GST on the Real Estate Sector – 360° Analysis

Table of Contents

1. Whether 5% is the only option?
2. Whether 1/3rd Value is the only option?
3. Joint Development Rights
4. Joint Development Agreement – Landowner Share
5. Development Rights
6. Sale of Plots
7. Slum Rehabilitation

1. Whether 5% is the only option?

1.1 GST @18%

• Developer pays GST @ construction consideration

1. 1. 18% charged on customer
   2. 5% charged on customer but 18% paid to Government

• No GST on the consideration for the land
• ITC availed
• Is this option available?
• Notification No. 3/2019 – CTR amends Notification No. 11/2017 –CTR
• Notification No. 11/2017 – CTR issued in exercise of powers available under Section 9(1), 11(1), 15(5) and 16(1) of the CGST Act, 2017

1. 1. Power to notify rates – 9(1)
   2. Power to grant exemption – 11(1)
   3. Power to determine value for such supplies in the manner prescribed – 15(5)
   4. Subject to conditions and restrictions as may be prescribed, ITC is available – 16(1)

• Power to notify rates is a simple power and there is no power to specify conditions or restrictions
• Power to grant exemption does not confer power to provide a deeming fiction where option is not exercised
• Non-availability of ITC can be specified only through Section 17(5) and not through a rate notification
• Section 16(1) does not confer power to deny credit
• Section 15(5) requires rules to be framed for valuation in respect of notified supplies
• Developers followed WCT category and discharged 18% GST under Entry 3(ii), Notification No.11/2017 – CTR as composite supply of works contract as defined in Section 2(119) of CGST Act, 2017
• Entry 3(ii) deleted by Notification No. 3/2019.
• Entry 3(xii) is the residual entry which refers to construction services other than … …
• Contractors and sub-contractors
• Developers who follow WCT

1. 1. Whether it can be called as other construction services?
   2. Whether it will fall under general residual services?
   3. Whether there is no entry for taxation since WCT is defined?

• Lower rate with conditions is more under Section 11 in the form of an exemption rather than a rate under Section 9.
• Lower rate with conditions as an exemption results in the following:

1. 1. If the exemption is absolute, then the assessee has no choice but to avail the exemption.
   2. If the exemption is conditional, then the assessee at his option can choose not to avail the exemption;

• Conditional exemption is at the option of the assessee – Decisions available
• Assessee can chose to ignore the conditional exemption (5%) and discharge GST at 18% and avail ITC
• If ITC availment was wrong and 5% rate was not available then full rate of GST would be payable but that cannot be on the land component.
• Given the nature of the condition it should be possible to take a position that 5% method is not the only method

1. 1. Construction segment would attract 18%
   2. ITC would be available
   3. Undivided share segment would not be liable to GST

2. Whether 1/3rd Value is the only option?

2.1 Notification No. 3/2019

• Land consideration Rs. 10,000 per sq. ft.
• Construction consideration Rs. 5,000 per sq. ft.
• Deduction under Notification – 1/3rd
• TaxableValue Rs. 10,000 per sq. ft.
• Can the assessee adopt the land value on actual basis since it is beneficial?
• This would result in levy of GST on land which is impermissible.
• Supreme Court decision in the case of Wipro Ltd.
• Whether inclusion of land in the consideration is permissible?
• Entry 49, State List not amended by the 101st Constitutional Amendment Act

2.2 Construction Service

• Munjal Manishbhai Bhatt v. UoI [2022] 138 taxmann.com 117/92 GST 327/62 GSTL 262 (Guj.)

1. 1. The legislative intent is to impose tax on construction activity undertaken by a supplier at the behest of or pursuant to contract with the recipient
   2. There is no intention to impose tax on supply of land in any form and it is for this reason that it is provided in the Schedule III to the GST Acts that the supply of land will neither be a supply of goods nor a supply of services
   3. There is specific consideration agreed for sale of land and for construction of bungalow
   4. When specific value of land and value of construction service is available, can the notification provide for a fixed deduction towards land? The answer has to be in the negative
   5. When the statutory provision requires valuation in accordance with the actual price paid or payable for the service and when such actual price is available then tax has to imposed on the actual value
   6. Deeming fiction can be applied only where the actual value is not ascertainable
   7. Para 2, Notification No. 11/2017 – CTR which provides for a mandatory fixed deduction of 1/3rd of total consideration towards value of land is ultra vires the provisions as well as the scheme of the GST Acts
   8. Application of such mandatory uniform rate of deduction is discriminatory, arbitrary and violative of Article 14 of the Constitution of India
   9. In our view, while maintaining the mandatory deduction of 1/3rd for value of land is not sustainable in cases where the value of land is clearly ascertainable or the value of construction service can be determined with the aid of the valuation rules, such deduction can be permitted at the option of the taxable person particularly in cases where the value of land or undivided share of and is not ascertainable
   10. Para 2, Notification No. 11/2017 – CTR is read down to the effect that deeming fiction of 1/3rd will not be mandatory in nature
   11. It will 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

• This decision has clearly indicated that

1. 1. Land value can be on actual basis where it is ascertainable.
   2. Same analogy can apply when para 2 is applied to different scenarios in the Notification.
   3. Court has also recognized that value of construction service can be determined through Rules.
   4. In respect of landowner share, the method of cost + 10% can be justified by relying upon this decision.

3. Joint Development Rights

3.1 JDA Before 01.07.2017

• Where a Joint Development Agreement is executed before 01.07.2017, can landowner share be taxed?
• Whether the provisions pertaining to GST in the context of development rights or construction for landowner have any relevance to a Joint Development Agreement that is executed before implementation of GST.
• The Tribunal in the case of CCE & ST v. Sri Lakshmi Promoters has held that if the JDA is before 01.07.2010 then no service tax is applicable, whether or not sale agreement is entered before 01.07.2010.
• From this, it can be construed that the date of JDA is the date on which liability arose and that will not get affected by the date when the allotment or possession of units is given to the landowner.
• State of Karnataka v. Lease Plan India Ltd. [2015] 58 taxmann.com 81/51 GST 273 (Kar.)
• Can Notification No. 4/2018 or No. 6/2019 even apply when development rights had moved earlier?

4. Joint Development Agreement – Landowner Share

4.1 GST on Landowner Share

• Joint Venture
• Different models
• Revenue share model

1. 1. No construction for owner
   2. No allocation of constructed area for owner
   3. All flats developed and marketed by builders
   4. Percentage of revenue shared with the owner

4.2 Revenue Share Model

• In the case of Mormugao Port Trust v. Commissioner of Cus. C. Ex & ST (2017) 48 STR 69 (Mum.-Trib.) the Mumbai Bench of the Tribunal has held that if the agreement is read as a whole it clearly comes out that the assessee and SWPL were jointly undertaking a common enterprise, the revenue of which was shared between the two.
• In so far as the other argument of the revenue that non-sharing of losses militates against the principle of partnership being canvassed by the Assessee is concerned, the broad principle of partnership of law applies to a transaction between co-venturer and joint venture and not the entire Partnership Act per se.
• Even under the Partnership Act there is no stipulation that the partners must necessarily share losses.
• In any case, in a joint venture of the present type where jointly controlled operations are being undertaken and one of the venturers brings in the land and the water front and the right to exploit such water front as his contribution while the other venturer brings in money to create infrastructure on the same as his capital, each of the partners is responsible/liable for the loss of his capital in case the venture is not successful.
• There is no service rendered by the appellant and the money flow to the assessee from SWPL under the nomenclature of royalty is not a consideration for rendition of any services but in fact represents the appellant’s share of revenue arising out of the joint venture being carried on by the assessee and SWPL.
• In Cricket Club of India v. Commissioner of Service Tax, [2015] 40 S.T.R. 973 (Mum.- Trib.), the Mumbai Bench of the Tribunal held that mere flow of money from one person to another cannot be considered as consideration agreed upon for any specific activity so as to constitute a service.
• The Supreme Court in the case of State of Bengal vs. Calcutta Cricket Club [2019] 110 taxmann.com 47/76 GST 614/29 GSTL 545 (SC) while holding that there cannot be any service tax on a club based on the principle of mutuality also held that there has to be an activity carried out by one person for another for consideration for service tax to apply.
• In Niraj Prasad vs. Commissioner of C.EX. & S.T. (2020) 38 G.S.T.L. 78 (All-Trib.), the appellant was party to a revenue sharing agreement and a demand was raised for Service Tax on the amount received by the appellant under the Agreement. The Allahabad Bench of the Tribunal held that in such a revenue sharing model agreement, the appellant was not a service provider and not providing any service and was therefore not eligible to pay service tax on the income received under the agreement.

4.3 Area Share Model

• Share of constructed area
• Is the developer liable to pay GST on construction done for the land owner?
• Can it be said that there is a supply of service by the developer to the landowner?
• Can it be said that since the cost of construction pertaining to the landowner share has  been captured in the selling rate to the customers, there cannot be any further levy?
• The Hyderabad Bench of the Tribunal in the case of Vasantha Green Projects v. Commissioner of Central Tax – Rangareddy – GST [2018] 95 taxmann.com 317/[2019] 20 GSTL 568 (Hyd. – CESTAT) has held that it is undisputed that the appellant provided construction services to landowners and received legal rights on his share of land; constructed villas and sold them.
• The Appellant had discharged service tax liability on the transaction with prospective customers and for such customers the cost of land has been included in the value.
• Since the value arrived for prospective customers included the consideration paid or payable for the acquisition of land it cannot again suffer service tax.
• The amount attributable to consideration received in the form of land right from the owner stands included in the value of villas sold to prospective customers.
• This decision was followed by the Hyderabad Bench subsequently in the case of PNR Infra Pvt. Ltd. in which the appellant had included the cost of land over and above the value of flats constructed and sold and paid service tax on that and produced a certificate from the chartered accountant. The Tribunal held that the amounts attributable to the value of land has been considered as an addition to the value that is charged on the flat owners who purchased the flats from the appellant and hence there is no service tax liability once again.
• Faqir Chand –Supreme Court

1. 1. An agreement between the owner of a land and a builder for construction of apartments and sale of those apartments so as to share the profits may be a joint venture, if the agreement discloses an intent that both parties shall exercise joint control over the construction/development and be accountable to each other for their respective acts with reference to the project.
   2. On facts there is a contract for construction of an apartment and there is consideration for such construction flowing from the land owner to the builder (in the form of sale of undivided share in the land and permission to construct and own the upper floors).
   3. The land owner is the consumer, builder is the service provider.

• Land/UDS given up by owner.
• Value of land/UDS given up by owner.

4.4 Notification No. 4/2018

• In exercise of the powers conferred by section 148 of the Central Goods and Services Tax Act, 2017, the Central Government, on the recommendations of the Council, hereby notifies the following classes of registered persons, namely:-

1. 1. registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and
   2. registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights,

• as the registered persons in whose case the liability to pay central tax on supply of the said services, on the consideration received in the form of construction service referred to in clause

1. 1. above and in the form of development rights referred to in clause
   2. above, shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter)

• Notification was amended by Notification No. 23/2019 – CTR dated 30.09.2019 which stated that nothing contained in this notification shall apply with respect to the development rights supplied on or after 01.04.2019

4.5 Notification No. 6/2019

• This Notification has been issued under Section 148 of the CGST Act whereby the followings classes of registered persons have been notified as the persons liable to pay CGST:

1. 1. Promoter who receives development rights or FSI including additional FSI on or after 01.04.2019 for construction of a project against consideration payable or paid by him wholly or partly in the form of construction service of commercial or residential apartment in the project or in any other form including in cash.
   2. Promoter who receives long-term lease of land on or after 01.04.2019 for construction of residential apartments in a project against consideration payable or paid by him in the form of upfront amount (called as premium, salami, cost price, development charges or by any other name).

• The liability to pay CGST is on the

1. 1. consideration paid by the promoter in the form of construction service of commercial or residential apartments in the project for supply of development rights or FSI including additional FSI;
   2. monetary consideration paid by the promoter, for supply of development rights or FSI including additional FSI;
   3. upfront amount (called as premium, salami, cost price, development charges or by any other name) paid by the promoter for long-term lease of land relatable to construction of residential apartments in the project;
   4. supply of construction service by the promoter against the consideration in the form of development right or FSI including additional FSI.

• The liability shall arise on the date of issuance of completion certificate for the project, where required by the competent authority or on its first occupation whichever is earlier.
• The Notification provides that the tax is required to be paid under reverse charge basis in accordance with Notification No. 13/2017.

4.6 Validity of Notifications

• Section 148 of the CGST Act, 2017 provides that the Government may on the recommendations of the Council and subject to such conditions and safeguards as may be prescribed, notify certain classes of registered persons, and the special procedures to be followed by such persons including those with regard to registration, furnishing of return, payment of tax and administration of such persons.
• This provision does not confer any power on the Government to issue a notification on taxability of a transaction.
• The power is only in the context of procedures and process and not for determining liability, if any

4.7 GST on Landowner Share – Options

• No tax position
• Rate charged for similar apartment nearest to the date on which development right is transferred less 1/3 rd towards land.
• Since the land already owned by the owner GST at 18% for the construction carried out for the owner (akin to a contractor)

1. 1. Value could be comparable rate
   2. Value could be guideline value of land given up by the owner
   3. Value could be agreed rate
   4. Value could be cost of construction plus 10%

5. Development Rights

5.1 Notification No. 4/2019 – CTR (Exemption) and 5/2019 – CTR (RCM)

• Development rights – Residential projects
• No GST through an exemption notification subject to conditions
• In case completion certificate is obtained and there are unbooked units, promoter has to pay GST on development rights under RCM @18%
• GST to be paid on issue of CC or first occupation whichever is earlier
• Liability will be calculated by taking into account carpet area of unbooked units as against carpet area of total units
• Where promoter is liable to pay on development rights notification provides that value shall be deemed to be equal to value of similar apartments charged by the promoter from independent buyers nearest to the date on which the developments rights are transferred to the promoter.

5.2 Whether development rights constitute immovable property

Development rights in immovable property can be considered as benefits attached to land and hence would take the character of immovable property.

• Chheda Housing Development Corpn.
• Anand Behara
• DLF Commercial Projects

5.3 Development Rights – GST

• Whether there is a supply in the course or furtherance of business?
• In order that a transaction may be treated as ‘business transaction’, it must be a transaction that answers the above description from the standpoint of both the parties to the transaction. It cannot be a business transaction from the standpoint of one party to the transaction and something else from the other. So viewed, a single transaction where an owner of immovable property agrees to sell his land to a society may or may not constitute a business transaction depending upon whether the seller is in the business of selling property for profit – Bhanushali Housing Co-operative Society Ltd. (SC)
• The purchase of property is an isolated transaction and the appellant has not carried out any business either before or thereafter. On execution of JDA, it cannot be said that the owner of land also intended to carry on business using the subject land as stock in trade since he may well have decided to part with the land for other reasons also – Devineni Avinash v. Principal CIT [2018] 100 taxmann.com 75 (AP and Telangana)

5.4 Valuation of Development Rights

The selling rate for a customer is to be identified as a tool for valuation.

• Can it be applied given the fact that development rights are not measured in terms of square feet.
• Selling rate would include land and the owner is not conferring development right in respect of the retained land.
• What happens when there is no selling rate given the fact that both parties lease out the constructed area?
• What the owner provides is the right to sell UDS as well as the right to develop.
• Computation mechanism does not exist for identification of value of development rights.
• If computation fails, the levy has to fail – CIT v. B.C. Srinivasa Setty [1981] 5 Taxman 1/128 ITR 294 (SC).

5.5 GST on Development Rights – Options

• No tax position
• Valuation as per the Notification

1. 1. Computation challenges
   2. Possible changes in the future
   3. RCM and no ITC

6. Sale of Plots

6.1 Plot

• Developer developing land into plots and selling plots

1. 1. Land purchased from land owner
   2. Land developed into plots
   3. Developer sells the plots

• Developer and Landowner enter into JDA

1. 1. Land developed by the Developer
   2. Both Landowner and Developer sell respective share of plots

• Developer and Landowner enter into JDA

1. 1. Developer sells all plots
   2. Percentage of revenue shares with the Landowner

• Conveyance of plot attracts stamp duty and registration
• When both parties sell plots, there is no question of GST
• When developer sells all the plots and shares revenue, revenue sharing arrangement?

1. 1. Position in income tax
   2. Capital gain treatment

• Can there be a GST on development charges separately collected?
• Can development charges be considered as incidental to sale of land and hence, not taxable?

6.2 Circular No. 177/09/2022 – Tru Dated 03.08.2022

• Land may be sold either as it is or after some development such as levelling, laying down of drainage lines, water lines, electricity lines, etc. It is clarified that sale of such developed
  land is also sale of land and is covered by Sr. No. 5 of Schedule III of the Central Goods and Services Tax Act, 2017 and accordingly does not attract GST.
• However, it may be noted that any service provided for development of land, like levelling, laying of drainage lines (as may be received by developers) shall attract GST at applicable rate for such services.

6.3 Development Charges

• In the context of service tax, the Chennai Bench of the Tribunal in the case of Hallmark Infrastructure vs. CGST has held that service tax cannot be levied on the consideration collected as land development charges. The Tribunal accepted the arguments that the development activities were undertaken before sale of land and hence the service is a self-service and there is no service provider – service recipient relationship.
• Concept of self-service
• Without development the plot is not really marketable
• Development is critical for the plots to be identified as marketable plots

7. Slum Rehabilitation

7.1 Slum Redevelopment

• In a typical Slum Redevelopment Project, the land would belong to the Government/Municipality
• Developer would be awarded the contract to construct units for the slum dwellers as per the terms of contract
• Consideration would be TDR or FSI which can be used by the developer in another building

1. 1. In terms of Section 7(1), levy of GST is on supply for consideration
   2. What is being supplied by the Developer is only construction on land owned by SRA and the consideration from Slum Rehabilitation Authority (SRA) is only for such supply.
   3. Even though some of the observations can be subject matter of another view, the decision of the Bombay High Court in the case of Sumer Corporation v. State of Maharashtra [2017] 82 taxmann.com 369 (Bom.) was to the effect that the TDR is a measurable benefit and would therefore constitute consideration for carrying out the construction work for SRA and the transaction is nothing but works contract.

• As the consideration does not involve money, the open market value can only be the amounts paid to a similar contractor for carrying out identical work at the same time
  when the supply being valued was made by the Company
• If Rule 27(c) is adopted, the general contract rate awarded by SRA to contractors for construction of slum re-hab buildings involving the same quality of materials would become the basis for valuation for the purpose of GST

7.2 Other Issues

• National Anti-Profiteering Authority (Now Competition Commission)
• Reconciliation challenges

1. 1. Unbilled revenue
   2. GST on advances while accounting based on construction completion method

• Impact of completion certificate/occupation certificate on ITC

1. 1. Whether ITC availed prior to 01.04.2019 needs to be reversed?
   2. What is the scope of unbooked units?

• Drafting of joint development agreements
• Customers’ understanding of GST

1. 1. RERA and GST

• Possible changes in future?

1. 1. Optional GST rate with ITC
   2. Merging stamp duty and registration into GST?
   3. Tax on land