With intent to ease out the process and norms of the goods and service tax paid by the taxpayer...
In the real estate industry, a business model known as the Joint Development Agreement (JDA) is often an examined model. The real estate sector has undergone tremendous changes concerned with GST implications. Joint Development Arrangement (JDA) has always been a bone of contention between the taxpayer and the tax department. Hence, it has always been an area of litigation. But despite this fact, JDA is the most common and popular form of arrangement for constructing properties in our Country. It is a preferable form both to the developer and to the Landowner. In this article, we have tried to put a broad concept of taxability of the Joint Development Agreement under GST and Income Tax law.
There is no detailed definition of the term ‘Joint Development’ prescribed under the law. But generally, in a Joint Development Agreement, a landowner contributes his share of land for the construction of a real estate project, and the developer undertakes the responsibility for the development of property or obtaining approvals or to perform legal formalities and to market the project.
The Landowner and the developer enter into an agreement where the Landowner transfers the power of Attorney to the developer. He assigns the developer the duty to obtain necessary approvals from various authorities and also allows him to enter the land and perform all the required activities needed for construction.
Through this agreement, the developer owns the right to sell and register the agreed portions of the land with respective undivided shares by way of flats to the other buyers. After the completion of construction, the landowner hands over the apartment allocated to his share, which can be kept for personal use or might even rent out or sell.
The advantages of Joint Development Agreement (JDA) are:
The developer earning income by making sales in his developed property is considered as his business income.the business income is taxable as per the applicable provisions. Whereas, the amount received by the Landowner in any form is considered as Capital Gains.
But the main difficulty lies in the calculation of capital gains. The JDA model is often challenged by the assessing officers due to lack of clarity relating to taxation in the hands of landowners and also the determination of the amount of taxable consideration received by the Landowner.
The Government in 2017 introduced a new provision of Section 45(5A) of the Income Tax Act, 1961.
This provision has been discussed below;
Hence, the critical point of the newly inserted sub-section 5A is enumerated below;
TDS @ 10% is also applicable by the developer on any monetary consideration paid to any individual or HUF landowner.
Under a JDA, the Landowner transfers the development rights and allows activities on his land, and the developer or builder, in turn, construct the building on the property. It is up to the Landowner either he can keep his share of flats for his use, or he can also sell such area or apartments to the buyers. So this type of arrangement can be broadened as:
There remains a debate about whether GST on Joint Development Agreement (JDA) is liable or not.
The main point is that the transfer of development rights is similar to the sale of immovable property and hence must be in the purview of GST.
The GST provisions with respect to the respective real estate sector have undergone a sea change with effect from 1st April, 2019. Before 1st April 2019, the rates of tax were much higher, and also it lacked clarity in some areas.
Also, Read: GST on Advertisement Services and its Taxability.
GST applies to the supply of development rights, where the responsibility to pay tax is no more in the hands of landowners somewhat, it has been shifted to the builder under the reverse charge mechanism (RCM). It is irrelevant in case, the Landowner is registered under GST or not. Hence, it can be interpreted that the transfer of development rights is not taxable in the hands of landowners.
Where the Landowner further sells his share of constructed area or flats allotted by the builder, and in turn, he receives consideration amount from the prospective buyers during the construction stage. Here the landlord is liable to pay GST on Joint Development Agreement (JDA). No GST is applicable if the sales have been made after the completion of construction.
In case of additional sales of area or flats by the Landowner, he will be liable to pay tax at the rate of 1% or 5% depending on the nature of the residential apartments that are affordable or non-affordable category. Hence, if the developer has opted for the existing system of 8% or 12%, then the Landowner will also have to choose for the same. Further, he can also claim ITC charged by the builder in both the old as well as the new rates on the consideration value against the transfer of development right in the land.
The Landowner must pay GST on the receipt of advance or the booking amount from the customers against sales.
The actual sales value realizable from buyers will be the value of supply.
The new GST rates (1% and 5% without ITC) with effect from 1st April apply to the construction of residential apartments in a project which initiates on or after 1st April, 2019.
The new tax rates will be available subject to the following conditions:
Supply of TDR or FSI for long term lease of land used for the construction of residential apartments in a project that is booked before the issue of completion certificate or first occupation is exempt vide serial number. 41A of notification number 12/2017-CT(Rate) dated 28-6-2017.
Supply of TDR or FSI for long term lease of land, on the value proportionate to the construction of residential apartments which remains un-booked on the date of completion of the project, will attract GST at the rate of 18%. Still, the amount of tax shall be limited to1% or 5% of the value of apartment (un-booked) depending upon whether the residential apartments for which such TDR or FSI is used, in the affordable residential apartment category or in other than an affordable residential apartment.
TDR or FSI on long term lease of land used for the construction of commercial apartments shall attract GST of 18%. However, the same has to be paid by the builder on a reverse charge basis, u/s 9(3). [S.No. 16(iii) of Notification No. 11/2017-CT(R) date. 28th June, 2017 as confirmed by AAR Maharashtra Ruling in the case of Vilas Chandanmal Gandhi dated 15th January, 2020]
Thus builder is liable to pay GST at the rate of 18% on TDR or floor space index supplied on or after 01-04-2019 on reverse charge basis and can take ITC thereof.
The liability of paying GST on the Joint Development Agreement (JDA) shall arise on the date of completion of the project or first occupation of the project, whichever is earlier. Hence the builder is liable to pay tax on reverse charge basis on the supply of TDR after 1st April, 2019. It is attributable to the residential apartments, which remain unbooked even after completion of the project. The same applies to both monetary and non-monetary consideration given for residential complex.
However, the liability to pay tax will arise immediately if the FSI is relatable to the construction of commercial apartments.
In case of sales of constructed area or flats to the buyer by the builder, the time of supply shall be a time of purchase or receipt of advance against such sale.
The cost of TDR must be equal to the amount that is charged by the builder for similar apartments from the independent buyers. The booking date nearest to the time on which the landowner transfers such development rights or FSI to the builder shall be considered.
In the case where the sale of constructed area or flats is made to the buyers in actual price, in this situation, the actual price will be the value of supply.
The Government has made several efforts to simplify the issue regarding transfer of property in development rights and taxation. Various provisions under the GST law are also linked to RERA Act, 2006. It is hence evident from the viewpoint of taxation that the taxable value under IT and GST laws are now more or less synchronized. Under the Income Tax law, taxation, as per section 45(5A) is charged on completion of the project. After 1st April, 2019 the GST liability of the Landowner regarding transfer of development right is shifted on the builder under the reverse charge mechanism. The point of taxation is also the same here. That is, it is made on completion of the project. Under the Income Tax Law, the taxable value for development right is levied on stamp duty adopted for constructed flat/area. The Government is trying to choose a Fair Market Value based on stamp duty valuation and sales price of similar apartment.
See Our Recommendation: GST on Education Services -A Complete Analysis.