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What is a Land Development Agreement

Land Development Agreement also known as Joint Development Agreement is one of the arrangements commonly resorted to by the builders/developers nowadays to develop and sell properties. There are two parties to this agreement, a Land owner and a Builder. It is sometimes also a tripartite agreement between the land owner, builder/developer and a contractor. We are discussing the first category of arrangement in this article. In this arrangement the land owner agrees to transfer the land rights to the developer to build/develop and sell flats/ property. In consideration to the said sale of land rights the land owner agrees to a sum in cash and some flats in the developed property. One of the major advantages of this kind of arrangement is that it does not involve excessive investments from both the parties and is as such a win-win situation for both the developer and the land owner.

Complexities involved

Some of the important issues in dealing with this kind of arrangement is (i) whether the sale of land and consideration received thereon is liable to service tax, (ii) whether the consideration received by the land owner in terms of flats is liable to service tax, (iii) if the answer to (ii) is yes then at what value will the service tax be leviable, (iv) who is liable to pay the service tax, is it the builder or the land owner (v) when is the service tax payable, is it at the time of entering into the agreement or at the time of possession of the flats.

This article attempts to answer all the above queries in as uncomplicated way as possible.


One of the most important circular in respect of real estate is Circular 151/ 2/2012-ST issued on 10th February 2012 which provided clarifications with respect to the various business model adopted by the construction industry and the treatment of service tax thereon. It also discussed the Development Agreement in detail. Further post the negative list regime the Para 6.2.1 of Education Guide – taxation of services issued by the CBEC also covered this subject briefly.

Clarification provides that the sale of land by the land owner to the builder/developer is exempt from service tax as it is a sale of immovable property which is out of the scope of service tax net. Hence answer to query (i) is a vehement NO.

Moving on the answer (ii), it is yes, which is what is warranting the need of writing this article. Construction services provided by the builder/developer is taxable in case any part of the payment /development rights of the land was received by the builder/developer before the issuance of completion certificate and the service tax would be required to be paid by the builder /developers even for the flats given to the land owner.

Coming to the valuation of the flats given to the land owner. Value of the taxable service in such as case would be determined in terms of section 67(1)(iii) read with Rule 3(a) of the Service Tax (Determination of Value) Rules 2006. Accordingly value of these flats would be equal to the value of similar flats charged by the builder/developer from other buyers to whom he is selling flats. In case the price of flat undergoes a change over the period of sale then the value of similar flat as sold nearer to the date on which the land is made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession of the flats are transferred to the land owner by entering into a conveyance deed or similar instrument(like allotment letter).

For the sake of convenience and better understanding I would like to explain the above in the form of an example. Mr. A (Builder/Developer) enters into an agreement Mr. B (Land Owner) to build a residential complex in his land. Mr. A agrees to construct 40 flats and 10 villas in the said land. The agreement states that the land development rights are sold to Mr. A in lieu of consideration in cash of Rs. 40 Lakhs (to be paid as per agreed terms of payment), 4 (3BHK) flats and a Villa. The agreement was entered into on the 10th July 2013. Mr. A starts the construction and sells his first flat (2BHK) for Rs. 4000 Rs. Per square feet on 10th September 2013 sells a 3BHK flat at Rs. 4200 on 7th November 2013. He sells his first villa on 5th January 2014 for Rs. 1.5 Crores. The construction is completed on 1st August 2015. Possession of flats are transferred to the land owner on 1st January 2015 and of the Villa on 15th July 2015. Now the valuation would be For Flats – 4*2000*4200=Rs. 3.2 Crores(Value to be taken of similar flat) and for the Villa would be Rs. 1.5 Crores. The service tax would be paid by the builder on separate date for flats and Villa as the possession was transferred on 2 separate dates.

On some of the instances the land owner may also decide to sell the flats given to him by the builder/developer in lieu of the land development rights transferred. In such cases also the service tax will be required to be paid by the transferee if any consideration is received by him from any person before the receipt of completion certificate.

(Article written by Sweta Agarwal – Contact me at

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  1. Rohit says:

    if a land developer purchase land, develop it as residential plots on request (receiving some amount as advance) of some co-operative society and sell them to the members of the society, is developer liable for service tax?

  2. murari srivastava says:

    Sir my client made 24 flat out of which 7 flat given to land owner.I receieved booking amount of 17 flat and constructed 24 flat and I have paid service tax on entire booking amount by which 24 flat constructed and now superintendent of Service tax dept is demading service tax on land owner question is that whether i should pay twice the amount of service tax to the dept

  3. sampath reddy neelapu says:



  4. Vijay n says:

    Sir I am having a land in my and my wife name and we have given our site for construction to a builder to build and hand it over back to us. This property is not for sale as we are going to occupy. My question is the builder has given the final bill and in that bill he has included VAT and Service tax based on reverse charge mechanism. Do I need to pay VAT and Service tax, pleas advice

  5. SAROJ says:

    MY Querry is if a land owner receives flats on his land share with possession certificate and then sells his flat after completion certificate, whether service tax is to be paid or not, if paid then by whom?

  6. anjaneyulu says:

    Dear sir,

    my wife and my self give 1730 sqys with radio of 65% and 35% development and builder completed the 40 flats construction
    know we want sell our share 14 flats (7flats 3bhk,2bhk 7flats)
    for owner share service tax will be applicable or not

  7. Asha Sivakumar says:

    84 flatowners are entering into a joint development venture. Builder is building 120 flats of 1085 sq.ft saleable area. Do the flat owners have to pay service tax. If so how much? The property is in Annanagar rate 12000 per sq ft.

  8. Prabhat Kumar Lal says:

    Thanks for such information.
    Will service tax be applicable if land owner sells flat after issuance of completion certificate? Who should pay this tax and on what rate?


  9. Prabhat Kumar Lal says:

    Thank you shweta forbsuch informative article.
    I want to know that if land owner sells flat after issuance of completion certificate, is service tax applicable? Who should pay the tax and on what rate?
    Thanks in advance,


  10. saran says:


    I have a query regarding the same. we got one flat out of 16 flats. 55 /45 jv, builder asking service tax 12.36 percent service tax and sales tax 2 percent of total buildup area i.e 1300 sq.ft. refused to give monthly rent for the past two year. eb water drainage 125000 he charged. we clearly said that we can give our share of land but no money. please advice in this situation. final stage construction and we are using our flat for own purpose. he constructed 19 flats overall.

  11. Sweta Agarwal says:

    Taxation of Services – Education Guide issued by CBEC also talks about the same treatment as prescribed in the Circular 151/2/2012-ST

  12. Aadesh Kumar Agrawal says:

    I have the same query as Alpesh Shah asked that

    If The Land owner sales the flat before getting completion certificate, Whether he will be able to get setoff (Input Credit) of Service tax paid to builder ?

    Further at which stage Service Tax would be payable by Land owner on further sale, on the date of agreement or on the date of amount received.

    Why will Land owner be liable to pay Service Tax as he is not giving any service to anyone unlike builder.

  13. Sweta Agarwal says:

    Dear All,
    I have been receiving a lot of queries regarding the sale of underconstruction property by the land owner before issuance of completion certificate. in my view the under constructed property is actually sold by the developer to the buyer as the property does not belong to the land owner. He can give the POA to the developer to sell the property on his behalf. In this way the flat will be sold like any other flat and the service tax obligations will be borne by the developer. However these are purely my view, any other view on this topic is welcome

  14. pawan says:


    From 10/07/2012 negative list is applicable , in that case whether Circular 151/ 2/2012-ST issued on 10th February 2012 – is vaild


  15. pawan says:


    From 10/07/20012 negative list is applicable

    In that case whether Circular 151/ 2/2012-ST issued on 10th February 2012 – is vaild


  16. Jagdish says:

    for the developers transferred of 4 flats and a villas and Rs.40 Lacs is cost of land than why should it be charged to service tax in the hand of developers?

  17. Alpesh Shah says:

    What is Tax implication on redevelopment of project in the hand of Developer (1) for flats given to existing flat owner free of cost
    (2) by taking nominal construction cost
    (3) If yes, then on what value and at what stage ?

  18. Alpesh Shah says:

    Pl. accept my complements for giving such a informative article with a very clear explanation.

    My Further query is.
    If The Land owner sales the flat before getting completion certificate, Whether he will be able to get setoff (Input Credit) of Service tax paid to builder ?

    Further at which stage Service Tax would be payable by Land owner on further sale , on the date of agreement or on the date of amount received.

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May 2024