#TaxmannPPT | Decoding GST for Real Estate Sector | Part 2

Decoding GST for Real Estate Sector – Part 2 By CA Tushar Aggarwal Co Founder – Tattvam Group Tattvam Advisors Copyright@

Joint Development Agreement

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Why Joint Development Agreements ?

Land ceiling laws

Developer expert in developing and selling the property

Lack of resources

Sharing of risk

What is Joint Development Agreement (JDA) NO

Contribution of land Landowner contributes his land for the construction of a real estate project.

Power of attorney Developer undertakes the responsibility for the development of property, obtaining approvals, performing legal formalities and marketing the project.

SPECIFIC

DEFINITION

Developer’s responsibility • Development of property; • Obtaining approvals; • Performing legal formalities; • Marketing the project.

Developer’s right to sell • It gives the Developer the rights to sell • register agreed portions of land with respective undivided shares by way of flats to other buyers © Tattvam Advisors, All rights reserved

Attributes of Development rights

Right to construct, own and sell the superstructure

The right entitles the holder to carry out development of a particular land or building.

This development potential of the land is separated from the land and is transferred to a third party for exploitation, called as transfer of development rights. Such transfer, thus, allows the transferee to access, develop, build/ construct, own, sell the superstructure over the underlying piece of land.

The development right, effectively, is associated with the land and emerges from the rights being exercised over such land.

The right is in the nature of Profit a Prendre: A right to enter another’s land and to take some profit of the soil, or a portion of the soil itself, for the use of the owner of the right.

Development Rights – Immovable Property ?

Shakti insulted wires limited v. JCIT It was held that development rights are embedded in the ownership of land only. These were valuable rights inherent in the ownership of land.

Chedda housing development corpoaration v. Bibijan shaikh farid [Bom HC] It was held that TDRs being a benefit arising out of land must be held to be immovable.

Sadoday builders private ltd, v joint charity commissioner [bom HC] It was held- s.36(1)(c) of Bombay public trusts act, 1950 necessitates taking permission of charity commissioner for sale of immovable property, therefore TDRs are benefit arising out of land and must be considered as immovable property. The sale of such rights requires permission of commissioner under the said provision.

PROFIT A PRENDRE Meaning and nature is described in Halsbury’s Laws of England, that is: A profit a prendre is a right to take something off another person’s land. It maybe more fully defined as a right to enter another’s land and to take some profit of the soil or a portion of soil itself, for the use of the owner of the right. In Indian law it is also known as benefit arising out of land. © Tattvam Advisors, All rights reserved

Taxability of development rights – Summary Service Tax regime

GST regime

 Non-taxable  Definition of services excluded transfer of title in immovable property by way of sale, gift or in any other manner  DLF Commercial Projects Corporation [2019-VIL-299-CESTAT-CHD-ST]

Before 01.04.2019

 Taxable  Forward charge  Landowner liable to pay tax

From 01.04.2019

 Taxable  Reverse charge  Developer liable to pay tax

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Taxability of Development Rights Schedule III: activities which shall neither supply of goods nor supply of servicesAs per section 65B(44) of Finance Act, 1994 “Service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include— a) an activity which constitutes ‘merely’,–– I. a ‘transfer of ‘title’ in goods or immovable property, by way of sale, gift or in any other manner; or

Paragraph 5

Taxability

Service Tax

‘sale of land and, subject to clause (b) of paragraph 5 of schedule II , sale of building’

GST

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JDA for construction of apartments

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Consideration in JDA

Revenue Sharing

Area Sharing

Scenarios: 1. 100% residential 2. 100% commercial 3. Mix project Tattvam Advisors Copyright

Transaction between Landowner and Developer AREA SHARING

REVENUE SHARING

Transfer of Development Rights

Developer

JDA

Consideration: - Construction services - % of the built up area

Transfer of Development Rights

Landowner

Developer

JDA

Landowner

Consideration: - % of the revenue from sale of units

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Real Estate Sector under GST New

REP other than RREP

Meaning as assigned in RERA

Ongoing as on 01.04.2019

RREP

Carpet Area of Commercial Apartment <= 15%

Project

Real estate project defined under clause (zn) of Section 2 of RERA, 2016 means a) The development of a building or a building consisting of apartments b) Converting an existing building or a part thereof into apartments c) Development of land into plots or apartments for the purpose of selling all or some of the said apartments or plots or building includes The common areas, the development works, all improvements and structures thereon, and all easements, rights and appurtenances belonging thereto Tattvam Advisors Copyright

Implications on developer under Revenue Sharing Arrangement

Residential real estate project (RREP) Nature of transaction

Tax rate (or amount)

Value of supply

Time of supply

Sale of units to customers

Affordable: 1% Other than affordable: 5% Commercial: 5%

Consideration charged from the customers for sale of a unit

As per milestones agreed in Builder Buyer Agreement (BBA)

Development rights attributable to:

Developer liable to pay tax under reverse charge in the following manner:

Residential units sold before OC/CC

Exempt

Residential units sold after OC/CC

GST @18% attributable to unsold units TDR Value : Share of Allocation basis: Proportion of landowner in the revenue. carpet area of unsold residential units Limit - 5% of unit value. to total carpet area of residential units

At the time of CC/OC

Commercial units

GST @18% attributable to commercial units Allocation basis: Proportion of carpet area of commercial units to total carpet area

At the time of transfer of development rights

Carpet Area of Commercial Apartment <= 15%

For initial payment of tax in relation to commercial units, the revenue can be taken on estimated basis.

Note: It has been assumed that development rights has been transferred on or after 01.04.2019

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Commercial project Nature of transaction

Tax rate (or amount)

Value of supply

Sale of units to customers

Commercial: 12%

Consideration charged from As per milestones agreed in the customers for sale of a Builder Buyer Agreement unit (BBA)

Development rights attributable to:

Commercial units

Time of supply

Developer liable to pay tax under reverse charge in the following manner:

@18%

Share of landowner in the At the time of transfer of estimated revenue from the development rights project. Deduction of land value is subject matter of dispute. Note: It has been assumed that development rights has been transferred on or after 01.04.2019

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Real estate project other than RREP Nature of transaction

Tax rate (or amount)

Value of supply

Time of supply

Sale of units to customers

Affordable: 1% Other than affordable: 5% Commercial: 12%

Consideration charged from the customers for sale of a unit

As per milestones agreed in Builder Buyer Agreement (BBA)

Development rights attributable to:

Developer liable to pay tax under reverse charge in the following manner:

Residential units sold before OC/CC

Exempt

Residential units sold after OC/CC

At the time of CC/OC

Commercial units

GST @18% attributable to commercial units Allocation basis: Proportion of carpet area of commercial units to total carpet area

At the time of transfer of development rights

For initial payment of tax in relation to commercial units, the revenue can be taken on estimated basis.

Note: It has been assumed that development rights has been transferred on or after 01.04.2019

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Implications on developers under Area Sharing Arrangement

Residential real estate project (RREP) Nature of transaction

Tax rate (or amount)

Value of supply

Time of supply

Sale of units to customers

Affordable: 1% Other than affordable: 5% Commercial: 5%

Consideration charged from the customers for sale of a unit

As per milestones agreed in Builder Buyer Agreement (BBA)

Sale of units to landowner

Affordable: 1% Other than affordable: 5% Commercial: 5%

Equal to total amount charged for similar apartments from independent buyers nearest the date of transfer of DR less The value of transfer of land (i.e., one-third)

Not later than the tax period in which date of issuance of CC/OC falls

Development rights attributable to:

Developer liable to pay tax under reverse charge in the following manner:

Residential units sold before OC/CC

Exempt

Residential units sold after OC/CC

GST @18% attributable to Value of DR: unsold units (on carpet Landowners allocated area to be valued at a area basis) value equal to the value of similar apartments charged from independent buyers nearest to GST @18% attributable to the date on which DR is transferred. commercial units (on Maximum tax is 5 percent of residential unit carpet area basis) value

Commercial units

NA At the time of CC/OC

Not later than the tax period in which date of issuance of CC/OC falls

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Commercial project Nature of transaction

Tax rate (or amount)

Value of supply

Sale of units to customers

Commercial: 12%

Consideration charged from customers for sale of a unit

Sale of units to landowner

Commercial: 12%

Equal to total amount charged for similar Not later than the tax period in apartments from independent buyers which date of issuance of CC/OC nearest the date of transfer of DR less falls The value of transfer of land (i.e., onethird)

Development rights attributable to:

Commercial units

Time of supply the As per milestones agreed in Builder Buyer Agreement (BBA)

Developer liable to pay tax under reverse charge in the following manner:

@18%

Value of DR: Landowners allocated area to be valued at a value equal to the value of similar apartments charged from independent buyers nearest to the date on which DR is transferred.

Not later than the tax period in which date of issuance of CC/OC falls

Note: It has been assumed that development rights has been transferred on or after 01.04.2019

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Real estate project other than RREP Nature of transaction

Tax rate (or amount)

Value of supply

Time of supply

Sale of units to customers

Affordable: 1% Other than affordable: 5% Commercial: 12%

Consideration charged from the customers for sale of a unit

As per milestones agreed in Builder Buyer Agreement (BBA)

Sale of units to landowner

Affordable: 1% Other than affordable: 5% Commercial: 5%

Equal to total amount charged for similar apartments from independent buyers nearest the date of transfer of DR less The value of transfer of land (i.e., one-third)

Not later than the tax period in which date of issuance of CC/OC falls

Development rights attributable to:

Developer liable to pay tax under reverse charge in the following manner:

Residential units sold before OC/CC

Exempt

Residential units sold after OC/CC

GST @18% attributable to Value of DR: unsold units Allocation Value of DR: Landowners allocated area to be valued at a basis: (on carpet area basis)

At the time of CC/OC

Commercial units

GST @18% attributable to commercial units (on carpet area basis)

Not later than the tax period in which date of issuance of CC/OC falls

value equal to the value of similar apartments charged from independent buyers nearest to the date on which DR is transferred. Maximum tax is 5 percent of residential unit value

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Implications on landowners under Joint development agreements

Implications on landowner Nature of JDA

Tax rate (or amount)

Value of supply

Revenue sharing model Area sharing model Sale of units to customers

Time of supply

No implications on the landowner GST payable on sale of units by landowner to its customer Same rates as applicable on developers (subject to nature of project and type of unit)

Consideration customer.

charged

from

the As per milestones agreed in the Agreement with the customer

*Input tax credit of GST charged by developer can be availed by landowner *Tax payable by landowner shall not be less than GST charged by developer Note: It has been assumed that development rights has been transferred on or after 01.04.2019

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Different case studies on development rights

Case Study 1 Joint Development Agreement

Year: 2010 (Non-taxable)

Revenue Sharing

Area Sharing

 Project delayed due to unforeseen circumstances  Construction started and completed b/w July 2017 to March 2022  Revenue also trfd. to landowner b/w July 2017 to March 2022

 Project delayed due to unforeseen circumstances  Construction started and completed b/w July 2017 to March 2022  Area allocated and handover to landowner in March 2021

Service Tax/GST Implications

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Case Study 2 Registered Joint Development Agreement

Year: 2015 (Non-taxable)

Revenue Sharing

Area Sharing

 Construction completed b/w July 2017 to March 2022  Revenue also trfd. to landowner b/w July 2017 to March 2022

 Construction completed b/w July 2017 to March 2022  Area allocated and handover to landowner in March 2021

Service Tax/GST Implications

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Case Study 3 Registered Joint Development Agreement

Year: 2018 (Forward charge)

Revenue Sharing

Area Sharing

 Construction completed after 01.04.2019

 Revenue also trfd. to landowner after 01.04.2019

Service Tax/GST Implications

 Area allocated to landowner after 01.04.2019

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Taxability of Development of Plots

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JDA in case of plots Our View

No Concept of development rights in case of sale of plot GST Implications Developer providing services of works contract and marketing GST payable by developer at 18% Area sharing: Value of plots provided to developer ?

Revenue share: Amount received by developer or cost plus 10%? AAR – Maarq Spaces Private Limited

Optimization of ITC on Construction of Immovable property for renting

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Legal Provisions

Blocked Credit

Plant and Machinery

Section 17(5)(c) – Works Contract Services when supplied for construction of immovable property (excluding Plant and Machinery) except where it is an input service for further supply of works contract service



Means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports

Section 17(5)(d) – Goods or services or both received by taxable person for construction of immovable property (excluding Plant or Machinery) on his own account



Excludesa) land, building or any other civil structures; b) telecommunication towers; and c) pipelines laid outside the factory premises

ITC under lease model

Safari Retreats Pvt. Ltd. vs. Chief Commissioner of CGST [2019] 105 taxmann.com 324 (Orissa)

Issue Issue

Availment of input tax credit on construction services of shopping mall which is to be used for leasing

Decision



Restriction unjust & contrary to basic rationale of GST



The petitioner is not using the immovable property ‘on his own account’ but letting out property. Hence, ITC should not be restricted



Section 17(5)(d) is to be read down and the narrow restriction as imposed, reading of the provision by the Department, is not required to be accepted SC admitted SLP without any stay of order © Tattvam Advisors, All rights reserved

Optimization of credit Registered Person

Civil Work

Land

Free Hold

Leasehold

Pre-Construction

Factory Sheds?

Immovable Plant & Machinery

Buildings?

Lift/ HVAC

During Construction

Project P&M

Civil Foundati on/ Support structure

Movable Plant & Machinery

Computer

Furniture

Post Construction

How to maximize credit and minimize dispute

Separate Work orders / PO / Agreements

Separate Invoicing for eligible and non eligible credit

Accounting and recording of credit

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Optimization of credit

Procurement strategies to minimize cost of blocked credit and/ or avoid accumulation of credit.

ITC on immovable plant & machinery other than telecommunication tower

ITC on movable plant & machinery

Other Strategies

Retention Money – GST Structuring

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Non-payment of consideration within 180 Days. Section 16(2) – Where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply of goods or services along with the tax payable thereon, within a period of one hundred and eighty days from the date of issue of invoice by the supplier, the amount equal to Input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed.  The recipient shall be entitled to avail Input tax credit on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.  What does failure to pay means?  What if contract term provide that payment is to be made within 200 days from date of issuance of invoice?

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Reversal of Input Tax Credit As per rule 37

Reversal of input tax credit in case of non- payment of consideration

Failure of Payment within 180 days from the date of issue of invoice shall furnish the details of such supply, the amount of value not paid and amount of ITC availed but not paid to the supplier in FORM GSTR-2 for the month.

Provided that the value of supplies made without consideration as specified in Schedule I shall deemed to have been paid for the purpose of second proviso to sub section (2) of section 16.

Rule 37(2): The amount of ITC which is not paid to the supplier shall be added to the output tax liability of the registered person for the month in which details are furnished.

Rule 37(3): The registered person shall be liable to pay interest at a rate as specified u/s 50 for the period starting from the date of availing such credit till the date when such amount is added in output tax liability is paid.

Rule 37(4): The time limit as specified u/s 16(4) shall not apply to a claim for re-availing of any credit, in accordance with the provision, that has been reversed earlier.

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Meaning of Non – Payment or failure to pay

The word Failure means “Non-fulfilment of an obligation imposed”.

Ram Kishore Vs. Bimla Devi and Ors. The word fails cannot connote the meaning of voluntary refusal. These words do not give a discretion or right to the person

Kavungal Kooppakkattu Zeenath Vs. Mundakkattu Sulfiker Ali “Failure means not doing something that one is expected to do”

Thattessara Subbaraya Vs. Chinne Gowda &Ors. “Failure means the there is an omission on the part of the person to do something which it is possible for him to do

In Malaysian Airlines Vs. Union of India – Failure to pay means non-payment, which means failure to pay when due. In the said case, there is a penalty imposed if amount of foreign travel tax collected is not paid to the government, within fifteen days from the date of collection. It was held that failure to pay within this prescribed time frame would mean non-payment or failure to pay. If any persons fails to pay within the statutory period, then such person is well within the sweep of the words “failure to pay’’ Once the statutory period is over and breach in payment of tax is committed, then it is immaterial when the defaulter in future is making the payment. Applying the said judgement, second proviso of section 16(2) of the CGST Act should only trigger when payment is due.

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Retention Money: Way Forward Accounting adjustment: Disclose the performance/retention amount as performance guarantee from supplier to company instead of showing it as payable to the vendor. Confirmation/acknowledgment from supplier: Letter of acknowledgment. to be taken from the supplier with respect to receipt of the payment on the invoices raised by the supplier. Change in contractual clauses: Modify/insert the below paragraph in its purchase order/contracts to substantiate that the retention money is held for performance guarantee. “The Company shall retain …. % of the invoice value on behalf of the contractor as a security for guaranteeing the performance of the contract. Such amount kept on behalf of the contractor shall be released by the Company after the expiry of the defect liability period/maintenance period.” Tattvam Advisors Copyright

Thank You

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#TaxmannPPT | Decoding GST for Real Estate Sector | Part 2 | Tattvam Advisors