GST UPDATE ON TREATMENT OF JOINT DEVELOPMENT AGREEMENTS - PART IV:-

Treatment of Joint Development Agreements in GST regime is very critical. In earlier three parts of this series, we have discussed the liability on account of builder and land owner in respect of construction of flats. In this update, we shall discuss the very important and not much talked aspect of joint development agreement, i.e. transfer of land development rights. In joint development agreement, the land owner transfers the right to develop the land to the builder. The builder develops the land and undertakes the construction of flats. Once the flats are constructed, some of them are transferred to land owner and remaining are sold to independent buyers by the builder. There is no ambiguity on the taxability of construction services undertaken by the builder. However, transfer of rights to develop the land is subject to different interpretations. One school of thoughts is of opinion that it will be treated as supply of service in view of clause 2(a) of SCHEDULE II of CGST Act, 2017.

This clause reads as follows:- '(a) any lease, tenancy, easement, licence to occupy land is a supply of services;' The followers of this view are of opinion that transferring the development rights is nothing but a license to occupy the land and use the same for the purpose of construction. Holding this view, there is liability of pay GST on the land development rights. It is worth noting here that the consideration received against transfer of land development rights is in form of flats received from the builder. Therefore, holding this view, there will be liability to pay tax on the transfer of land development rights. Another school of thoughts is of the opinion that it is outside the purview of GST as it is neither the supply of goods nor supply of service. It is worthwhile to mention here that schedule III of CGST Act, 2017 prescribes the list of transactions which are outside the purview of GST.

Clause 3 of schedule III covers the sale of land. Therefore, where a transaction is of sale of land, it will be outside the purview of GST. This school of thought is of the view that the transfer of land development rights is nothing but an agreement in which ultimately the transfer of title in land takes place on a future date.

Thus, there are divergent views on the treatment of land development rights. If the view that it will be treated as service is considered; there will be further ambiguities as to how the same will be valued and how the consideration for the same will be determined. Also, will it be the case that consideration for builder will be land development rights against the transfer of flats to the land owner. Further, for land owner, the consideration will be value of flats received by him against transfer of land development rights. Therefore, following this view, tax will be levied at following stages:-

• On transfer of land development rights - GST will be payable by the land owner.
• On construction of flats (whether sold to land owner or transferred to independent buyer) in accordance with schedule II [clause 5(b)] - GST will be payable by the builder.
• On further sale of flats by land owner from his share of received flats - GST will be payable by the land owner.

Thus, following this view, GST will be levied twice in hands of land owner. However, it is worthwhile to mention here that as of now land owners are not paying any tax on the transfer of land development rights. It is worth noting here that the joint development agreements were given same treatment in the service tax regime also and no one was paying the tax on the land development rights. Whether due to unawareness or due to interpretational issues, the factual position is the same and tax was neither being paid in the service tax regime nor it is being paid in GST regime.

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