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.<\/p>\n\n\n\n
There\nis no detailed definition of the term ‘Joint Development’ prescribed under the\nlaw. But generally, in a Joint Development Agreement, a landowner contributes\nhis share of land for the construction of a real estate project, and the\ndeveloper undertakes the responsibility for the development of property<\/a> or\nobtaining approvals or to perform legal formalities and to market<\/a> the project. <\/p>\n\n\n\n The\nLandowner and the developer enter into an agreement where the Landowner\ntransfers the power of Attorney to the developer. He assigns the developer the\nduty to obtain necessary approvals from various authorities and also allows him\nto enter the land and perform all the required activities needed for\nconstruction.<\/p>\n\n\n\n Through\nthis agreement, the developer owns the right to sell and register the agreed\nportions of the land with respective undivided shares by way of flats to the\nother buyers. After the completion of construction, the landowner hands over\nthe apartment allocated to his share, which can be kept for personal use or\nmight even rent out or sell.<\/p>\n\n\n\n The\nadvantages of Joint Development Agreement (JDA) are:<\/p>\n\n\n\n The\ndeveloper earning income by making sales in his developed property is\nconsidered as his business income.the business income is taxable as per the\napplicable provisions. Whereas, the amount received by the Landowner in any\nform is considered as Capital Gains. <\/p>\n\n\n\n But\nthe main difficulty lies in the calculation of capital gains. The JDA model is\noften challenged by the assessing officers due to lack of clarity relating to\ntaxation in the hands of landowners and also the determination of the amount of\ntaxable consideration received by the Landowner.<\/p>\n\n\n\n The Government in 2017 introduced a new provision of\nSection 45(5A) of the Income Tax Act, 1961.<\/p>\n\n\n\n This provision has been discussed below;<\/em><\/strong><\/p>\n\n\n\n Hence, the critical point of the newly inserted sub-section 5A is enumerated below;<\/strong><\/p>\n\n\n\n TDS @ 10% is also applicable by the developer on any\nmonetary consideration paid to any individual or HUF landowner<\/strong>.<\/p>\n\n\n\n Under\na JDA, the Landowner transfers the development rights and allows activities on\nhis land, and the developer or builder, in turn, construct the building on the\nproperty. It is up to the Landowner either he can keep his share of flats for\nhis use, or he can also sell such area or apartments to the buyers. So this\ntype of arrangement can be broadened as:<\/p>\n\n\n\n There remains a debate about whether GST on Joint Development Agreement (JDA) is liable or not.<\/p>\n\n\n\n The\nmain point is that the transfer of development rights is similar to the sale of\nimmovable property and hence must be in the purview of GST. <\/p>\n\n\n\n The GST provisions with respect to the respective real estate sector<\/strong> have undergone a sea change with effect from 1st<\/sup> April, 2019. Before 1st April 2019, the rates of tax were much higher, and also it lacked clarity in some areas. <\/p>\n\n\n\n Also, Read:<\/b> GST on Advertisement Services and its Taxability<\/a><\/mark>.<\/p><\/div>\n\n\n\n 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<\/a><\/strong> or not. Hence, it can be interpreted that the transfer of development rights is not taxable in the hands of landowners.<\/p>\n\n\n\n Where the Landowner further sells\nhis share of constructed area or flats allotted by the builder, and in turn, he\nreceives consideration amount from the prospective buyers during the\nconstruction stage. Here the landlord is liable to pay GST on Joint Development\nAgreement (JDA). No GST is applicable if the sales have been made after the\ncompletion of construction.<\/p>\n\n\n\n In case of additional sales of area\nor flats by the Landowner, he will be liable to pay tax at the rate of 1% or 5%\ndepending on the nature of the residential apartments that are affordable or\nnon-affordable category. Hence, if the developer has opted for the existing\nsystem of 8% or 12%, then the Landowner will also have to choose for the same.\nFurther, he can also claim ITC charged by the builder in both the old as well\nas the new rates on the consideration value against the transfer of development\nright in the land.<\/p>\n\n\n\n The Landowner must pay GST on the\nreceipt of advance or the booking amount from the customers against sales.<\/p>\n\n\n\n The actual sales value realizable from buyers will be the value of supply.<\/p>\n\n\n\n Read our article<\/b>:How GST has Changed the Real Estate Sector?<\/a><\/mark><\/p>\n\n\n\n The new GST rates (1% and 5% without\nITC) with effect from 1st<\/sup> April apply to the construction of\nresidential apartments in a project which initiates on or after 1st<\/sup>\nApril, 2019.<\/p>\n\n\n\n The new tax rates will be available subject to the following conditions:<\/strong><\/p>\n\n\n\n Supply of TDR or FSI for long term\nlease of land used for the construction of residential apartments in a project\nthat is booked before the issue of completion certificate or first occupation\nis exempt<\/strong> vide<\/em> serial number. 41A of notification number\n12\/2017-CT(Rate) dated 28-6-2017. <\/p>\n\n\n\n Supply of TDR or FSI for long term\nlease of land, on the value proportionate to the construction of residential\napartments which remains un-booked on the date of completion of the project,\nwill attract GST at the rate of 18%. Still, the amount of tax shall be limited\nto1% or 5% of the value of apartment (un-booked) depending upon whether the\nresidential apartments for which such TDR or FSI is used, in the affordable\nresidential apartment category or in other than an affordable residential\napartment.<\/p>\n\n\n\n TDR or FSI on long term lease of land used for the construction of commercial apartments shall attract GST of 18%<\/strong>. However, the same has to be paid by the builder on a reverse charge basis, u\/s 9(3). [S.No. 16(<\/strong>iii<\/strong><\/em>) of Notification No. 11\/2017-CT(R) date. 28th June, 2017<\/strong> as confirmed by AAR Maharashtra Ruling in the case of Vilas Chandanmal Gandhi dated 15th January, 2020]<\/p>\n\n\n\n Thus builder is liable to pay GST at\nthe rate of 18% on TDR or floor space index supplied on or after 01-04-2019 on\nreverse charge basis and can take ITC thereof.<\/p>\n\n\n\n The\nliability of paying GST on the Joint Development Agreement (JDA) shall arise on\nthe date of completion of the project or first occupation of the project,\nwhichever is earlier. Hence the builder is liable to pay tax on reverse charge\nbasis on the supply of TDR after 1st<\/sup> April, 2019. It is attributable\nto the residential apartments, which remain unbooked even after completion of\nthe project. The same applies to both monetary and non-monetary consideration\ngiven for residential complex.<\/p>\n\n\n\n However, the liability to pay tax\nwill arise immediately if the FSI is relatable to the construction of\ncommercial apartments. <\/p>\n\n\n\n In case of sales of constructed area\nor flats to the buyer by the builder, the time of supply shall be a time of\npurchase or receipt of advance against such sale.<\/p>\n\n\n\n The cost of TDR must be equal to the\namount that is charged by the builder for similar apartments from the independent\nbuyers. The booking date nearest to the time on which the landowner transfers\nsuch development rights or FSI to the builder shall be considered.<\/p>\n\n\n\n In the case where the sale of\nconstructed area or flats is made to the buyers in actual price, in this\nsituation, the actual price will be the value of supply.<\/p>\n\n\n\nWhat are the Advantages of Joint Development Agreement?<\/h2>\n\n\n\n
How Joint Development Agreement is Charged under the Income Tax Law?<\/h2>\n\n\n\n
Current Provisions for Taxability of Joint Development Agreement under the\nIncome Tax Law<\/h2>\n\n\n\n
Taxability of GST on Joint Development Agreement<\/h2>\n\n\n\n
Rate of GST on Joint Development Agreement (JDA) -Landowner<\/h2>\n\n\n\n
Liability to pay\ntax –GST on Joint Development Agreement (JDA)<\/h3>\n\n\n\n
Rate of tax <\/h3>\n\n\n\n
Time of supply<\/h3>\n\n\n\n
Value of supply<\/h3>\n\n\n\n
GST on Joint Development Agreement-Developer\/Builder<\/h2>\n\n\n\n
Liability to pay\ntax and Rate of Tax<\/h3>\n\n\n\n
Reverse Charge on\nTDR<\/h3>\n\n\n\n
Time of supply<\/h3>\n\n\n\n
Value of supply<\/h3>\n\n\n\n
Conclusion<\/h3>\n\n\n\n