SC Scrutinizes GST Applicability on Joint Development Agreements: A Landmark Petition

The Supreme Court (SC) has issued a notice to the Union government on a petition challenging a Telangana High Court verdict on imposing the GST on rights under the Joint Development Agreement (JDA) in the real estate sector.

The Telangana High Court had held that JDA is different from an agreement for the sale of land and therefore the rights under this should be taxed. In the interim, GST will continue to be applicable on the rights.

The key question is whether the incidental and ancillary right to the sale of land would be subject to GST as the supply of land is excluded from the purview of GST. Taxes on land and building are a state subject. Part of this is already subject to full tax and hence the additional tax on the value of the sale of land could make the projects unviable and lead to tax cascading.

The matter will now be heard on September 9. GST on development rights is a complex issue as some believe that the Centre does not have the power to levy tax on the sale of land, according to the Constitution.

Brief about Joint Development Agreement:

Joint Development Agreement (JDA) in Real Estate: A Joint Development Agreement (JDA) is a contract between a landowner and a real estate developer. In a typical JDA, the landowner contributes their land, and the developer manages the construction side of the project. The landowner and the developer combine their resources and efforts for the development of real estate. The landowner may receive consideration in the form of either a lump sum, a percentage of sales revenue, or a certain percentage of the constructed area in the project.

GST Implications on JDA: GST on Joint Development Agreement (JDA) is charged at 18% on the value of the contract. There are three types of transactions that can occur in every JDA, and accordingly, the GST is applied to those transactions:

1) When the landowner transfers development rights to the developer — wholly or partly in the form of construction service.

2) When the developer transfers construction services to the landowner – wholly or partly in the form of a transfer of development rights.

3) Sale of the developed area by the developer or landowner.

The GST implications can vary based on the timing of the agreement’s execution, whether the JDA involves residential or commercial projects, or the specific transaction within the JDA.