Taxmann's Analysis | GST Implications in Joint Development Agreements (JDAs)

1. Introduction

Joint Development Agreements (JDAs) have become a popular arrangement in the Indian real estate sector, where property owners and developers collaborate to develop land. In a typical JDA, the landowner transfers the possession of the property to the developer, who then develops the land at their own cost and expertise. In return, the landowner receives a share of the developed property, either in the form of monetary consideration or a percentage of the built-up area.

The taxation of JDAs has been a subject of much debate and controversy, with various legislative amendments and judicial precedents attempting to provide clarity.

This document analyzes the taxability of transactions involved between the landowner and the developer in relation to the transfer of development rights and the construction of apartments/plots.

2. Understanding Joint Development Agreements

JDA is a type of arrangement between a developer and a landowner where the landowner transfers the development rights of the land to the developer while the developer undertakes the responsibility of developing the property. Thus, the transaction involved in a JDA can be broadly categorized into two main components:

a) Transfer of Development Rights by landowner to developer

b) Supply of Construction Services by developer to landowner

Notably, under JDA, the consideration for the landowner usually comes in the form of a share in the developed property or a portion of the revenue from the sale of the developed units. JDAs can be broadly classified into two types:

a) Area-sharing basis: Under this arrangement, the developer hands over a portion of the developed units to the landowner as consideration for the transfer of development rights.

b) Revenue-sharing basis: Under this arrangement, the developer sells the developed units and shares a predetermined portion of the revenue with the landowner.

3. Taxability of JDAs under GST

Under the GST law, tax is levied1 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 defined2 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 includes3 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.

3.1. 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.

1 Section 9 of the CGST Act, 2017

2 Section 2(52) of the CGST Act, 2017

3 As defined under Section 2(26) of the General Clauses Act

3.2. 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 underconstruction property is considered as supply of services under GST.

3.3. 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 held4 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.

4. GST on Transfer of Development Rights

4.1. 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 exempted5 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 provides6 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)

4 Prahitha Contruction (P.) Ltd. [2024] 159 taxmann.com 437 (Telangana)

5 Sl. No. 41A inserted vide Notification No. 4/2019-Central Tax (Rate), Dated 29-03-2019

6 Sl. No. 41A inserted vide Notification No. 4/2019-Central Tax (Rate), Dated 29-03-2019

The above exemption is subject to the following conditions summarized below:

Sl. No. Conditions

1. Promoter Developer is liable7 to pay tax attributable to the residential apartments which remain unbooked on the relevant date under RCM

(RCM applicability is discussed separately in detail in the next paragraph)

Calculation

[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 not8 exceed the following:

(a) 1% of the value in case of affordable residential apartments remaining unbooked 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 (Time of supply provisions are discussed separately in detail later in this document)

4.2. Applicability of Reverse charge on Transfer of Development Rights

Effective from April 1, 2019, the developer is liable9 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.

4.3. Value of Transfer of Development Rights

The Rate notification specifically provides10 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.

7 First Proviso to Sl. No. 41A inserted vide Notification No. 4/2019-Central Tax (Rate), Dated 29-03-2019

8 Second Proviso to Sl. No. 41A inserted vide Notification No. 4/2019-Central Tax (Rate), Dated 29-03-2019

9 SI No. 5B inserted vide Notification No. 5/2019-Central Tax (Rate), Dated 29-03-2019

10 Para 2A inserted by of Notification No. 3/2019-Central Tax (Rate), Dated 29-03-2019

This amount would be further reduced by the value of transfer of land. Notably, value of land shall be deemed to be one-third11 of the total amount charged.

4.4. 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

Area Sharing Model (Non-Monetary12 Consideration)

Revenue Sharing Model (Monetary13 Consideration)

Type of property

For both residential and commercial units

For Residential Units

Time of Supply

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.

The Government has specifically deferred the payment of GST liability by specifying that the Developer can pay GST 14 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

5. GST on Construction services

5.1. 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:

11 Para 2 inserted by of Notification No. 3/2019-Central Tax (Rate), Dated 29-03-2019

12 Para 1(a) of Notification No. 06/2019-Central Tax (Rate), dated 29-03-2019

13 Para 1(b) of Notification No. 06/2019-Central Tax (Rate), dated 29-03-2019

14 Notification No. 06/2019-Central Tax (Rate), dated 29-03-2019 and Notification No. 03/2021-Central Tax (Rate), dated 02-06-2021

Particulars Tax Rate Whether ITC available?

Affordable Residential apartments (in both RREP15 and other REP16 Projects)

Residential Apartments (Other than affordable) (in both RREP17 and other REP18 Projects)

Commercial Apartments (in RREP19 Projects)

No

No

No

Construction services of Commercial apartments in other REP projects20 and the projects other than the specified above21 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 opt22 for the higher rate with the eligibility of ITC.

5.2. 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 computed23 in the following manner:

Particulars

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)

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)

15 Sl. No. 3(i) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

16 Sl. No. 3(ic) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

17 Sl. No. 3(ia) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

18 Sl. No. 3(id) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

19 Sl. No. 3(ic) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

20 Sl. No. 3(if) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

21 Sl. No. 3(xii) of Notification No. 11/2017-Central Tax (Rate), dated 28-06-2017

22 Refer Explanations to Sl. No. 3(if) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

23 Para 2 of Notification No. 11/2017-Central Tax (Rate), dated 28-06-2017

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 challenged24 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.

5.3. Mandatory Conditions attached to the new rates with effect from 01-04-2019

Sl. No. Conditions25

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:

• Landowner further supplies such apartments to his buyers before the relevant date and

• Pays tax on such supply of apartments, which is not less than the amount of tax charged by the developer from him on construction of such apartments.

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.

24 Munjaal Manishbhai Bhatt v. Union of India [2022] 138 taxmann.com 117 (Gujarat)

25 Refer conditions to Sl. No. 3(i) to (id) of Notification No. 3/2019-Central Tax (Rate), dated 29-03-2019

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 specified26 .

5.4. Time of supply of supply of Construction Services

Time of Supply in case of supply of Construction Services as follows:

Area Sharing Model (NonMonetary27 Consideration)

Revenue Sharing Model (Monetary Consideration)

Residential and commercial units

The Developer is required to pay GST28 in a tax period not later than the tax period in which the relevant date falls.

Residential and commercial units As per Section 13 of the CGST Act

5.5. 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:

26 Sl. No. 3(i) to 3(id) of Notification No. 03/2019-Central Tax (Rate), dated 29-03-2019

27 Para 1(d) of Notification No. 06/2019-Central Tax (Rate), dated 29-03-2019

28 Notification No. 06/2019-Central Tax (Rate), dated 29-03-2019 and Notification No. 03/2021-Central Tax (Rate), dated 0206-2021

Particulars

Procurement of inputs and input services from registered person falling short of 80% limit29 (Refer Para 5.3. above)

Taxability

The Developer is required to pay tax on reverse charge basis30 on such shortfall at the rate of 18%

Time of Supply

The Developer is required to calculate tax payments on the shortfall at the end of financial year31 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

Procurement of Cement33 form Unregistered person

The Developer is required to pay tax on reverse charge basis32 on the supply of capital goods at applicable rates

The Developer is required to pay tax on reverse charge basis34 on the supply of such cement at applicable rates

As per the Section 12 of the CGST Act

The tax shall be paid in the month35 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.

29 Condition for para (i) to (id) of Notification No. 03/2019-Central Tax (Rate), dated 29-03-2019

30 Sl. No. 1 of Notification No. 07/2019-Central Tax (Rate), dated 29-03-2019

31 Explanation of Condition of para (i) to (id) of Notification No. 03/2019-Central Tax (Rate), dated 29-03-2019

32 Sl. No. 2 of Notification No. 07/2019-Central Tax (Rate), dated 29-03-2019

33 Condition for para (i) to (id) of Notification No. 03/2019-Central Tax (Rate), dated 29-03-2019

34 Sl. No. 3 of Notification No. 07/2019-Central Tax (Rate), dated 29-03-2019

35 Explanation of Condition of para (i) to (id) of Notification No. 03/2019-Central Tax (Rate), dated 29-03-2019