Joint Development Agreement (JDA) & GST

JDA is common factor in the real estate sector which tied between the landowner and the developer in an agreement for the construction of new Building / projects. In return by the developer agrees to provide like i. Lump sum consideration, ii. Percentage of sales revenue, or a certain percentage of the newly constructed project on the said piece of land, depends upon the terms and conditions, mutually decided by the parties.

Before we start we have to check below abbreviations:-

JDA: Joint Development Agreement

RREP : Residential Real Estate Project

FSI: Floor space Index

TDI: Transferable Development Rights

60 square meter :  (646 Sqft)

90 square meter : (969 Sqft)

There is two types of JDA

1. Area Sharing Joint Development Agreement (JDA)

2. Revenue Sharing Joint Development Agreement (JDA)

JDA helps both the developer and landowner together with no initial investment for land procurement, Partial avoidance of stamp duty, Fast-track development of the property as capital is only required for meeting the construction work , consideration for the landlord to be paid mostly after completion of the project.

After allocation of a certain portion to the landowner, the remaining areas to be sold by the developer directly to the market.

Now we have to see some legal provisions

Under Notification No. 4/2018-Central Tax (Rate), dated 25th January 2018

Notifies the following classes of registered persons, namely :-

(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; and

(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, on the consideration received in the form of construction service referred to in clause (a) above and in the form of development rights referred to in clause (b) 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)

Regarding Definition of supply

(a) “supply” as defined under Section 7 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) inter alia includes 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) Para 2(a) in Schedule II of CGST Act, provides that any lease tenancy, easement, license to occupy land is a supply of service

Some of the definition we have to remind as follows:

Definition of affordable Residential Apartment:

Affordable residential apartment is a residential apartment in a project which commences on or after 01-04-2019, or in an ongoing project in respect of which the promoter has opted for new rate of 1% (effective from 01-04-2019) having carpet area upto 60 square meter in metropolitan cities and 90 square meter in cities or towns other than metropolitan cities and the gross amount charged for which, by the builder is not more than forty five lakhs rupees. (Cities or towns in the notification shall include all areas other than metropolitan city as defined, such as villages.)

In an ongoing project in respect of which the promoter has opted for new rates, the term also includes apartments being constructed under the specified housing schemes of Central or State Governments.

(Metropolitan cities are Bengaluru, Chennai, Delhi NCR (limited to Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata and Mumbai (whole of MMR) with their geographical limits prescribed by Government.)

 Definition of ongoing project :

A project which meets the following conditions shall be considered as an ongoing project.

(a) Commencement certificate for the project, where required, has been issued by the competent authority on or before 31st March, 2019, and it is certified by a registered architect, chartered engineer or a licensed surveyor that construction of the project has started (i.e. earthwork for site preparation for the project has been completed and excavation for foundation has started) on or before 31st March, 2019.

(b) Where commencement certificate in respect of the project, is not required to be issued by the competent authority, it is to be certified by any of the authorities specified in (a) above that construction of the project has started on or before the 31st March, 2019.

(c) Completion certificate has not been issued or first occupation of the project has not taken place on or before the 31st March, 2019.

(d) Apartments of the project have been, partly or wholly, booked on or before 31st March, 2019.

Under new scheme, the GST rates for residential apartments are as follows –

1. CGST 0.5% plus SGST/UTGST 0.5% (total 1%) (without ITC) for affordable residential apartments

2. CGST 2.5% plus SGST/UTGST 2.5% (total 5%) (without ITC) for other residential apartments.

In respect of commercial apartments (shops, offices, godowns etc.) in RREP(Residential Real Estate Project), the GST rate is CGST 2.5% plus SGST/UTGST 2.5% (total 5%) (without ITC).

In respect of construction of commercial apartments (other than RREP), the GST rate is CGST 6% plus SGST/UTGST 6% (total 12%) (with ITC).

In case of ongoing projects, if the promoter intends to shift to new scheme (of 1%/5%) w.e.f. 1-4-2019, he is required to reverse excess ITC availed as on 31-3-2019 or get credit of ITC less claimed as on 31-3-2019.

All conditions mentioned in notification No. 3/2019 ibid against S. No. 3(i) to 3(id) (i.e. opting for new scheme) are mandatory i.e. payment of tax through Cash Ledger, 80% of the inputs and input services shall be received by the registered suppliers only (includes tax paid under reverse charge mechanism), non-availing of Input Tax Credit, reversal of credit, maintenance of project wise account, reporting of ITC not availed in corresponding GSTR 3B etc.

Rate of tax on supply of TDR(Transferable Development Rights) or FSI(Floor Space Index) or long term lease of land, used for the construction of residential apartments would be liable at 18% but the amount of tax shall be limited to 1% or 5%, as applicable, of value of apartment in the new projects where new rate of 1% or 5% is applicable.

TDR or FSI or long term lease of land, used for construction of commercial apartments shall attract GST of 18%. Hence, for such supplies the provisions as applicable prior to 1st Apr ’19 would continue to apply and the notification No. 4/2019-CT(R) dated 29th Mar ’19 would not be applicable as the same is w.r.t. residential apartments.

The rate of GST applicable on transfer of development rights, FSI and long term lease of land

GST on supply of FSI relating to commercial apartments where consideration is in monetary terms, the liability to pay GST would arise immediately, as notification 6/2019- CT(R) dated 29th Mar ’19 does not cover such FSI.

Supply of TDR or FSI or long term lease of land, on such value which is proportionate to construction of residential apartments that remain un-booked on the date of issue of completion certificate or first occupation, would attract GST at the rate of 18%, but the amount of tax shall be limited to 1% or 5% of value of apartment depending upon whether the residential apartments for which such TDR or FSI is used, in the affordable residential apartment category or in other than affordable residential apartment.

Through an example we can elaborate if total project cost sale value is 2 crore and sale upto completion 1.2 crore, TDR will be on 80 Lakhs X 18% I.E 14.40 Lakhs (but it will not exceed 10 lakhs i.e 5% on Rs. 2 Crore of Total project cost sale price) hence no tax is payable since flats sold after completion as immovable property.

TDR or FSI or long term lease of land used for construction of commercial apartments shall attract GST of 18%.

The above shall be applicable to supply of TDR or FSI or long term lease of land used in the new projects where new rate of 1% or 5% is applicable.

In case of Partly Residential and Partly Commercial

In that case if Land used more than 15% for Commercial purpose  and remaining for Residential Purpose in that case proportion to commercial area for land used, tax on TDR to be paid by the developer under RCM.

Time of Supply where Developer to pay tax on RCM on TDR used in case  Commercial Property

When agreement of Transfer of Development right is entered with the Landlord, Developer to pay tax under RCM on such date.

Time of Supply where Developer to pay tax on RCM on TDR used in case  Residential Property

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

Value of supply in case of TDR in Commercial Property :-

Shall be the value charged by the landlord on supply of TDR or open market value (charged by Government while levy of Stamp duty) when such TDR agreement entered.

Constitutional Provision

Aricle 265 of the Constitution of India provides that no tax can be collected without the authority of law, so prima-facie it appears wrong to collect tax indirectly on the value of land.

As per FAQ Released on 14.05.2019 question no. 18 it has been clarified that ‘Inward supplies of exempted goods / services shall be included in the value of supplies from unregistered persons while calculating 80% threshold. That means for exempted supplies developer needs to pay tax @18% on RCM further no input of such payment made under RCM is entitled to the developer.

So here is a question when a particular goods and services u/s 11 exempted how can it will be taxed u/s 9(4) so demand tax under RCM absolutely without the authority of law and violation of article 265.