“If we desire respect for the law, we must first make the law respectable.”
Press Release (43rd GST Council Meeting) discusses on an important change for the landowner who has entered into the ‘Development Agreement’ with the developer. In this light, we have authored this article to explain the practical implication. We provide the disclaimer that this change will actually be crystalized once the notification comes into the picture.
In case of development agreement, landowner transfers the development rights of his land for the construction of a real estate project and the developer assumes the responsibility for the development of project along with other tasks including obtaining approvals, project launching etc. In area sharing arrangement, landowner receives the agreed ratio of constructed area with or without lump sum amount.
It may be noted that when the developer and landowner enter into the development agreement, it carries the GST implications not only in the hands of developer but also on the landowner (i.e. implication is for both of the parties.)
We all know that development agreement has seen number of colours in Indian Indirect Taxes, be it service tax or GST. Authors have attempted to provide the clarity on the issue prevalent as on the day (Part A) along with the change to take place in time to come which is yet to be notified (Part B). It is clarified that here we have not covered the GST implications pertaining to transfer of development rights by landowner to developer.
Part A: What is the position as on the day?
This part of the article enlightens on every aspect of the present law and practical implication about the Liability to pay tax, when the tax liability to pay the tax arises, valuation and ITC.
A-1) Liability is on the developer : Developer shall pay the tax on such supply of flats/ shops etc. to landowner as per the development agreement. (treated as supply of construction services)
Needless to state that developer is entitled to collect the tax from the landowner.
A-2) What is the value on which tax is required to be levied?
Developer will have to pay the tax on the value of first booking of such similar flats/shops etc. supplied to independent buyers (i.e. Date of first booking being the nearest date of development agreement.)
A-3) At what time the tax is required to be paid by the developer?
Tax liability in hands of developer on supply of flats/shops etc. to the landowner shall arise on the date of issuance of completion certificate for the project, where required, by the competent authority or on its first occupation, whichever is earlier.)
It signifies that liability of payment of GST is deferred till the completion of the project.
A-4) Is landowner eligible for ITC?
Landowner is eligible to take the credit of the tax paid by the developer if landowner further supplies such flats/shops etc. to his buyers before issuance of completion certificate or first occupation, whichever is earlier, and
This provision is also supported by section 17(5)(c). As per section 17(5)(c), ITC is not blocked in respect of procurement of works contract services when supplied for construction of an immovable property where it is an input service for further supply of works contract service.
It signifies that when the landowner will not be eligible to take the ITC in respect of :
- flat/shop etc. supplied by landowner after issuance of completion certificate or first occupation (whichever is earlier).
- Units not intended for further supply (i.e. intended it to be used it for own account say, rental purpose)
A-5) How developer can collect the tax from landowner (Interplay in Tax invoice, GSTR 1/3B and financial credit note)?
In the arrangement of development agreement, where developer supplies the flats/ shops etc. in lieu of the procurement of development rights from landowner, the developer is entitled to collect the tax only (but not the value of supply of flats/shops etc.) from the landowner, the developer will have to issue the tax invoice to landowner.
Say, developer has charged the 7.5% GST to landowner of on value of supply of units of INR 10 Cr. (2/3rd of value).It may be noted that GSTR 1/3B do not allow to put the tax component (INR 75 lakhs) without entering the taxable value (INR 10 Cr). So, even though developer does not receive the amount of INR 10 Cr from the landowner, he will have to mention the value and tax both in tax invoice and GSTR 1/3B. Therefore, to nullify the effect of the 10 Cr shown in the ledger of landowner in the accounting, he has to issue the financial credit note (also known as commercial credit note) of INR 10 Cr in name of landowner to ensure the accounting adjustment.
Part B :
B-1) Difficulty being faced by landowner at present time
Even if the landowner is entitled to take the input tax credit on the procurement of flats/shops etc. from the builder, still landowner is facing the problems!!Timing is important!! Reason is the point of time on which the tax liability arises in the hands of developer.
Developer’s liability to pay the tax arises on the date of say first occupation (obviously landowner is entitled for ITC then only) but what will happen if the landowner books the flats/shops etc. for his buyer before this!!
For example, say in the March, 2021 the occupancy certificate is received by the developer whereas the landowner books his own share of flats/ shops etc. in July 2020 (i.e. before occupancy certificate). Due to this, landowner will not be able to enjoy the input tax credit for paying the liability for July 2020 as he has yet to avail the ITC in March, 2021. Landowner will have to pay the tax which he is entitled to collect from the buyer in July 2020. Here utilisation of ITC becomes theory for him as he will be eligible to take ITC later on (i.e. in March, 2021). ITC remains in the electronic credit ledger and could not be utilised by the landowner on the part of the sold units. Helpless Landowner, oh!!
B-2) How market is affected due to this?
As the ITC could not be utilised by the landowner and consequently there are 2 types of side effects can be observed:
| (a) | It is obvious that the price of the flats/shops will go upside as the unutilized ITC becomes cost to the flats/shops etc. in the hands of landowner and/or |
| (b) | Landowner may loose the margin, if he has to compete with the market and to sell the flats/ shops etc. without giving the burden of unutilized ITC on the pricing. |
B-3) Now where is the sun light?
It is said that everything that is faced can not be changed, but nothing can be changed until it is faced. To overcome this issue 43rd GST Council Meeting has decided as per below (Extract of Press Release is as under):
“To make appropriate changes in the relevant notification for an explicit provision to make it clear that land owner promoters could utilize credit of GST charged to them by developer promoters in respect of such apartments that are subsequently sold by the land promotor and on which GST is paid. The developer promotor shall be allowed to pay GST relating to such apartments any time before or at the time of issuance of completion certificate.”
Charging of tax by the developer is decided by the GST Council to be preponed.
Effect of this change will be bringing the smile on the face of landowner as he will be able to enjoy the ITC against payment of the tax liability of the further supply of his own share of flats/ shops. It is stated in the press release that developer shall be allowed to pay GST relating to such flats/shops etc any time before or at the time of issuance of completion certificate.
B-4) Amendment is prospective or retrospective?
This change will be the prospective change but not the retrospective. Developers may plan the tax accordingly by preponing the tax liability (mutually with landowner) for the running projects.
Kindly note that the proposed change does not seem to apply for Revenue Sharing Model under Development Agreement/Joint Venture set up.
Authors can be reached at vivekladdha@hotmail.com, caguptamanish@gmail.com, dineshdoshi@tulsirealty.com
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