Plotted development done for landlords under JDA and GST

Background

From the inception of GST, there has been confusion with regards to GST applicability on the development and sale of plots.

To give a background to this issue, plotted development is a scheme that involves forming land into a layout after obtaining the necessary plan approval from the Development Authority, getting all other permissions required to take up, commencing, and completing what would be the layout, comprised of individual sites.

In the activity of plot development, the following are done: leveling the land, amenities, facilities like roads, drainage, underground sewage, underground electricity lines, water supply connection for storage, overhead tank, and other infrastructure works. Sale of such sites is done to end customers who may construct houses/villas in the plots.

Such plot development could be done under the JDA joint development model by the developer on land belonging to the landlord. It could also be done by a developer on their own land.

Joint development agreements, or JDAs, on an area-sharing basis, are entered into by the landowners with developers. The landowners may not be having the resources or technical expertise/experience to do the infrastructure works for the development of the layouts consisting of sites. The developer would do the development of sites under JDA. The developer and landlord would be entitled to a specified portion of total sites formed on the property.

Clarification has been given in circular 177/9/2022-TRU that the sale of developed plots is out of GST net. This has made it clear that when the developer sells developed plots, it is not liable to GST.

Significantly, the circular has been silent, not explicitly setting out the development works done for the landlord's share of sites under the area-sharing Joint Development Agreement [JDA] excluded from the tax net. It is being seen that across states the GST department has been issuing notices, demanding tax to be paid on the developed area of the landlord's share under the joint development agreement [JDA]. Such an approach seems to be incorrect and seeks to indirectly levy GST on land, which is excluded from the levy [Schedule III Entry 5].

In this backdrop, the paper writer has examined the GST implications for plot development done for landlords share under JDA and coverage in the Third Schedule entry under GST.

Whether GST is leviable on landlords share of developed plots?

In order to constitute a supply under GST, there has to be a 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 the course of business. Supply of goods/services could be done as barter as well.

The term "barter" is not defined in GST law. In common parlance, barter is the exchange of goods or services against other goods or services, without the 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 the supply of goods/services. Consideration covers both monetary and non-monetary consideration.

Schedule II sets out the activities that are treated as a supply of goods or a supply of services. Therein it covers the following relevant entries related to construction done by the developer. Entry 5(b) wherein the construction of a complex, building, civil structure, or part thereof, including a complex or building meant for sale to a buyer, wholly or partly, is treated as a supply of service, except where the entire consideration has been received after the issuance of a completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. Further, vide entry 6. (a), a works contract, being a contract for building, construction of any immoveable property, which involves the transfer of property in goods [as goods or in any other form] in the course of the execution of the contract, is treated as a supply of service.

Under GST, tax is levied on the supply of goods/services. It may be noted that Schedule III to GST law sets out activities that are treated neither as a supply of goods nor as a supply of services. Therein, entry 5 covers the sale of land and the sale of a completed building/constructed unit, which is consequently excluded from the tax levy.

Analyze why GST is not applicable on landlords share of developed sites

It is seen that in JDA, the developer would be providing to the landlord developed sites formed. The landowner, in turn, is providing the land/development rights to develop the scheduled property to the developer.

The dept could allege that the developer is engaged in the development activity done for the landlord, against the consideration of development rights, received prior to the completion of development/construction, which is barter leviable to GST.

While it is very clear that the transaction shall be out of the GST net if the activity is dealing with the transfer of title or transfer of ownership of land, which is immoveable property or earth. Here the intention of the agreement between the parties is important. During infrastructural development, where the intention of the developer is to deliver the immovable property, then there may not be any liability on the supplier as the same is excluded from the ambit of GST vide inclusion in Schedule III. These amenities and facilities are largely to be handed over to local authorities and no longer remain part of the property. It cannot be artificially vivisected to tax the infrastructures, if any.

This would also be in line with the L&T decision [2013 TIOL 46 SC-CT-LB], as per which immovable property is not liable to service tax or VAT under the erstwhile law. Persuasive value under GST as well.

Taking a cue from Circular 177/2022, it can be contended that GST is not leviable on the plots of the landlord's share. Hence, a view could be taken that where the intention is to deliver a completed plot, then GST may not be paid, even though there is an agreement. However, this could be disputed but defendable at higher levels of jurisdiction.

In addition, there is no price that is actually paid or payable by the landlord for the supply of development services. There is no specific valuation mechanism prescribed either to value the services done towards the landlord's share of plots/sites under the GST regime. In the absence of a valuation mechanism, the levy fails. The B.C. Srinivasa Setty case [Appeal (civil) 2335 of 2003] established that if a law lacks a mechanism for calculating a tax, it implies no tax was intended.

Due to there being no specific clarification to date that GST is not payable on developed plots of landlord area, the department is raising frivolous demands of GST from the developer, valuing the land valuation for the sale of plots done by the developer!! This is not in line with the intention of the GST provisions, which is not to levy tax on land [which is a state subject].

On a side note

However, the risk-averse developers who do not wish to litigate the matter may call to discharge GST on the development works attributed to landlord sites.

In which case, options are available to discharge the GST liability under GST Valuation Rules. Rule 27 sets out the value of services when the consideration is not wholly in money.

i. Open market value or value of services of like kind/quality - This may not be determinable as there may not be available any other supply of services under the same/similar circumstances that is similar or substantially resembles the supply of infrastructure services to the landlord.

ii. In which case, the cost of provision of service + 10%—Rule 30 is a defensible option: This may be determined by the developer as supported by a chartered engineer certificate. Example per sft cost of construction Rs. 275 + 27 [10% markup] tax at 18% per sft to the extent of the area of the landlord share. ITC attributed to the landlord share can be availed by the developer. It is seen that the ITC related to the landlord area can be sufficient to cover output GST liability. Marginal extra cash outflow is expected from the developer's pocket.

iii. Note: Value declared on invoice to be acceptable where recipient [such as landlords] is eligible to take full ITC. This may not be applicable as the landlord or developer may sell their share of developed sites without charging GST, as per Circular 177, in which case they cannot avail themselves of the full credit.

While there is no separate time of supply set out for discharge of GST on landlord sites, taking cue from 6/2019-CT(R) can discharge at completion of project.

Conclusion

In this article, the paper writer has examined JDA and GST implications in the context of the plotted development of the landlord's area.

The author can also be reached at roopa@hnaindia.com.