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GST on Transfer of Development Rights, Floor Space Index and Joint
Development Agreement of Land
GST
is imposed on the supply of goods and services. 'Goods' encompass all types of
movable property, excluding money and securities. 'Services,' on the other
hand, are defined as anything that is not classified as goods, thereby
broadening the scope of taxable services under GST. Transfer of development
rights (TDR) involves the transfer of rights in land, which is considered
immovable property. Consequently, TDRs cannot be categorized as goods. However,
since services include everything other than goods, TDRs fall under the
category of services. Let's delve into the nature of the service provided under
this entry and the specific parties involved in such transactions.
Meaning of JDA
A joint development
agreement means a joint collaboration between land owner and builder/developer
to create a new entity with mutuality of interest to share common risk and
common profit/risk. The new entity undertakes construction of building
/apartment on behalf of the land owner and builder/developer. In other words
where landlord does not want to sale land but want to develop the said land,
jointly with builder/developer by entering into Joint Development Agreement (JDA)
on profit sharing and area sharing basis for a new project under joint venture.
What is Transfer of
Development Rights?
However, many landowners
in India leave their land idle, neither using it for productive purposes nor
selling it. This could be due to a lack of resources, a risk-averse mindset, or
insufficient marketing skills for constructing and selling property. In the
real estate industry, several business models typically emerge:
·
The landowner constructs the property
themselves.
·
The landowner appoints a development
manager to oversee construction on their behalf, with the manager earning a
monetary fee for their services.
·
The landowner enters into a Joint
Development Agreement (JDA) with a developer, along with a Memorandum of
Understanding (MoU) to transfer development rights in exchange for either area
sharing or revenue sharing.
In cases where
construction services are provided by the developer, the landowner does not
make any monetary payment. Instead, the landowner grants development rights
associated with the land, along with an agreement to transfer a proportionate
share of the land. The developer (promoter) is then entitled to develop a
complex or an agreed number of flats on the land and has the right to sell
their proportionate undivided share of the land.
What is Floor Space Index
(FSI)?
Floor Space Index (FSI),
also known as Floor Area Ratio (FAR), is the maximum area that can be built on
a plot of land. It is regulated by the local or municipal authorities of the
State Government, with FSI guidelines typically based on the National Building
Code. FSI is calculated by dividing the total built-up area of all floors of a
building by the area of the plot. For example, if a plot is 100 square meters
and the permissible FSI is 1, then you can build up to 100 square meters on
that plot.
Exemption applicable to
Residential Apartments:
The GST Council has
provided major exemptions to the residential apartments in 33rd and
34th Council Meetings. One such exemtions is given with respect to
transfer of development rights and FSI too. For the JDA entered on or after 1st
April, 2019, the developmet rights / Floor Space Index (FSI) provided by the
landowner to the developer is exempted vide entry No. 41A, to the extent of construction
of residential apartments which are sold before obtaining date of completion
certificate or date of first occupancy, whichever is earlier.
Valuation of Transfer of
Development Right Share
As per para 1A of the
Notification No. 12/2017 – CT (Rate), inserted vide Notification No. 04/2019 –
CT (Rate) “ Value of supply of service by way of transfer of development rights
or FSI by a person to the promotor against consideration in the form of residential
or commercial apartments shall be deemed to be equal to the value of similar
apartments charged by the promoter from the independent buyers nearest to the
date on which such development rights or FSI is transferred to the promoter”.
Provision of taxability
under GST:
In GST, 'supply' is the
event that triggers taxation. According to Section 7 of the CGST Act, 'supply'
includes any sale, transfer, exchange, rental, lease, or other transactions
involving goods or services done for a consideration in the course of business.
The Act also lists specific activities that are considered supplies of goods or
services.
Schedule II of the CGST
Act specifies which activities are treated as supplies of goods or services.
For example, the construction of a complex, building, or civil structure for
sale is considered a supply of services, unless the entire payment is received
after the completion certificate is issued or after the building is first
occupied, whichever comes first.
In the case of
construction, building projects are treated as a composite supply of services.
According to entry 6(a) of Schedule II, a works contract, which involves the
construction of any immovable property where goods are transferred, is
considered a supply of services.
Therefore, it's clear
that the construction of a complex is considered a supply of services if it is
sold before the completion certificate is issued.
Additionally, Schedule
III of the GST Act lists activities that are neither considered supplies of
goods nor services. This includes the sale of land and the sale of buildings,
provided the entire payment is received after the completion certificate is issued.
These transactions are exempt from GST
Manner of Taxability
prior to 1st April, 2019
In the GST regime as per
Notification No. 04/2018 CT, the Transfer of Development Right (TDS) or Floor
Space Index (FSI) qualify as taxable supply and subject GST. The taxability
situation before or till 31st March, 2019 was as under:
·
The landowner was liable to pay the GST on
the development rights transferred to the builder in respect of which he receives
apartments.
·
The builder in turn takes the ITC and
utilises ITC while discharging the output GST liability.
·
The builder discharge GST liability on the
flats allotted to the land owner and flats sold to normal buyers.
Taxability on part of
Land Owner after 1st April 2019
As per new provisions,
where land owner has transferred development rights of his land to the
developer for development of residential or construction of apartments. The
land owner has received consideration in terms of money (i.e. revenue sharing)
or in terms of share of apartments (i.e. area sharing) or a combination of
both. The treatment of GST on transfer of development rights by landowner to
developer in case of-
·
Revenue sharing agreement: No liability on
the land owner to pay GST, Liability will arise on the developer on RCM basis
[(Sr. No. 5B of Notification No. 13/2017 – CT (Rate) read with notification No.
5/2019 CT (Rate).
·
Further sale by land owner of his share in
the built-up area / apartments, which attract GST as it is a supply of service
and taxable under entry at SI. No. 16(iii) (Heading 9972) heading description
“Real Estate Services” other than (i) and (ii) above and accordingly would
attract GST at the rate of 18% vide Notification No. 11/2017 Central Tax (Rate)
dated 28.06.2017
Taxability on part of
Developer after 1st April, 2019
The developer is exempted
from payment of GST on transfer of development rights by land owner to
developer is exempted in the following conditions as per Notification No.
12/2017 – CT (Rate) read with Notification No. 04/2019 CT (Rate).
The exemption is granted
such transfer of development rights only to the extent residential apartments.
The exemption is
applicable only to the extent of residential apartments booked as on the date
of completion certificate. In case of some residential apartments remains un-booked
then tax on supply of development rights needs to be paid on RCM basis
proportionately.
The developer is liable
to pay GST on transfer of development rights given for construction of
commercial apartment under RCM basis as per Notification No. 13/2017 CT (Rate)
read with Notification No. 5/2019 CT (Rate).
ITC Eligibility of Tax
paid under RCM:
The eligibility for
claiming Input Tax Credit (ITC) on taxes paid by a promoter under the Reverse
Charge Mechanism (RCM) for the transfer of development rights or FSI depends on
the following scenarios:
1. Commercial
Apartments Sold Before Completion:
o If
the construction is for commercial apartments and all units are sold before the
completion certificate is issued or before the first occupancy (whichever is
earlier), the promoter can claim full ITC on the tax paid under RCM for the
transfer of development rights/FSI.
2. Commercial
Apartments Sold After Completion:
o If
all commercial apartments are sold after the completion certificate is issued
or after the first occupancy (whichever is earlier), the promoter cannot claim
ITC on the tax paid under RCM for the transfer of development rights/FSI.
3. Some
Commercial Apartments Sold Before and Some After Completion:
o If
some commercial apartments are sold before the completion certificate is issued
or before the first occupancy (whichever is earlier), and some are sold after,
the promoter can claim ITC proportionate to the number of apartments sold
before the completion certificate or first occupancy.
4. Residential
Apartments:
o For
residential apartments, the promoter cannot claim ITC on the tax paid under
RCM. It is important to note that GST on the transfer of development rights/FSI
under RCM for residential apartments sold before the completion certificate or
first occupancy is exempt.
5. Mixed
Use: Commercial and Residential Apartments:
o If
the construction involves both commercial and residential apartments, the
promoter cannot claim ITC for the residential units. For the commercial units,
ITC can be claimed proportionately for the apartments sold before the
completion certificate or first occupancy (whichever is earlier).
Frequently Asked
Questions (FAQ’s)
Q.1 What is the rate of
GST applicable on transfer of development rights, FSI and long term lease of
land?
Ans. Supply
of TDR or FSI or long term lease of land used for the construction of
residential apartments in a project that are booked before issue of completion
certificate or first occupation is exempt.
Supply of TDR or FSI or
long term lease of land, on such value which is proportionate to construction
of residential apartments that remain
un-booked on the date of issue of completion certificate or first occupation,
would attract GST at the rate of 18%, but the amount of tax shall be limited
to1% or 5%of value of apartment depending upon whether the residential
apartments for which such TDR or FSI is used, in the affordable residential
apartment category or in other than affordable residential apartment.
TDR or FSI or long term
lease of land used for construction of commercial apartments shall attract GST
of 18%.
The above shall be
applicable to supply of TDR or FSI or long term lease of land used in the new
projects where new rate of 1% or 5% is applicable.
Q.2 Who is liable to pay
GST on TDR and floor space index?
Ans. The
promoter is liable to pay GST on TDR or floor space index supplied on or after
01-04-2019 on reverse charge basis.
Q.3 At what point of
time, the promoter should discharge its tax liability on TDR.
Ans. The
liability to pay GST on development rights shall arise on the date of
completion or firstoccupation of the project, whichever is earlier. Therefore,
promoter shall be liable to pay tax on reverse charge basis, onsupply of TDR on
or after 01-04-2019, which is attributable tothe residential apartments that
remain un-booked onthe date of issuance of completion certificate, or first
occupation of the project.
Q.4 At what point of
time, the promoter should discharge its tax liability on FSI (including
additional FSI).
Ans. On
FSI received on or after 1.4.2019, the promoter should discharge his tax
liability on FSI as under:
(i)
In case of supply of FSI wherein
consideration is in form of construction of commercial or residential
apartments, liability to pay tax shall arise on date of issuance of Completion
Certificate.
(ii)
(ii) In case of supply of FSI wherein
monetary consideration is paid by promoter, liability to pay tax shall arise on
date of issuance of Completion Certificate only if such FSI is relatable to
construction of residential apartments. However, liability to pay tax shall
arise immediately if such FSI is relatable to construction of commercial
apartments.
Disclaimer: All the Information is based on the notification, circular and order issued by the Govt. authority and judgement delivered by the court or the authority information is strictly for educational purposes and on the basis of our best understanding of laws & not binding on anyone.
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