GST IMPLICATIONS ON DEVELOPER (PROMOTER) IN CASE OF RE-DEVELOPMENT OF HOUSING SOCIETY – PART II

In the second and concluding part of examining GST implications on society re-development we will put aside all arguments & Case Laws which support the contention that development rights being arising from land are to be considered as Immovable property and we will further discuss relevant provisions in GST Law, Notifications, FAQ’s published by CBIC considering Supply of Transfer of Development Rights as Supply of Service.

1. Whether transfer of Development Rights is supply of Service or Supply of Goods?  

Section 2(52) of CGST Act 2017 defines “Goods”. Mandatory feature is movable property. Section 2(52) is as below:

(52) “goods” means every kind of movable property other than money and securities

but includes actionable claim, growing crops, grass and things attached to or forming

part of the land which are agreed to be severed before supply or under a contract of

supply;

Development Rights are not movable property. Hence transfer of development rights cannot be considered as Supply of Goods.

Section 2(102) of CGST Act 2017 defines “Services”

(102) “services” means anything other than goods, money and securities but includes

activities relating to the use of money or its conversion by cash or by any other mode,

from one form, currency or denomination, to another form, currency or denomination

for which a separate consideration is charged;

Definition of “Services” is very wide and is anything other than goods, money & securities. Hence, we can conclude that transfer of development rights can be considered to be Supply of Service.

2. GST Liability under Reverse Charge Mechanism on Transfer of Development Rights:

Reverse Charge has been defined in Section 2(98) of CGST Act 2017 as below:

(98) “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act;

In simple terms, reverse charge means liability to pay GST is on recipient of supply of Goods or Services. Normally as per Section 9, GST Liability is on Supplier of Service or Goods.

Section 9(3) of CGST Act 2017 is as below: 

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

Notification 13/2017-CGST (Rate) dated 28^th June 2017 (alongwith various amendments made through many notifications) is issued for intra-state supply of Services under Section 9(3) of CGST Act 2017. This notification mentions categories of services, recipient of service and supplier of services and mandates that for all the services mentioned in Notification 13/2017-Central Tax (Rate), GST will be paid under reverse charge by recipient of supply of service. Notification 13/2017-Central Tax (rate) has been amended

Section 5(3) of IGST Act 2017 (along with various amendments made through many notifications) is similar provision for inter-state services that attract reverse charge in IGST Act 2017. Notification 10/2017-Integrated Tax (Rate) dated 28th June 2017.

We will discuss GST implications under provisions of CGST Act & Notifications issued under provisions of CGST Act. Please note that same also apply under IGST Act for inter-state supplies. Tax Research Unit (TRU) has issued two Circulars on 7^th May 2019 and 14^th May 2019. These are in form of Frequently Asked Questions (FAQ’s). We will refer them FAQ-I (dated 7^th May 19 and having 41 questions) and FAQ-II (dated 14^th May 19 and having 27 questions).

Entry 5B and 5C of Notification 13/2017-CT(R) reads as below:

Both entries 5B and 5C were inserted by Notification 5/2019-Central Tax (Rate) dated 29^th March 2019 wef 1^st April 2019. Both entries are similar except 5B deals with transfer of development rights and 5C deals with transfer of leasehold rights. We will discuss Entry 5B related all GST implications and same apply to transfer of leasehold rights.

Situation & Query: In case an individual who is not in real estate business transfers Development Rights then can such transfer of Development Rights be held as not in furtherance of business and hence not “Supply”.

Response: Definition of term “Business” is very wide and hence all such transacttions of transfer of development rights of Land whether regular business or not will be considered as “Supply”. (Question No 39 of FAQ-I)

Notification 13/2017-Central Tax (Rate) mentions various definitions in Explanation and relevant to Entry 5B are as below:

1. Explanation j mentions that the term 'promoter' shall have the same meaning as assigned to it in clause (zk) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

2. Explanation k mentions the term 'project' shall mean a Real Estate Project (REP) or a Residential Real Estate Project (RREP);

3. Explanation l mentions that the term 'Real Estate Project (REP)' shall have the same meaning as assigned to it in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016);

4. Explanation m mentions that the term 'Residential Real Estate Project (RREP)' shall mean a REP in which the carpet area of the commercial apartments is not more than 15 per cent of the total carpet area of all the apartments

5. Explanation n mentions that the term 'floor space index (FSI)' shall mean the ratio of a building's total floor area (gross floor area) to the size of the piece of land upon which it is built.

Conclusions about Entry 5B of Notification 13/2017-CT(Rate):

1. Project as registered under RERA Act should be considered for 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016). We will hereinafter refer as RERA Act.  Number of buildings, number of residential flats, commercial space, shops etc should be considered for interpreting RCM Entry 5B and 5C as per RERA Registration. Assume total land area for which development rights are transferred to Developer is 75 Acres but initially Developer registers with RERA a project of say 4 buildings in 3 Acres (Say Phase-I), subsequently after 2 years another 5 Acres are registered as project (Say Phase-II) under RERA then for purpose of Entry 5B each will be different Project.  

2. REP shall have same meaning as per Section 2(zn) of RERA Act. In case the carpet Area of commercial apartments to total carpet area of all apartments is upto 15% then such a project is RREP. Thus, RREP is a subset of REP.

Concept of FSI:

FSI has been defined in Notification 13/2017-Central Tax (Rate). It broadly means buildable potential of plot of Land. The Unified Development Control and Promotion Regulations for Maharashtra (“UDCPR-2020”) sets out in detail the manner of computation of FSI and which portions of the floor area of the building and plot are to be included/excluded from FSI computation. The FSI is determined by the local town planning authority. It is determined keeping in mind the location of the land, use of the land and nature of development to be undertaken thereon.

UDCPR-2020 defines basic FSI and premium FSI as follows.

1. Basic FSI – means floor Space Index permissible without levy of premium or loading of TDR on any parcel of land as per the provisions of these regulations.”

2. Premium FSI – means the FSI that may be available on payment of premium as may be prescribed under these regulations.

3. Transferable Development Rights (TDR):

To understand the concept, we can consider an example wherein private landowners have transferred land to government for expanding roads or metro in city. These land owners who have transferred a portion of their land to the Government as and when the Government has required such private land are compensated by way of granting development rights. The alternate mode of compensation, instead of payment of money is TDR, which is nothing but a development potential, in terms of increased floor space index (hereinafter referred to as “FSI”) awarded in lieu of the area of land given, conferred in the form of a Development Rights Certificate (hereinafter referred to as “DRC”), by the Government. Such TDR or DRC is negotiable and can be transferred for consideration, leaving it open for the owner of the acquired land to either use the TDR for himself or to sell it in the open market. In Slum Re-Development, where a Developer builds building accommodating all slum dwellers and developer gets compensation in form of development rights which he can transfer / load on his own buildings.

GST Notifications do not clarify meaning of Premium FSI or TDR. But FAQ-I dated 7^th May 2019 has question No 28 clarifies that in case of transfer of development rights by TDR Certificate the recipient developer is liable to pay GST @ 18% under RCM.

It would be safe to assume that term “Additional FSI” mentioned in Entry 5B of Notification 13 includes Basic permissible FSI, Premium FSI, Additional FSI by whatever name and transfer of development rights.

3. Exemption from GST Liability on transfer of Development Rights – Notification 12/2017-CT (Rate) as amended by Notification 4/2019-CT (Rate):

Section 11(1) of CGST Act 2017 empowers Central Government to exempt intra-state supplies from GST. Accordingly, Notification 12/2017-Central Tax (Rate) has been issued listing exempted intra-state supply alongwith conditions for exemption. Notification 4/2019-Central Tax (Rate) dated 29^th March 2019 introduced Entry 41A wef 1^st April 2019 dealing with exemption from GST when development rights are transferred to a promoter are utilised for construction of residential apartments. Similar Entry 41B was also introduced which dealt with transfer of leasehold rights and residential apartments being constructed on such leasehold land. We will discuss Entry 41A only and same applies to Entry 41B of Notification 12/2017-Central Tax (Rate). We will discuss Entry 41A for which “Description of services” reads as below:

Service by way of transfer of development rights (herein refer TDR) or Floor Space Index (FSI) (including additional FSI) on or after 1st April, 2019 for construction of residential apartments by a promoter in a project, 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.

The amount of GST exemption available for construction of residential apartments in the project under this notification shall be calculated as under:

[GST payable on TDR or FSI (including additional FSI) or both for construction of the project] × (carpet area of the residential apartments in the project ÷ Total carpet area of the residential and commercial apartments in the project)   

Analysis & Conclusion:

1. Development Rights transferred after 1^st April 2019 and where “Promoter” utilises such development rights for constructing residential apartments, then such “Promoter” is exempted from GST subject to all flats being sold before Completion Certificate. This has to be read along with Entry 5B of Notification 13/2017-Central Tax (Rate) which makes recipient (Promoter) as responsible for paying GST under RCM on receiving Development Rights.

2. In case the area developed has residential as well as Commercial space (including Shops, Godowns, Office space) then GST will be payable by recipient (Developer) to the extent such Commercial Development.

4. Amount of GST Exemption Available for Development Rights used for Residential Development when Project has Residential and Commercial Development is equal to

GST Liability on receiving service of Development Rights can be bifurcated in two parts:

1. GST Liability under RCM when Development Rights are used for Commercial Development.

2. GST Liability on Unsold Flats of Developer on Completion Certificate

Each of the above is examined in detail.

1. GST Under RCM when Development Rights are used for Commercial Development:

[GST Payable on TDR/FSI/Additional FSI or both for Construction of Project] * Carpet Area of Residential Development / Total Carpet Area of Residential and Commercial Development

We need to analyse GST Payable on TDR/FSI/Additional FSI. This will be product of Value of TDR/FSI/Additional FSI and Rate of GST.

Value of TDR/FSI/Additional FSI:

Development Rights are valuable and when a Land owner transfers Development Rights, he takes certain number of flats and / or shops and / or Cash as reciprocal consideration.

Value of Development Rights = Value of Flats/Shops + Cash

Para 1A of Notification 12/2017-CT (Rate) reads as below:

“Value of supply of service by way of transfer of development rights or FSI by a person to the promoter 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”.

There is no mention of cash paid as consideration. But obviously if additional cash is paid as consideration then that amount is to be added to the value of Development Rights as defined in Para 1A

“Related Persons” are defined in Section 15 of CGST Act 2017. Please note employer and employee are considered as related persons.

Rate of GST is 18% and is as per Entry 39 of Notification 11/2017-Central Tax (Rate) dated 28^th June 2017.

Example: Assume following data wrt Re-Development Agreement. We will assume for illustration purpose certain amounts assuming all flats are of uniform size and specifications:

1. Date of execution of Development Agreement – 1^st June 2024
2. No of Residential Apartments of Existing residents – 400
3. No of Commercial Apartments of Existing residents – NIL
4. No of Free Sale flats available to Developer – 150
5. Consideration for flat out of free sale area sold to independent buyer nearest to signing Re-Development Agreement – Rs 2 crore per flat
6. Value of Apartments as consideration for transfer of Development Rights = Rs 800 Crores
7. GST on transfer of development rights = 18%*Rs 800 Crs = Rs 144 Crs
8. Carpet Area for residential development = 5,00,000 Sft
9. Carpet Area for Residential & Commercial Development = 6,00,000 Sft
10. GST Exemption is available = [144*5,00,000/6,00,000] = Rs 120 Crores
11. GST Payable by Promoter for Commercial Portion = Rs 24 Crores

Notification 6/2019-Central Tax (Rate) provides Time of Supply when reciprocal consideration for receiving Development Rights is in different forms. In above case, there is no consideration in form of commercial development for development rights received by Promoter. Indeed, Development Rights in above example are partly used for Commercial Development by Promoter and consideration from such commercial development is his entitlement. This situation is not covered in Notification 6/2019-Central Tax (Rate) and so GST is payable on transfer of Development Ras per Question No 14 of Circular dated 7^th May 2019  

2. GST Payable on Unsold Flats on Completion Certificate:

Entry 41A of Notification 12/2017-Central Tax (Rate) mentions that minimum of the following two amounts will be payable for such unsold flats:

1. 1% or 5% of Value for Affordable and Non-Affordable Apartments. As per Para 1B such Value of Apartment is equal to the Consideration charged for similar apartments near the date of Completion Certificate.

2. [GST Payable on Residential Apartments for which Exemption is claimed] * [Area of Residential apartments sold after Completion certificate] / [Total Carpet Area of Residential Apartments]

In continuance with above example, in case out of the 150 apartments, the developer is unable to sell 30 apartments equivalent to say 50,000 sft then the amount at (b) will be worked out as 120 crs * [50,000 / 5,00,000] = 12 Crs

Assuming the last apartment sold near completion certificate is of 3 Crs making 30 residential apartments equivalent to 90 Crs and thus 5% of 90 Crs works to 4.5 Crs. Hence lower of the above two (i.e) 4.5 crs will be payable under RCM by Promoter at time of Occupation Certificate (O.C)/Completion certificate (CC)

5. GST on Construction Service for Flats to existing Flat Buyers:

It is pertinent to note that Developer (Promoter) offers construction service to Notification 11/2017-Central Tax (Rate) notifies rates of GST on different construction services. Para 2A mentions that where development rights are consideration for the Construction Services then the Value of construction service is equal to the value of similar apartments as charged at the time nearest to the date on which development rights are transferred.

In continuance of above example, for the 400 flats, the developer will be providing 400 flats which may be slightly bigger flats. These 400 flats have to be valued as per the last sold similar flat and GST @ 1% for affordable apartments and 5% for non-affordable apartments will be payable.

We may analyse case law of VASANTHA GREEN PROJECTS VERSUS CCT, RANGAREDDY GST - 2018 (5) TMI 889 - CESTAT HYDERABADby CESTAT Hyderabad relating to Service tax regime. Part of Para 7 is as below:

7. It has to be construed, in the above factual matrix, that construction of villas for the land owners is a consideration towards the land on which villas were constructed and offered for sale to prospective customers. It would not be a rocket science to understand that the value which has been arrived at for sale of villas to prospective customers, would include the consideration paid or payable for acquisition of land. It is not a case that appellant has not discharged the service tax liability on the value received for the villas from prospective customers. In our view, if the consideration towards the acquisition of the land has been included in the value of the villas sold to prospective customers and appropriate service tax liability has been discharged the same value, it cannot be again made liable to service tax under the premise that sale value of the villas given to land owners is a consideration on which service tax liability was not discharged. 

This is challenged in Supreme Court. Secondly as case law pertains to Service Tax regime, there may be only a persuasive value.

6. Additional Area Purchased by Existing Flat Buyer:

This will attract GST @ 1% if gross amount charged (meaning including club charges, development charges etc) exceeds Rs 45 Lacs and carpet Area is below 60 Sqm in Metro cities or 90 Sqm in Non-Metro Cities as defined in Notification 11. Promoter (Developer) should raise tax invoice on such person.

There may be few other transactions in society redevelopment. Article is intended to give overview of the important GST Implications.

(Views are strictly personal and article is for general understanding)

Manoj.M.Kasture ([email protected])

28^th June 2025