APPLICABILITY OF INCOME TAX AND GST ON JOINT DEVELOPMENT
AGREEMENT IN REAL ESTATE FOR LANDOWNERS AND BUILDERS
- Introduction
In the real estate sector, Joint Development Agreements (JDAs) are a common arrangement between landowners and builders or developers. These agreements enable the development of property without requiring the landowner to invest in the construction process. The financial transactions and obligations arising from such agreements have significant tax implications under both the Income Tax Act and the Goods and Services Tax (GST) framework. Understanding these implications is crucial for both landowners and builders to ensure compliance and optimize tax efficiency.
- Different
Forms of Joint Development Arrangement
There are different forms of Joint Development Arrangement
(JDA) that can be used for real estate projects. Some of the common forms of
JDA are:
1. Revenue Sharing Model: In this model, the
landowner and the developer share the revenue or profits from the project as
agreed in the JDA.
2. Built-up Area Model: In this model, the landowner
receives a built-up area in the project in proportion to the land contributed,
while the developer gets the remaining built-up area for sale.
3. Saleable Area Model: In this model,
the landowner gets a share of the saleable area in the project in proportion to
the land contributed, while the developer gets the remaining saleable area for
sale.
- Rights
& Responsibilities for the Developer and Builder:
It is of immense importance that the landowner and the
developer, before the construction of the property, decide in advance, the
rights/responsibilities of each entity. Here are a few rights/responsibilities
of the developer/builder in a Joint Development Agreement (JDA).
I. Licensee rights
The landowner grants a ‘licence’ to the developer to enter
into his land with the full right as well as the authority to start, carry on
and complete the development following the permission granted. This ‘licence’
granted by the landowner to the developer is the nature of a personal licence
and under no circumstances will the developer assign his title, right as well
as interest to any other party. It is important to use the word ‘licensee’ in a
JDA. Then all the rights that a licensee has, will belong to the developer.
This becomes important when there arises a dispute between the landowner and
the developer. e.g. The developer can seek an injunction to enter the
land, in case the landowner refuses the developer to enter his premises on
account of the conflict. The developer’s capital has already been invested in
the project. If the developer does not have the licensee’s rights, then he is
left with no such remedy and his capital investment will be a useless and
unprofitable wasted effort. Therefore, it is important that the
developer is granted a ‘licence’ and this right is exquisitely drafted well in
JDA clauses.
II. Development rights:
Legally, the right to develop the land is called
‘development rights’, in which the owner of the land authorizes a person
(developer/builder) to develop a structure on land. These ‘development rights’
can be easily transferred, sold, or exchanged. Now let us understand the
concept of development rights with an example:-
- Let
Mr. X be the landowner and Mr. Y the developer. Mr. Y approaches Mr. X
with a Joint Development proposal and Mr. X agrees to the proposal of
developing the project on his land under the Joint Development Agreement.
After completion of the project, Mr. Y sold some of the units to buyers
with Mr. X’s consent. Mr. X will transfer the undivided share in land in
favour of the outsider’s cooperative housing society. In this case, Mr.
X’s permission will be granted in the form of transfer of development rights.
III. Right to seek approvals:
The developer has the right to have separate contracts in
his name with the contractor, architect, and others to carry out the
development at his risks and costs. The landowner on entering into a Joint
Development Agreement with the developer engages the developer to take full
responsibility for the development work. The developer undertakes the
responsibility of obtaining requisite approvals regarding development from the
competent authorities, property development as well as launching, advertising,
and marketing the project with the help of financial resources.
IV. General Power of Attorney (GPA):
As per the provisions of Section 53A (which deals with part-performance of a
contract) of the Transfer of Property Act 1882, the developer shall
not be a transferee or buyer of the development work under the JDA. The
partnership between the two entities is restricted only till the project’s
development and the JDA does not entitle the developer to sell the units on his
own. The ownership of the land still lies with the landowner only. To
facilitate the process of selling, the landowner will have to assign the right
to the developer to sell the property. So, he confers the authority to the
developer/builder by signing a General Power of Attorney (GPA). This gives the
developer the right to sell and register agreed portions of land with
respective undivided shares by way of flats to other buyers. In case
of any breach of the terms of the agreement by the developer, the landowner has
the right to revoke the Power of Attorney as well as take legal action against
the developer.
V. Right to take legal action:
Co-operation from both the entities, the landowner and the
developer is crucial in a Joint Development Agreement (JDA). JDA should provide
for the possible repercussions in case there is a failure by one or more
parties to fulfil the agreed responsibilities. Therefore, if the
landowner fails to cooperate with the developer, the developer has sufficient
rights to sue against the landowner in a court of law. There may be
instances that the landowner fails to get a clear title and this flaw comes to
light, post-completion of construction. Not only this, but it is also possible
that the whole construction by the developer gets challenged in the court of
law on account of the absence of a clear title. The developer, in such cases of
any breach of the terms of the agreement by the landowner, can take legal
action against him. Also
Income Tax Implications:
Taxability Of Income Arising from JDAs In India
1. Taxability in the hands of owner of the
property
Capital Gains taxation consists of 3 aspects i.e. full value
of consideration, cost of acquisition and the year for determination of
taxability
Computation of Capital Gains tax:
|
Full Value of Consideration |
SDV of owner’s share in project + consideration
received in cash |
|
Less : Indexed Cost of Acquisition |
Purchase Price (COA) x Cost Inflation Index of the
year of transfer ÷ |
|
Capital Gains |
Xxx |
*If the asset is acquired before April 1, 2001, the cost of
acquisition shall be the actual cost or FMV as on April 1, 2001, whichever is
higher.
Full Value of Consideration
FVC shall be the stamp duty value of his share in the
developed property as on the date of issue of Completion Certificate plus cash
consideration received, if any.
Cost of Acquisition
Cost of acquisition shall be the price at which such
property was acquired by the owner. If the land is held for more than 2 years,
the cost must be indexed up to the year in which land is transferred to
the developer.
- Year
of transfer
Year of transfer is the year in which land is
transferred under JDA.
- Year
of taxability i.e. the year in which owner has to pay tax
As per the provisions of Section 45(5A), the
taxability of JDA arises in the year in which the certificate of
completion is issued for the whole or part of the property.
However, this provision shall not apply if such property is
transferred by the owner before such completion certificate is issued.
- Eligibility
for exemption under Section 54 to 54F
Where the owner buys a part of property after the
redevelopment of such property and makes a payment for the same, he shall be
entitled to claim exemption under Section 54 to 54F depending on the nature of
such property.
2. Taxability In the Hands of the Developer of The Property
For the builder/developer, such property built by them will
be considered as stock-in-trade. Therefore, the nature of income from the sale
of such property shall be ‘Income from business and profession’.
The income will include proceeds from sale of such property,
he shall be allowed to deduct the business expenses incurred on development of
such property. The balance will be taxable.
Liability to deduct TDS on payment made under Joint
Development Agreement (Section 194-IC)
Under JDA, where the real estate developer pays any monetary
consideration in form of cash or any other mode in addition to the share in the
project, then the developer shall be liable to deduct TDS @10% on such payment.
However, if the PAN of the owner is not available, then, such TDS shall be
deducted @20%.
GST Implications:
Taxability of JDAs under GST
Under the GST law, tax is levied on the supply of goods or
services or both. Hence, the subject matter of taxation under GST is the
‘supply’ of goods or services. Therefore, in order to fall within the ambit of
GST, the supply should either be of goods or services or both. Thus, a
transaction cannot be subject to GST where there is no supply of goods or
services.
The term ‘goods’ has been defined as every kind of
movable property. The generic meaning of the term ‘movable’ means something
that has the ability to move, and it does not include immovable property.
Whereas, the immovable property includes land, benefits to arise out of the
land, and things attached to the earth or permanently fastened to anything
attached to the earth. Therefore, the activities undertaken in respect of JDA
for construction of immoveable property and sale of immoveable property cannot
be considered as supply of goods under the GST law.
Schedule II of the CGST Act classifies a list of activities
either as supply of goods or supply of services. In terms of Entry 5 of the
said Schedule, the construction activities are treated as supply of services:
(b) Construction of a complex, building, civil structure or
a part thereof, including a complex or building intended for sale to a buyer,
wholly or partly, 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, Schedule III of the CGST Act provides few
transactions which are neither treated as the supply of goods nor supply of
services under GST. Entry No. 5 of the said schedule provides the following:
Sale of land and sale of building, subject to clause (b) of
paragraph 5 of Schedule II
For the ease of reference, the expression “the date of
issuance of completion certificate, or first occupation of the project,
whichever is earlier” is referred to as ‘relevant date’ in this article.
Sale of completed property and sale of land is not exigible to GST
As per Schedule III, GST is not leviable on the sale of
land. In case of sale of building, where the entire consideration has been
received after relevant date, GST will not be leviable.
Sale of under-construction property is considered as supply of services
The conjoint reading of Schedule II and Schedule III
suggests that the sale of under-construction property is considered as supply
of services under GST.
Transfer of Development rights is supply of service
The Development rights transferred by the landowner to
developer are also considered as supply of services under GST. In this regard,
the Telangana High Court has held that transfer of development rights is a
supply of service under GST law which is offered by the landowner to the
developer for a consideration and it is not a sale of an immovable
property as transferring the development rights does not result in transfer of
ownership rights. Notably, in this cases, a Special Leave Petition has been
filed before the Hon’ble Supreme Court and the Supreme Court had not
stayed operation of impugned judgment.
GST on Transfer of Development Rights
Residential Projects
Exemption on Transfer of Development Rights pertaining to
residential apartments
Effective from April 1, 2019, services by way of transfer of
development rights for construction of ‘residential’ apartments by a promoter
in a project has been exempted from GST. Notably, such exemption is only
applicable in respect of the construction of residential apartments and
booked apartments before the relevant date.
Thus, the said exemption does not apply to the construction
of ‘commercial apartments’ and to the residential apartments remaining
‘un-booked’ on the relevant date.
In this regard, the law also provides the manner of
computing the exempt amount:
[GST payable on TDR for construction of the project] ×
(Carpet area of residential apartments in the project ÷ Total carpet area of
residential and commercial apartments in the project)
|
Sl. No. |
Conditions |
Calculation |
|
1. |
Promoter Developer is liable to pay tax
attributable to the residential apartments which remain un-booked on the
relevant date under RCM (RCM applicability is discussed separately in
detail in the next paragraph) |
[GST payable on TDR for construction of
residential apartments but for the exemption contained herein] × (Carpet area
of residential apartments remaining un-booked on the relevant date ÷ Total
carpet area of the residential apartments) |
|
Notably, the maximum tax payable in case of
un-booked apartment shall not exceed the following: (a) 1% of the value in case of
affordable residential apartments remaining un-booked on the relevant date
and (b) 5% of the value in case of
residential apartments other than affordable residential apartments remaining
un-booked on the relevant date |
||
|
2. |
The liability to pay GST on the development
rights shall arise on the relevant date. |
|
The above exemption is subject to the following
conditions summarized below:
Applicability of Reverse charge on Transfer of
Development Rights
Effective from April 1, 2019, the developer is
liable to pay GST on reverse charge basis on the services supplied by any
person by way of transfer of development rights for construction of a project.
Commercial Projects:
Regardless of whether the agreement was signed before or
after March 2019, when the landowner transfers development rights for
commercial projects, an 18% GST is applicable. The value on which GST is
calculated is determined as per CGST Rule 27 and Section 15 of the CGST Act.
For instance, if the value of a commercial building is
Rs.10,00,000, the landowner must pay 18% GST, which amounts to Rs.1,80,000. The
GST rate remains consistent, regardless of whether the agreement was executed
before or after March 2019.
Value of Transfer of Development Rights
The Rate notification specifically provides that where
a person transfers development right to a promoter against consideration in the
form of construction of apartments (whether wholly or partly), the value of
supply of service shall be deemed to be the Total Amount charged for similar
apartments in the project from the independent buyers nearest to the date on
which such development right is transferred to the promoter.
This amount would be further reduced by the value of transfer of land. Notably, value of land shall be deemed to be one-third of the total amount charged.
Time of Supply of Transfer of Development Rights
The Time of Supply in case of supply of Transfer of
Development Rights are as follows:
|
Model |
Type of property |
Time of Supply |
|
Area Sharing Model (Non-Monetary Consideration) |
For both residential and commercial units |
The Government has specifically deferred the payment of
GST liability by specifying that the Developer can pay GST in a tax period
not later than the tax period in which the relevant date falls. |
|
Revenue Sharing Model (Monetary Consideration) |
For Residential Units |
The Government has specifically deferred the payment of
GST liability by specifying that the Developer can pay GST in a tax period
not later than the tax period in which the relevant date falls. |
|
For Commercial Units |
As per Section 13 of the CGST Act |
GST on Construction Services
GST applicability on different Real Estate projects
GST on supply of construction services by Developer is
liable to paid at the applicable effective rate provided under the rate
notification, which depends on the nature of the project and apartment.
Notably, with effect from 01-04-2019, the Government
introduced significant amendments in the rate notifications to change the GST
rate structure on the construction services. The GST rates on construction
services are lowered based on the type of project and the type of apartments.
However, ITC cannot be claimed by the supplier of construction services on the
revised concessional rates. The GST rate on construction services for different
projects and different types of apartments are discussed below:
|
Particulars |
Tax Rate |
Whether ITC available? |
|
Affordable Residential apartments (in both RREP and other REP Projects) (Residential Real Estate Project) (Real Estate Project) |
1.5% |
No |
|
Residential Apartments (Other than affordable) (in both RREP and other REP Projects) |
7.5% |
No |
|
Commercial Apartments |
7.5% |
No |
Construction services of Commercial apartments in other
REP projects and the projects other than the specified above are
taxable at the rate of 18% with no restriction on availing ITC.
Notably, the above rates would be applicable on the
respective projects strictly and the supplier cannot opt for the higher
rate with the eligibility of ITC.
The term “Residential Real Estate Project (RREP)” shall mean
a REP in which the carpet area of the commercial apartments is not more than
15% of the total carpet area of all the apartments in the REP.
Valuation of Construction Services
Where the supply of construction services involves transfer
of land or undivided share of land, the value of such supply is
computed in the following manner:
|
Particulars |
Amount |
|
Total amount charged for supply of construction services
i.e. (Consideration charged for construction service + Amount
charged for transfer of land or undivided share of land, including by way of
lease or sub-lease) |
XXX |
|
Less: Value of transfer of land or undivided share of land (value of land deemed to be one third of the total amount
charged for such supply) |
(XXX) |
Notably, the deeming value of land to be one-third of the
total value is to be mandatorily adopted in all the construction services under
different projects. This provision has been challenged before the Gujarat High
Court wherein the High Court read down the given provision and held that the
deeming fiction of 1/3rd will not be mandatory in nature and it will only be
available at the option of the taxable person in cases where the actual value
of land or undivided share in land is not ascertainable.
Mandatory Conditions attached to the new rates with
effect from 01-04-2019
|
Sl. No. |
Conditions |
|
1. |
Payment of tax shall be made in cash only |
|
2. |
ITC has not been taken on goods and services used in
supplying construction services except to the extent prescribed in Annexure I
(REP) and Annexure II (RREP). Further, ITC not availed shall be reported
every month as ineligible ITC in Form GSTR 3B. |
|
3. |
Reversal of ITC attributable to construction in a project,
time of supply of which is on or after 1st April, 2019. Amount of ITC
reversal is computed in manner prescribed in Annexure I (REP) and Annexure II
(RREP). |
|
4. |
In case of area-sharing model, the Developer is required
to pay tax on supply of construction of apartments. Notably, the Landowner shall be eligible for availing ITC
on such supply of construction services, subject to the further conditions
that:
|
|
5. |
At least 80% of value of input and input services used in
supplying the service shall be procured from the registered supplier only. However, where value of inputs and input services falls
short of 80%, tax shall be paid by the developer on value of input and input
services comprising such shortfall at the rate of 18% on reverse charge
basis. (RCM provisions applicable on developer are discussed separately later
in this document). Notably, the above 80% limit does not apply on services by
way of grant of development rights, long term lease of land, electricity,
high speed diesel, motor spirit, natural gas. Thus, these supplies can be
procured from unregistered person without any obligation on the developer. |
|
6. |
Where cement is received from an unregistered person, the
promoter shall pay tax on supply of such cement at the applicable rates on
reverse charge basis. This is irrespective of whether cements constitutes
less than 20% eligible limit discussed in previous para. (RCM provisions applicable on developer are discussed
separately later in this document). |
However, the above specified conditions are not applicable
for the construction of Commercial apartments in other REP projects and the
projects other than the specified
Time of supply of supply of Construction Services
Time of Supply in case of supply of Construction Services as
follows:
|
Model |
Particulars |
Time of Supply |
|
Area Sharing Model (Non- Monetary Consideration) |
Residential and commercial units |
The Developer is required to pay GST in a tax period not
later than the tax period in which the relevant date falls. |
|
Revenue Sharing Model (Monetary Consideration) |
Residential and commercial units |
As per Section 13 of the CGST Act |
RCM on inward supply of input, input services and capital
goods by Developer
As per the rate notifications, the Developer is also liable
to pay GST on reverse charge basis on certain inward supplies relating to the
construction services. These are summarized in the below table:
|
Particulars |
Taxability |
Time of Supply |
|
Procurement of inputs and input services from registered
person falling short of 80% limit (Refer Para 5.3. above) |
The Developer is required to pay tax on reverse charge
basis on such shortfall at the rate of 18% |
The Developer is required to calculate tax payments on the
shortfall at the end of financial year and the tax to be added to his
output liability in the month not later than the month of June following the
end of the financial year. |
|
Inward supply of Capital Goods from Unregistered person |
The Developer is required to pay tax on reverse charge
basis on the supply of capital goods at applicable rates |
As per the Section 12 of the CGST Act |
|
Procurement of Cement form Unregistered person |
The Developer is required to pay tax on reverse charge
basis on the supply of such cement at applicable rates |
The tax shall be paid in the month cement is received from
the unregistered person |
|
Note: The above-mentioned inputs and input services
exclude the grant of Development rights, long term lease, FSI, electricity,
high speed diesel, motor sprit and natural gases. |
||
Understanding Term Affordable Housing and Non-Affordable
Housing.
What Is Affordable Housing?
Affordable housing comprises homes with a carpet area of up
to 60 square meters (approx. 645 square feet) in metro cities** and 90 square
meters (approx. 960 square feet) in non-metro cities. Homes with a value
up to INR 45,00,000/- in both, metro and non-metro cities) are considered
affordable housing.
**Metro cities are Bengaluru, Chennai, Delhi NCR (limited to
Delhi, Noida, Greater Noida, Ghaziabad, Gurgaon, Faridabad), Hyderabad, Kolkata
and Mumbai (whole of MMR).
What is Non-Affordable Housing?
Non-affordable housing in India refers to upscale
residential properties that are priced beyond the reach of a large segment of
the population. These luxurious homes, designed with high-end features and
located in prime areas, target affluent individuals and investors who can
afford the premium price tags. Non-affordable housing offers a lavish living
experience, superior amenities, and a prestigious address, catering to those
seeking opulence and exclusivity.
- Conclusion:
The taxability of income from a Joint Development Agreement
involves a nuanced understanding of both Income Tax and GST. For landowners,
the primary concern is the capital gains tax on their share of the property,
while developers must navigate business income tax and GST implications.
Effective tax planning and compliance with both Income Tax and GST regulations
are crucial for optimizing the financial outcomes of a JDA. Both parties should
consider consulting with tax professionals to ensure that they adhere to all
applicable tax laws and maximize their tax efficiency.
0 Comments
Leave a Comment