Background
In the real estate sector, joint development agreements or JDA, are entered into by which the land owners with developers. The land owners may not be having the resources or technical expertise to do the construction of residential or commercial buildings. Such land owners approach the builder, who then engages in the development of the project. The developer could get the construction done on his own or by contractors. Under such arrangement, a specified portion of the constructed area is given to the landowner and another portion is for developer. Developer is entitled to sell his share of constructed units and the land owner can sell his share of constructed units.
In the past regime, under service tax and VAT laws, a view was being taken that tax was not payable on the landlord share of constructed area, citing intention was delivery of constructed units, being immoveable property which was delivered by developer to landowner. Consequently as it was not goods/services, it was being claimed to be excluded from ST/VAT levy.
However the LB in Para 111 of the Order in L&T (2013-TIOL- 46-SC- CT-LB), has stated that 'in the development agreement between the owner of the land and the developer, direct monetary consideration may not be involved but such agreement cannot be seen in isolation to the terms contained therein and the agreement in the nature of a tripartite agreement between the owner of the land, the developer and the flat purchaser whereunder the developer has undertaken to construct a flat for the purchaser for monetary consideration Seen thus, there is nothing wrong if the transaction is treated as a composite contract comprising of both a works contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract.'. Unless reconsidered, the matter appeared to favour the revenue.
Even post 1..7.2017, there has been a lot of confusion of whether GST is applicable on construction done for landlord, if yes what is the value on which tax to be paid and when tax is to be paid. These and other relevant aspects are examined by paper writer in this article.
GST and landlord share of constructed area
In order to constitute a supply under GST, there has to be supply of goods or services or both done in any manner such as sale, transfer, barter, exchange, license, rental, lease or disposal done or agreed to be done for a consideration, in course of business. Supply of gods/services could be done as barter as well.
The term 'barter' is not defined in GST law. In common parlance, barter is exchange of goods or services against other goods or services, without use of money. Consideration is defined in GST, to include any payment made or to be made, whether in money or otherwise, in respect of supply of goods/services. Consideration covers both monetary and non-monetary consideration.
Schedule II sets out the activities which are treated to be supply of goods or supply of service. Therein it covers the following relevant entries related to construction done by developer. Entry 5(b) wherein the construction of a complex, building, civil structure or part thereof, including complex or building meant for sale to a buyer, wholly or partly, is treated as supply of service, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. Further vide entry 6. (a) works contract, being contract for building, construction of any immoveable property, which involves transfer of property in goods[as goods or in any other form] in course of execution of contract, is a supply of service.
It maybe noted that Schedule III to GST law sets out activities which are treated neither as supply of goods nor as supply of service. Therein entry 5-covers sale of land and sale of completed building/constructed unit, which is consequently excluded from tax levy.
In this backdrop, it is seen that in JDA, the developer would engage in providing construction service to landlord, in exchange for which the landowner maybe said to provide the land/development rights to develop the schedule property to the developer. It appears that there is barter done by way of construction services supplied by developer against the non-monetary consideration of the land/development rights given by land owner.
The developer is engaged in the construction activity done for landlord, in exchange for the consideration of development rights, received prior to completion of construction, which maybe treated as supply of service covered in Schedule II Entry 5. Similarly the arrangement of developer and landlord whereby the building/units construction work is done by developer, using material and labour, after entering into JDA with land owner, maybe said to be a works contract service under GST.
From the above a view maybe possible that GST is attracted on the construction service done by developer to landlord post 1.7.2017. It is relevant to remember at this juncture the decision of Supreme Court in Bala Bhaskar Rao Vs. CST (2016(43) S.T.R 161 (Mad.), maintained in 2017(48) STR J43 (Supreme Court) where it was held that, the exchange of undivided land with builder for constructed area amounts to service. This was a decision under erstwhile law and may have pursuasive value under GST.
Valuation of constructed area of landlords share
There is no price which is actually paid or payable by landlord for the supply of construction services. Following options would be available to discharge the GST liability under GST Valuation Rules. Rule 27 sets out value of services when the consideration is not wholly in money. The valuation of constructed area of Landlord share to be determined from perspective of the service recipient landlord.
(i) Open Market Value- 'Open market value' of services means full value in money[excluding GST] payable by a person to get such supply at same time when supply being valued is made. The consideration to obtain such supply by Landlord at the same time when the supply being valued is made may not be possible. 'Open market value' of construction services to Landlord may not be determinable.
(ii) Value of services of like kind or quality: 'Supply of services of like kind and quality' means any other supply of services made under similar circumstances in respect of quality, quantity, functional components, materials, and reputation of services first mentioned, that is same as or substantially resembles, that supply of services. This may not be determinable as there may not be available any other supply of services under similar circumstances that is similar or substantially resembles, the supply of construction services to Landlord.
(iii) Cost + 10%-Rule 30: This may be determined but the developer as supported by a chartered engineer certificate. He may have to add margin to the cost of construction as his cost for constructing say 100 units maybe lesser than the cost which Landlord would have to incur if Landlord had constructed say for example 10 units.
Value declared on invoice to be acceptable where recipient[such as related persons-landlords being group companies] is eligible to take full ITC. This may not be applicable as the Landlord of developer may sell their share of flats after completion, without charging GST in which case cannot avail full credit.
When to pay the tax?
GST liability arises at the time when the JDA agreement entered into and consideration of the development rights was received, in line with the section 13(2), where it sets out GST liability arises on supply of services at the time of date of receipt of payment. The receipt of development rights could be treated as receipt of payment of non-monetary consideration.
However in accordance with notification no. 4/2018-CT(R) GST on the construction services provided by the developer to LL would be liable to be paid, when developer transfers possession or the right in the constructed building or apartments to LL by entering into a conveyance deed or similar instrument for example allotment letter. Similarly under earlier service tax law, there was a circular 151/2012-ST clarified on the payment of taxes may be postponed to the time when flats/units are delivered/handed over to Landlord.
Whether tax can be collected by developer from landlord
The primary liability to pay GST on landlord share of constructed area is on the supplier of service namely the developer. However as GST is a destination based levy to be borne by consumer, the developer could collect from landlord and pay GST to Govt especially when there is specific clause in JDA that tax such as GST to be paid extra by landowner to developer. It was similarly held in number of decisions [of persuasive value in GST] that tax can be collected from recipient and paid to Govt.
- In said decision of Bala Bhaskar supra held that the developer could demand tax from landlord.
- In All India Fedn. Of Tax Practitioners Vs UOI (2007(7) STR 625(SC) held under service tax that it is not charge on business but on consumer.
Other issues
Whether GST is applicable on construction done under JDA prior to 1.7.2017?
GST is applicable on the construction service supply done by developer for landowner under JDA post 1.7.2017.
This is supported by section 142(10) of GST [transition provisions] which sets out the goods or services or both supplied on or after the appointed day in pursuance of a contract entered into prior to the appointed day, shall be liable to tax under the provisions of GST
Whether the landlord can avail credit of tax charged and collected by developer on flats of landlord share of constructed area?
The landlord is liable to GST on the flats which he sells in course of construction to end buyers by entering agreement to sale with them. When the landlord is liable to pay output GST on the sale of flats of his share sold prior to completion of construction, he can avail credit of tax charged to him towards such units/flats by developer. The completed flats which are sold/supplied after completion, is treated as exempted supply and credit attributed to same cannot be availed.
Conclusion
In this article the paper writer has examined JDA and GST implications in context of landlords share of constructed area. The developers who are engaged in construction services to landlord under JDA may attract levy of GST, which maybe collected from landlord and paid to avoid future disputes in this regard.
For any clarifications reach to roopa@hiregange.com.
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