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GST Applicability on Collaboration Agreement (JDA)

Date 11 Oct 2019
Replies5 Replies
Written by
GST on development rights and construction services affects valuation, timing and reverse charge liability for collaboration agreements.
GST on collaboration agreements addresses taxability of transfer of development rights, construction services and pre /post completion flat sales across three phases. Earlier phases treated construction as continuous composite supply with taxable value based on cost plus margin or deemed fractions of sale value; timing was tied to completion events or sale agreements. The later framework differentiates taxable and exempt sales, prescribes reduced effective rates for specified residential projects, requires valuation of construction supplied to landowners by reference to prices charged to independent buyers less deemed land value, fixes time of supply to completion certificate or first occupation, and imposes reverse charge and cash payment/no ITC conditions in certain cases. (AI Summary)

First of all we all should know about various transactions embedded under Collaboration Agreement:-

  1. Supply of Development Rights by Landowner
  2. Supply of Construction services by Builder against development rights
  3. Sale of flats by builder or landowner – pre completion
  4. Sale of flats by builder or landowner – post completion

But there were frequent amendments in provisions governing taxability of works contract from day one of GST Regime.

We would like to throw some light on these changing provisions and would like to summarize applicability of GST on certain transactions involved in Collaboration Agreement.

For the sake of convenience, we have bifurcated GST provisions in 3 phases as follows:-

Phase – I Provisions between 01.07.2017 to 24.01.2018

During the abovementioned period, time of supply is not specifically defined and hence governed by general provisions of Time of Supply which will be the completion of individual event encrypted in the said continuous contract of construction.

             SERVICE

GST  RATE

TAXABLE VALUE

Time of Supply

  1. CONSTUCTION  SERVICE

(composite supply)

12% on a single residential unit, otherwise rate is 18%.

Cost of provision of construction service + 10% of cost OR Fair Market Value.

Should be treated as continuous service and accordingly completion of event as per agreement will determine time of supply

  1. DEVELOPER RIGHTS (under Forward Charge)

18% on transfer of Development Rights.

Value of Construction service + upfront cash paid by builder

It should be at the time of transfer of possession from landowner to builder for construction

  1. SALE OF FLAT Pre-completion(Land is a part)

12% on a single residential unit, otherwise rate is 18%.

2/3rd of Sales Value of flat.

Time of supply should be the date of agreement for sale of flats

Phase – II        Provisions between 25.01.2018 to 31.03.2019

ASCERTAINING GST RATE & TAXABLE VALUE OF WORKS CONTRACT

SERVICE

GST  RATE

TAXABLE VALUE

Time of Supply

  1. CONSTUCTION  SERVICE (composite supply)

12% on a single residential unit, otherwise rate is 18%.

Cost of provision of construction service + 10% of cost OR Fair Market Value.

It will arise on completion of construction services by entering into conveyance deed or allotment letter

  1. DEVELOPER RIGHTS (under Forward charge)

18% on transfer of Development Rights.

Value of Construction service + upfront cash paid by builder

It will arise on completion of construction services by entering into conveyance deed or allotment letter

  1. SALE OF FLAT Pre-completion           (Land is a part)

12% on a single residential unit, otherwise rate is 18%.

2/3rd of Sales Value of flat.

This will be treated as continuous supply of service, hence time of supply will be governed by terms of contract

Phase – III      Provisions Applicable after 01.04.2019

SERVICE

GST RATE

TAXABLE VALUE

TIME OF SUPPLY

  1. Taxability of Transfer of Development Rights by Landowner (covered under RCM and to be paid by Builder)
  1. In case where sale of flats is taxable

Exempt

N.A.

N.A.

  1. In case where sale of flats is exempt

Rate will be 18% subject to max 5% or 1% of value of flats sold

Value of construction service + upfront cash paid by builder

It will be the date of Completion Certificate or its first occupation whichever is earlier.

  1. Taxability of Construction Services (GST to be paid by Builder on forward Charge Basis)
  1. Where supplied w.r.t residential complex, etc.-

18%

Cost of construction of land owner’s portion

It will be the date of Completion Certificate or its first occupation whichever is earlier.

  1. Where supplied w.r.t single residential unit

12%

Cost of construction of land owner’s portion

It will be the date of Completion Certificate or its first occupation whichever is earlier.

  1. Taxability of Sale of Flats
  1. Pre-completion

(i)Affordable housing projects-1.5%,

(ii)Residential projects-7.5%

(iii)others-18%

Value of flat

(-)

1/3rd

(deemed value of land)

This will be treated as continuous supply of service, hence time of supply will be governed by terms of contract

  1. post-completion

Exempt

N.A.

N.A.

Additional Conditions for flats to be sold @ 1% / 5% GST

 

  1. GST Payable @ 1% / 5% should be paid in cash i.e. no ITC is allowed to the builder.

 

  1. In case any flat is sold post completion, builder has to compulsorily pay RCM on development charges.
  1. RCM @18% (except cement which is taxed @ 28%) to be paid in case purchases from unregistered dealers is >20% of total purchases.

Conclusion

One can easily conclude that it’s very difficult for Professionals, developers & landowners to determine the exact tax liability in case of collaboration agreements due to number of amendments made in the said provisions. Therefore, agreements should be studied thoroughly so that one can conclude whether the agreement under question falls under Phase-I, Phase – II or Phase – III.

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By Deepak Gulati, Deepak Arya

Goods and Services Tax - GST
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