Date of liability w.r.t to JDA entered in pre-GST regime

Introduction:

• Real estate is an important sector of the economy and Joint Development Agreements (hereinafter referred to as 'JDA') forms one of the fundamental parts of such sector. JDA is an agreement entered between the landowner and the developer wherein the landowner would provide the right to the developer to develop the land, in return for the construction services to be provided by the developer. Let us analyze a situation wherein such JDA was entered in the service tax regime (hereinafter referred to 'ST') and the developer commenced construction during that period. In such cases usually, if the construction activity continues in the GST regime, the completed flats would be handed over to the landowner in the GST regime.
• The question that needs to be answered in such scenarios is whether ST or GST would be applicable on the construction services provided by the developer to the landowner as the said transaction is spread over in two different tax regimes. A similar case was analyzed in the ruling given by the Karnataka Authority for Advance Ruling (AAR) in the case of M/s Durga Projects and Infrastructure Private Limited dated 25.07.2019 [2019-TIOL-246-AAR- GST], wherein it was ruled that the applicant is liable to pay GST at the time of transfer of possession of the landowners' portion of the flats. Let us have a look at the said ruling and analyze in the light of the provisions and the business practices.

Facts:

1. The applicant is engaged in the construction and sale of residential apartments and residential complexes under joint development agreements.
2. The applicant has executed projects under JDA with landowners for an agreed ratio of the built-up area. Construction was commenced during the pre-GST regime and continued under the GST regime. 

Applicant's submission and the query:

1. The applicant stated that construction services provided to the landowner under JDA would be a supply in terms of section 7 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as 'Act') and the value for such work executed to landowner would be determined in terms of rule 27 to 35 of CGST Rules, 2017 which would be the value of the land on the date of entering into JDA.
2. However, the applicant stated that GST would be applicable only on the portion of work executed under GST and ST would apply to the extent of work executed in the pre-GST regime in terms of section 142(11) of the Act. However, the applicant seeks ruling whether he is liable to pay GST towards the work executed under JDA on landowner's portion wherein work is commenced in the pre-GST regime and continued in the GST regime and if so, the value for the said service. 

Authority's observation and analysis:

1. The applicant is supplying the construction service to the landowner against consideration in the form of transfer of development rights. Hence, it would be a supply under GST.
2. Moreover, the applicant has not furnished any information as to whether he has transferred the possession of the landowner's share of flats or not. Hence, it is inferred that the possession of the landowner's share of flats has not been given to the landowner as on date. Therefore, the said possession obviously would happen during the GST regime and hence the entire transaction would be leviable to GST in terms of notification No.4/2018 – Central Tax Rate dated 25.01.2018. The value on which GST would be payable would be total consideration after the deduction of one-third portion towards land.

Ruling:

In view of the above facts and observations of Authority, it was ruled that the applicant is liable to pay GST at the time of transfer of possession of the landowners' portion of flats.

Comments

1. The views expressed in the above ruling are incomplete and may not be correct as they failed to examine the transitional provisions u/s 142(11)(b) of the Act which states that no tax shall be payable on services under GST to the extent tax was leviable on such services under the Finance Act, 1994. In the instant case, it is evident that by entering into a JDA, the developer would have agreed to provide the construction services to the landowner in return for development rights and a share of land received from him (non- monetary consideration). Hence, it would be a service in terms of section 66B of the Finance Act, 1994. (hereinafter referred to as 'ST Act') Therefore, for JDA's entered prior to the GST regime, levy under ST would be attracted before 01.07.2017 and hence GST would not apply in terms of section 142(11) (b) of the CGST Act, 2017 for such services by the developer.

2. Therefore, in our view, in cases where JDA was entered in ST regime and possession or allotment of flats takes place in the GST regime, the developer would be liable to pay ST only. Further, the point of taxation would arise on the date of entering into the JDA for the reason that on such date itself the Developer gets right over his share, which is the non-monetary consideration for the development services that he would provide i.e. the date of receipt of consideration In terms of rule 3 of Point of Taxation (PoT) Rules, 2011.

3. A similar view was held in CCE & ST v. Sri Lakshmi Promoters 2018-TIOL-832-CESTAT-HYD, wherein it was held that if the JDA is before 01.07.2010 then no ST is applicable, whether or not SA is entered before 01.07.2010. From this, it can be construed that the date of JDA is the date on which liability arose and that will not get affected by the date when the allotment or possession of units is given to the landowner.

4. Moreover, it is to be noted that the said notification 4/2018 ibid referred in the advance ruling which gives the power to issue a notification with respect to procedural aspects only and not with respect to any aspect of the law. Therefore, this notification cannot be issued to prescribe the time of supply, what is mentioned in the above notification is only when the payment is to be made and it cannot shift the ToS (which is a substantive law) from the date of JDA to possession date.

5. Further, the wordings 'transfer of possession or right' used in the above-referred notification is similar to the wordings used in Circular No.151/2/2012-ST dated 10.02.2012 issued under the erstwhile Finance Act, 1994. In the Service Tax regime, there exist different interpretations with respect to the date of payment of tax as follows:

• A view that point of taxation (hereinafter referred to as 'PoT') shall be the date of conveyance deed or Supplementary Agreement (SA) entered allotting the flats to the landowners by stating that the right has been transferred to the landowner on that date.
• Another view is that the PoT would arise only the date of the transfer of possession of flats to the landowner, which will happen only after completion of construction but not on the date of allotting flats to the landowner.

6. As the words used are the same, the above confusion and interpretations continue in the GST regime and thus the Authority ruled that GST would be liable to be paid on construction services provided to the landowner on date of transfer of possession of flats. Further, a point to be noted here is that the above circular is not law and it cannot go beyond the law and prescribe when the liability to pay tax would arise. Thereby, what is mentioned in the above circular is only when the payment is to be made and it cannot shift the point of taxation from the date of JDA to SA date. A circular which is contrary to the statutory provisions has no existence in law as held in the case of CCE Vs Ratan Melting & Wire Industries (2008) 231 ELT 22. Thereby, it can be said that the clarification in para B(ii) of 2.1 of circular 151 ibid, is not as per law and thereby has no effect of shifting the PoT from the date of JDA to the date of allotment or possession date.

7. Based on the above discussion, the point of taxation in the present case would be the date of JDA itself and service tax would be applicable as the JDA was entered before 01.07.2017 and the time to discharge such liability would be the month following the month in which SA was entered or handover of flats to the landowner has taken place. Further, the advance rulings give confirmation to such views (which in the view of the paper writers should not be taken too seriously to take business decisions). However, it is advised in case of huge stakes a professional can be consulted to identify possible value additions considering the risks involved to make informed decisions.