GST treatment of joint development agreements: landowner's flats and development rights are taxable supplies under notified valuation rules

In an area-sharing joint development agreement, the landowner's transfer of development rights in exchange for constructed residential flats is treated as a taxable supply of service under GST. Construction of the landowner's share of apartments is taxable, with the promoter liable to pay tax under the relevant notifications and reverse charge framework for development rights. Where the project is not an affordable residential apartment project, the construction service is taxable at 5% without input tax credit. Valuation is to be based on the deemed value mechanism using similar apartments sold to independent buyers nearest to the date of transfer of development rights.

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Issues: (i) Whether GST is applicable to the landowner's share of constructed residential flats under the joint development agreement; (ii) If GST is applicable, what is the applicable rate and valuation for the construction service and development rights.

Issue (i): Whether GST is applicable to the landowner's share of constructed residential flats under the joint development agreement.

Analysis: The arrangement was found to be a joint development agreement on an area-sharing basis, under which the landowner transferred development rights to the promoter and received constructed flats in exchange. Such exchange constitutes a supply under section 7(1)(a) of the CGST Act, 2017. The construction of residential apartments for the landowner's share was treated as a taxable supply of construction service, and the transfer of development rights was also treated as a supply of service, with reverse charge implications for the promoter in respect of the applicable portion of development rights.

Conclusion: GST is applicable to the landowner's share of constructed residential flats, and the promoter is liable to discharge the tax as determined under the GST law.

Issue (ii): If GST is applicable, what is the applicable rate and valuation for the construction service and development rights.

Analysis: The project was held not to be an affordable residential apartment project, as the apartment size exceeded the prescribed threshold for a non-metropolitan city. Accordingly, the construction service was held taxable at 5% without input tax credit under the relevant rate notification. The value of construction service was directed to be determined by the deemed value mechanism based on similar apartments sold to independent buyers nearest to the date of transfer of development rights. For development rights, the notifications governing exemption and reverse charge were applied so that GST would be payable on the promoter's construction service and, in the case of un-booked units at completion or first occupation, on the relevant portion of development rights under reverse charge.

Conclusion: The applicable GST rate on the construction service is 5% without input tax credit, and valuation is to be based on the value of similar apartments sold to independent buyers nearest to the date of transfer of development rights; development rights are governed by the applicable exemption and reverse charge notifications.

Final Conclusion: The transaction under the joint development agreement was held taxable under GST, with the landowner's share of flats treated as consideration for supply, and the promoter made liable under the notified rate and valuation mechanism.

Ratio Decidendi: In an area-sharing joint development agreement, transfer of development rights in exchange for constructed flats constitutes a taxable supply of services, and the value and tax rate are governed by the specific GST notifications applicable to residential apartment construction and development rights.

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