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The occasion for writing this article arises from the recently concluded 43rd GST Council meeting and subsequent notifications issued to give effect to the decisions taken at such meeting. Notification No. 2/2021- Central Tax (Rate) and Notification No. 3/2021- Central Tax (Rate) both dated 2nd June 2021 [hereinafter ‘Notifications’] clarifies ITC related issues and thereby provides marginal relief to the landowners who were grappling with the methodology of availing ITC in case of joint development arrangement. In this article, author has made an attempt to decode the implication of aforesaid notifications in joint development arrangement.
In cities like Mumbai and some other metro cities, land is the costliest and a scarce resource. To overcome scarcity & sky-touching cost, the real estate industry (hereinafter ‘Industry’) has evolved various joint development models. Broadly, landowners (hereinafter ‘Landowner Promoters’ or ‘LP’) enters into a Development Agreement (hereinafter ‘Joint Development Agreement’ or ‘JDA’) with the Developers (hereinafter ‘Developer Promoters’ or ‘DP’) for joint development of land and sharing of reward earned out of such joint development. LP contributes land whereas construction & finance activities are handled by DP without much intervention and control of LP. Such joint development arrangements are usually entered into either as ‘Area Sharing Model’ or ‘Revenue Sharing Model’.
To put it briefly, in this type of arrangement DP undertakes to construct free of cost certain specified portion of built-up area for LP(hereinafter ‘landowners flats’). Many a time in addition to such free area an upfront lumpsum consideration is also paid to the LP. In return for such consideration, LP agrees to transfer development rights to DP and sell a specified percentage of undivided interest in the land to the prospective buyers nominated by the DP (hereinafter ‘developers flats’). LP and DP both are free to sell their respective flats to prospective buyers and a mechanism of tri-partite agreement is employed for transfer of the title to the prospective buyers.
Instead of sharing built-up area, in revenue sharing arrangement contracting parties agrees to share the proceeds arising from the joint development of the land. Of late, there is a discernible trend of bias in favour of revenue-sharing model instead of time-tested area sharing model.
Having understood popular models, let us go a step further and look into the taxability arising out of sale of land and sale of building in the GST regime.
In terms of Sl. No. 5 of Schedule III to the CGST Act, 2017, sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building is treated as an activity or transaction which is neither a supply of goods nor a supply of services and therefore not subject to the levy of GST. In terms of clause 5(b) of Schedule II, GST is applicable on the sale of an under-construction complex, building, civil structure or a part thereof. Impliedly, GST is not leviable on ready to move in or completed complex/building provided entire consideration has been received after the issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.
In terms of Notification No. 4/2018-Central Tax (Rate) dated 25th January 2018, the registered LP was made liable to pay GST on the transfer of development rights. Further DP was made liable to pay GST on the value of apartments that were transferred to the LP in pursuance of the JDA. W.e.f 1st April 2019 taxability has been re-written and for Residential Real Estate projects (hereinafter ‘RREP’) GST rate has been reduced to 1% (affordable housing) or 5% (non-affordable housing) but developer’s right to avail ITC has been taken away.
LP may retain few flats out of allotted portion for their own occupation and balance flats may be sold out to prospective buyers either before or after completion of the project. In case flats are sold by LP before completion of the project, technically LP is also providing construction services to prospective buyers and therefore LP is required to charge GST from prospective buyers. Further such service will fall within the purview of a ‘continuous supply of services’ and therefore, in terms of Section 13 of the CGST Act, time of supply of such service will be the earliest of the milestone mentioned in agreement or receipt of payment from prospective buyers.
Construction of complex services rendered by DP to LP will also fall within the purview of a ‘continuous supply of services’. However, in terms of Notification No. 6/2019-Central Tax
1As defined in Section 2(33) of the CGST Act.
(Rate) dated 29th March 2019 (hereinafter ‘Notification No. 6’), the liability to pay tax on such construction service has been postponed to the date of issuance of completion certificate for the project, where required, by the competent authority or on its first occupation, whichever is earlier.
Notification No. 6 has created one unique puzzle for the industry. From a well-intended thought to ensure that LP and DP are not burdened with GST liability at the commencement of the project, drafting lacuna has made this postponement a nightmare for LP. To understand this nightmare, let us consider one hypothetical example. Let us presume 100 flats of equal size were constructed under JDA and LP was entitled to say 40 flats. Before OC, LP has sold 25 flats from its portion to prospective buyers and charged applicable GST. However, qua such 25 flats, DP will raise an invoice and charge GST for construction of complex services only on the completion of the project. To add more confusion, Notification No. 3/2019-Central Tax (Rate) dated 29th March 2019 (hereinafter ‘Notification No. 3’) specifically permits availment of ITC to LP in respect of Input tax paid by him to DP towards the input supply of construction of complex services
Following moot questions were looming large and creating headache for LP:
Considering the intent of Notification No. 3 and applying purposive interpretation, industry has taken a practical view on this matter. DP was preponing their tax liability and syncing it with the tax liability of LP. Accordingly in the above example as and when landowners’ flats were sold, DP was also raising an invoice for construction of complex service on LP. Due to such preponement LP were in a position to avail and utilise ITC of input tax paid to DP on the construction of complex services. However, many players in the industry were fearing allegation of a colourable device for such preponement of liability. Some cautious industry players were also informing jurisdictional officer about such preponement by way of written communication.
It would perhaps make sense to compare the relevant statutory provisions that existed pre and post amendment:
When Liability to pay GST on construction of complex service shall arise in the hands of DP?
On the date of issuance of completion certificate for the project, or on its first occupation, whichever is earlier
In a tax period not later than the tax period in which the date of issuance of the completion certificate for the project, where required, by the competent authority, or the date of its first occupation, whichever is earlier
Further to clarify doubts, vide Notification No. 02/2021- Central Tax (Rate) dated 2nd June 2021, it has been provided that LP shall also be able to utilise Input tax charged by DP.
Earlier liability to pay tax on construction of complex services was fastened to the date of completion of the project. With this amendment, DP is now specifically permitted to choose the date of tax liability any time up to date of issuance of the completion certificate for the project or the date of its first occupation, whichever is earlier. Consequently, DP is now legally permitted to time his liability to match with the liability of LP. LP therefore can avail and utilise such ITC against output tax liability arising on sale of flats to prospective buyers. This amendment validates practice widely followed in the Industry.
It is interesting to note that though Notification No. 3 permit availment of ITC to LP there is a string attached to this availment. ITC is available only to the extent of GST charged from prospective buyer qua such flats and in case of a shortfall, balance ITC shall lapse.
It has been observed that many LP were not interested in ITC headache and ultimately DP were paying GST on construction of complex services from their own pockets. Needless to say, while negotiating JDA deal, DPs must have factored such GST loss. Now with the availability of credit, overall transaction cost shall be reduced for DP and the hanging sword of an allegation of colourable device also disappeared.
LP intending to sell a portion of landowner’s flats should register for GST as early as possible and ensure necessary compliances. As and when they are about to enter any deal with prospective buyers, DP can be requested to raise an invoice for construction of complex services. Input tax paid to DP subject to conditions mentioned above can be utilised for payment of outward tax liability.
Moving to the prime question of whether this amendment is prospective from 2nd June 2021 or retrospective? As per the thumb rule, unless notification says otherwise the notification would come into effect from the date and time when it was printed in the gazette. Since aforesaid notifications are silent some experts are of the view that notification shall take effect prospectively from 2nd June 2021. On the other hand, there is another school of thoughts that is of view that instead of literal interpretation instant case is the best fit for purposive and functional interpretation. It is argued that these amendments are brought in to remove drafting lacuna and absurdity in notification and therefore should take retrospective effect. Author believes the second view is more appropriate in the instant case.
In midst of all this hustle and bustle, the issues which gained traction many a time and still left unanswered are:
2 This matter is pending before Hon’ble Supreme court in the matter of Vasantha Green Projects.
3 NN: 3 treat such service as construction of complex services, however in the opinion of the author, since there is no transfer of land qua services rendered to LP, such services can be aptly classified as works contract services. In the opinion of author there is a strong force in the argument that such services should be valued at cost+ 10%
have been given to brutally thrashed industry. As of now all the above questions are highly debatable and would have to be settled only before higher forums after protracted litigation.
Certainly Industry is in a mood to sing a song too little, too late. 
4 Many might be knowing, too little too late” is the lead single from JoJo’s sophomore album “The High Road”. The single reached the top 5 in the United States, in the UK and in Ireland
The contents of this document are solely for informational purpose. It does not constitute professional advice or a formal recommendation. The presentation is made with utmost professional caution but in no manner guarantees the content for use by any person. It is suggested to go through original statute / notification / circular / pronouncements before relying on the matter given. The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by us. Professional advice recommended to be sought before any action or refrainment
About the author
Jignesh Kansara, Chartered Accountants, Practise in the area of Indirect Taxation including GST.
Email id: firstname.lastname@example.org
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