Introduction to JDA:
- JDA is an agreement between a landowner and a developer.
- The landowner provides land, while the developer constructs buildings.
- It avoids upfront land purchase costs for developers.
- Common in real estate for large-scale projects.
Legal Framework for JDA’s:
- GST Act, 2017: Defines supply and taxability.
- Income Tax Act, 1961: Capital gains on landowner’s share.
- RERA,2016: Registration and compliance requirements.
- Stamp Duty Act: Impacts registration costs.
GST Applicability on JDA’s:
JDA is considered a ‘supply of service’ under GST. Tax applies to:
- Transfer of Development Rights (TDR)(Section 7 read with Schedule II (Entry 2b) of CGST Act,2017)
- Construction Services (Section 7(1A) read with Schedule II (Entry 5b) of CGST Act, 2017)
- Sale of Flats (Pre-CC taxable) ((Section 7(1A) read with Schedule II (Entry 5b) of CGST Act, 2017)
Types of JDA’s:
- Revenue Sharing Model: Landowner liable for GST on revenue received.
- Area Sharing Model: Landowner’s flats attract GST when sold before CC (Completion Certificate).
- GST treatment depends on the nature of the agreement.
Important JDA Documents:
1. Joint Development Agreements (JDAs): This agreement lays down the base construct of the project. Contains details such as the responsibilities of the landowner, responsibilities of the developer, the sharing ratio, etc.
2. General Power of Attorney (GPA): This document is entered into between the landowner and the developer to enable the developer to do certain acts on behalf of the landowner. The GPA provides the developer the right to obtain plan sanctions, obtain required registrations, apply for licenses, etc.
3. Allocation Agreement: This agreement is entered into post the signing of JDA and GPA. It clearly demarcates the units of the constructed project that will be provided to the landowner and the units that will belong to the developer.
4. Commencement Certificate: This certificate is issued by the local authorities to signify that the project has met all the legal pre-requisites. This certificate allows the developer to begin work on this project.
5. Completion Certificate: A completion certificate certifies that the building is constructed by following the approved building layout and the standards set by the local authority, like building height and the distance from the road, among many other things. This certificate is compulsory to apply for basic amenities like electricity and water supply.
GST on Transfer of Development Rights (TDR):
- TDR refers to the landowner allowing construction on their land.
- GST @18% applies under reverse charge mechanism (RCM). (Developer has to pay under reverse charge).
- Exemptions available for residential projects i.e., GST on TDR is not payable proportionate to the carpet area of units sold before OC/CC.
GST on Construction Services:
GST applies to construction services provided by the developer. Following are the Rates:
- 1 % (affordable housing projects),
- 5% (regular residential projects),
- 12% (commercial projects).
Input Tax Credit (ITC) available for commercial projects only.
GST on Sale of Flats:
- Pre-Completion Certificate (CC) sales attract GST.
- Post-CC sales are exempt (considered immovable property).
- Rates:
- 1% (affordable housing),
- 5% (other residential),
- 12% (commercial).
Importance of Completion Certificate (CC):
- Determines whether GST applies to flat sales.
- Issued by municipal authorities upon construction completion.
- Without CC, flats are considered ‘under construction’ and attract GST.
Time of Supply in JDAs:
- For TDR: In a tax period not later than the tax period in which the OC/CC issued.
- For Construction Services: In a tax period not later than the tax period in which the OC/CC issued.
- For Sale of Flats: As per the provisions of Sec 13 of CGST Act, 2017 (Pre-CC taxable, post-CC non-taxable).
Valuation of Supply in JDAs:
1. TDR: 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 is transferred to the promoter.
2. Exemption: GST on TDR not payable proportionate to the carpet area of units sold before OC/CC. (For Residential Projects).
3. Construction Services to landowner: 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 are transferred to the promoter, less the value of transfer of land, if any.
4. Sale of Flats: Agreement value or stamp duty value, whichever is higher.
Input Tax Credit (ITC) in JDAs:
- ITC on Construction cost and on TDR is not available in the hands of developer for Residential projects. However, developer can claim ITC on Construction costs and TDR for commercial projects.
- Landowners can utilize the ITC of the GST charged by the Developer on the construction services rendered to offset against the liability arising from the sale of units to end customers.
- ITC is only available if used for taxable supplies.
Exemptions & Concessions:
- TDR for affordable housing is exempt from GST.
- Lower tax rates apply for certain housing categories.
- RCM applicable for landowner’s TDR taxation.
Karnataka AAR Ruling: Maarq Spaces Pvt. Ltd. (2019):
- TDR by landowner to developer is a supply of service under GST.
- Taxable at 18% under Reverse Charge Mechanism (RCM).
- Developer pays GST on TDR on behalf of the landowner.
- GST does not apply if the landowner sells flats after obtaining CC.
Impact & Key Takeaways TDR taxation:
- TDR taxation under RCM at 18% GST clarified.
- Landowners must account for TDR valuation in tax planning.
- Developers bear GST compliance responsibility for TDR.
- Flats received by landowners are taxable only if sold before CC.
Challenges in GST for Joint Development Agreements (JDA):
- Timing of Tax liability whether at agreement stage or possession stage.
- Compliance burden on developers under reverse charge mechanism (RCM).
- Differential treatment of landowner and developer under GST.
- Impact of completion certificate (CC) on taxability of flats.
Conclusion:
- Joint Development Agreements (JDA) are complex under GST framework.
- TDR is taxable under GST, primarily under RCM at 18%.
- Landowners must carefully plan tax liability on flats allocation.
- Developers must ensure compliance to avoid penalties.
- Proper structuring of JDAs can help optimize GST obligations.
