1.4.2019, the promoter should discharge his tax liability on FSI as under:
(i) In case of supply of FSI wherein consideration is in form of construction of commercial or residential apartments, liability to pay tax shall arise on date of issuance of Completion Certificate.
(ii) In case of supply of FSI wherein monetary consideration is paid by promoter, liability to pay tax shall arise on date of issuance of Completion Certificate only if such FSI is relatable to construction of residential apartments. However, liability to pay tax shall arise immediately if such FSI is relatable to construction of commercial apartments.
|(c )||At what point of time, the promoter should discharge its tax liability on supply of long term lease.||On long term lease received on or after 1.4.2019, the promoter should discharge his tax liability on long term lease as under:
In case of supply of long term lease of land for construction of commercial apartments, tax shall be paid by the promoter immediately. However, for construction of residential apartment, liability to pay tax on the upfront amount payable for long term lease shall arise on the date of issuance of
|(d)||Whether TDR purchased on or after 1.4.2019 to be consumed by a developer-promoter in an ongoing project, in respect of which the promoter has opted for the new rate of tax, shall be liable to be taxed at the applicable rate, but limited to 1% or 5%, as the case may be, of the unsold area at the time of issuance of completion certificate?||Yes. Portion of such TDR transferred on or after
01-04-2019 which is used in an ongoing project in respect of which the promoter has opted for new rate of tax on construction of apartment @ 1% or 5% without ITC which remained un-booked on the date of issuance of completion certificate or first occupation of the project shall be liable to tax at the applicable rate not exceeding 1% of the value in case of affordable residential apartments and 5% of the value in case of other than affordable residential apartments.
(Article is republished with amendments by Taxguru Team & CA Anita Bhadra)