Real-estate developers contest 18% GST on Joint Development Agreements

Real estate developers are contesting the 18% Goods and Services Tax (GST) levy on the transfer of development rights within joint development agreements (JDA) between developers and landowners. They believe the JDA does not involve any sale of land and hence the transfer of the rights is not taxable.

Earlier this week, a developer filed an appeal in the Supreme Court (SC) against a ruling of a Telangana High Court, which held that JDAs should be taxed. The apex court has issued a notice to Centre to seek its response and will hear the matter on September 9. As no stay has been given on the Telangana High Court order, landowners and the developers will have to pay the taxes after valuing the service till the matter is finally decided.

Essentially, a JDA is a contractual partnership between a landowner and a real estate developer to jointly work on a project on the landowner’s property. In this arrangement, the real estate developer is responsible for constructing the building and related infrastructure while the landowner provides the land. “If land is sold to the third party, GST can be levied. However, in a JDA there is no sale, so it is not taxable,” an expert told FE.

He believes that levying GST on joint development will make real estate development unviable. “It will increase costs further which the developers will need to recover from buyers,” he said.

Another expert observed that GST is levied on services provided. “There are no services provided in a joint development and thus, no GST should be levied on this,” he said. “We are paying stamp duty on agreements in JDAs, so why pay GST?” he asked.

Tax experts say that development rights are only incidental to the sale of land. Any arrangement in a JDA is only ancillary to the ultimate conveyance of land in favour of the developer against construction services. As such, the JDA is not taxable.

The Advocate representing a developer in the apex court, argued that the moot point in this barter transaction is whether the incidental and ancillary right to the sale of land would be subject to GST, as the supply of land is excluded from the purview of GST. He emphasised that subjecting that sale of land to additional tax will make the projects “unviable and lead to tax cascading”.

Another tax expert said that the levy of GST on transfer of development rights remains a vexed issue. “Considering that the legislation by itself does not categorically tax such transactions under the Act, and seeks to impose tax basis notifications issued in respect of valuation and time of supply for such services, there appears to be a prima-facie case for the industry,” she said.

However, on the other hand it can also be argued that development of land can be construed to be a service leviable to GST, in the same manner as the construction on the land and leasing, she said.