Background
Joint development agreements or JDA, are entered into by 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, using his resources. The developer could get the construction done on his own or by contractors. Under such arrangement, an allocated share of the constructed area is given to the landlord 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 to end customers.
The intention of JDA is for developer to undertake the construction and delivery of immoveable property to landlord. At this point, it would do well to recall that GST is applicable on supply of goods-moveables/services[anything other than goods] done for a consideration. When developer hands over the constructed area, ie immoveable property of landlord's share, there is a possibility of challenge contending that the intent is to deliver the constructed apartment, which is immoveable property[not goods/service] and excluded from GST levy. This view may have to be judicially tested and could be disputable.
Further it is seen that under JDA, the developer would engage in providing construction service to landlord, in exchange for which the landlord 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 landlord.
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 [vide Schedule II Entry 5 to GST law]. 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 landlord, maybe said to be a works contract service under GST. Similarly held under erstwhile Vat laws in decision of L&T(2013-TIOL-46-SC-CT-LB).
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. The above said decisions under erstwhile law may have pursuasive value under GST.
Further after the new scheme of taxation under GST for real estate sector which is introduced wef April 2019 onwards, there has been confusion among assesses on tax treatment of construction done for landlord under JDA. Questions are being raised about applicability of GST on construction done for landlord by developer under JDA, who is the person liable to pay the tax, value on which tax to be paid and time when tax is to be paid.
These and other relevant issues are covered by paper writer in this article.
Applicability of GST on the landlord's share of area where construction works were done in GST period:
JDA where development rights transferred by landlord post April 2019:
a. GST applicability: GST is leviable on the construction done by developer for landlord against the non-monetary consideration of development rights parted by landlord.
b. When to pay GST: GST to be paid at the time of completion certificate or first occupation, whichever is earlier.
c. Valuation: The value of construction service in respect of such apartments would be deemed to be equal to the total amount charged for similar apartments in the project from the independent buyers nearest to the date of JDA. However, since this value includes the value of land as well, 1/3rd deduction shall be eligible from such value of construction.
When Development rights transferred under JDA prior to March 2019
a. GST applicability: GST is leviable on the construction of units done by developer for landlord post July 2017 onwards. The receipt of development rights could be treated as receipt of payment of non-monetary consideration, by developer against the construction service done for landlord.
b. When to pay GST: In accordance with notification no. 4/2018-CT(R) GST on the construction services provided by the developer to Landlord, GST would be liable to be paid, when developer transfers possession or the right in the constructed building or apartments to Landlord 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.
c. Valuation: Based on (a) open market value[OMV] or (b)value of supply of goods or services of like kind and quality, where OMV is not determinable or (c)110% of Cost, where a/b are not determinable. Note: This is when handover of landlords share is done prior to April 2019.
Who is liable to pay GST on landlords constructed area?
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 taxes 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. Similarly in above said decision of Bala Bhaskar supra held that the developer could demand tax from landlord.
Recent Advance ruling under GST:
In re Durga Projects and Infra Structure Private Limited (GST AAR Karnataka) Advance Ruling No. KAR ADRG 17/2019.
Facts: The Applicant is engaged in construction and sale of residential apartments and residential complexes under joint development agreements.
The Applicant has executed projects under JDA with Land Owners for an agreed ratio of built-up area. Construction was commenced during pre-GST regime and continued under GST regime.
Issue: Whether Applicant is liable for GST towards work executed under JDA on land owner's portion where work commenced during pre-GST and continued under GST Law. If tax is applicable what is the valuation for payment of tax?
Held: The construction commenced during pre-GST regime and continued thereafter also. Further it is inferred that the possession of the land owner's share of flats has not been given to the land owner. Therefore the said possession obviously would happen during the GST regime and hence would attract applicable GST. The value to be arrived at in terms of para 2 of the Notification No.11/ 2017-Central Tax (Rate) dated 28.06.2017
In terms of Notification No.4/2018-Central Tax (Rate) dated 25.01.2018 the time of supply would fall under the purview of GST law. Therefore the tax liability arises not partly under the earlier law and partly under the GST law, but entirely under the GST law.
It maybe noted that Advance ruling is applicable only to assessee who has sought it and to his set of facts. It has limited validity for others. It maybe followed only when it is in line with the provisions.
Paper writers Comments:
This ruling confirmed that GST to be paid on Land owner's portion construction under JDA. Also that tax to be paid on the value to be arrived at including land value, and that the tax to be paid at the time of transfer of possession of the land owners' portion of the fiats.
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.
The next article in real estate would be on tax implications of revenue sharing arrangements between developer and landlord.
The author can also be reached at roopa@hiregange.com
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