GST for Builders, Developers and Works Contractors

Transcription

1 GST for Builders, Developers and Works Contractors CA Yashwant J. Kasar B.Com, FCA, DISA, CISA, PMP, FAIA 20 th March 2018

2 GST on construction activity Service Accounting Code Heading for Construction Services is Services covered under this heading are construction of building (99541), general construction of civil engineering works (99542), Site preparation services (99543), assembly and erection of pre-fabricated construction (99544), Special trade construction services (99545), Installation Service (99546) and Building completion and finishing services (99547). CA YASHWANT J. KASAR 2

3 Works Contract service Works Contract Service is a specie of construction service. However, this activity has special relevance as it was defined as 'deemed sale' in Constitution of India. Since then, works contract has been a very litigation prone issue. Later, after introduction of service tax on services, complexities of 'works contract' increased as issue of valuation, TDS and reverse charge made this issue complex. After introduction of GST and abolition of distinction between goods and services, really the concept of 'works contract' has become redundant. However, this term is continuing in GST also. CA YASHWANT J. KASAR 3

4 What is 'works contract' "Works contract" means a contract for building, construction, fabrication, completion, erection, installation, fitting out, improvement, modification, repair, maintenance, renovation, alteration or commissioning of any immovable property wherein transfer of property in goods (whether as goods or in some other form) is involved in the execution of such contract- section 2(119) of CGST Act. Works contract as defined in section 2(119) of CGST Act is 'supply of service' - para 6(a) of Schedule II of CGST Act. CA YASHWANT J. KASAR 4

5 A tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract is deemed sale of goods under Article 366(29A) of Constitution of India. [As inserted by 46th Amendment to Constitution in 1982]. Note that this Article in the Constitution of India is continuing even after Constitutional amendment. Thus, the Constitution states that 'works contract' is deemed sale of goods, while GST Law states that it is 'supply of service' [in any case, GST is payable, but issues relating to rate, place of supply or time of provision of service can arise] Works contract is essentially and inherently a contract of service, irrespective of legal fiction created by Article 366(29A) of Constitution of India - Larsen and Toubro Ltd. v. CST (2015) 318 ELT 633 (CESTAT LB 3 v. 2 decision) Basically, works contract is a contract for work, where supply of material is incidental to the contract for work. CA YASHWANT J. KASAR 5

6 Distinction between construction service and works contract service There is no doubt that construction contract is also a 'works contract'. However, under GST, distinction has been made between 'works contract service' and 'construction of complex'. The distinction is that in case of works contract, a customer (recipient of supply of service) approaches the supplier of service (contractor) to undertake construction as per his requirements. In almost all the cases, the land is owned by or taken on lease by customer. The contractor enters into contract with customer and then undertakes construction with his own material. If the material is supplied by recipient himself (customer), then it is not works contract. It is simple contract for work. CA YASHWANT J. KASAR 6

7 In construction of complex, the builder or developer normally does not have any identified customer. Even if he has some identified customers before commencement of construction, he is undertaking construction activity on his own and not on basis of contract with customer. The land never belongs to the customer. Eg. a society awards a contract to a contractor to construct residential complex in premises owned by society, it will be a 'works contract' and not 'construction of complex'. CA YASHWANT J. KASAR 7

8 Construction Services (Heading 9954) NOTIFICATION NO. 11/2017-CENTRAL TAX (RATE), DATED , AS AMENDED BY, NOTIFICATION NO. 20/2017-CENTRAL TAX (RATE), DATED NOTIFICATION NO. 24/2017-CENTRAL TAX (RATE), DATED NOTIFICATION NO. 31/2017-CENTRAL TAX (RATE), DATED NOTIFICATION NO. 46/2017-CENTRAL TAX (RATE), DATED NOTIFICATION NO. 1/2018-CENTRAL TAX (RATE), DATED CA YASHWANT J. KASAR 8

9 Sr. No. GST Rate Description of Service 1. 18% Construction of a comp-lex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. (Provisions of paragraph 2 of this notification shall apply for valuation of this service) 2. 18% Composite supply of works contract as defined in clause 119 of section 2 of Central Goods and Services Tax Act, CA YASHWANT J. KASAR 9

10 Sr. No. GST Rate Description of Service 3. 12% Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied to the[central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity] by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, (a) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under the Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (b) canal, dam or other irrigation works; (c) pipeline, conduit or plant for (i) water supply, (ii) water treatment, or (iii) sewerage treatment or disposal CA YASHWANT J. KASAR 10

11 Sr. No. GST Rate Description of Service 4. 12% Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of, (a) a road, bridge, tunnel, or terminal for road transportation for use by general public; (b) a civil structure or any other original works pertaining to a scheme under Jawaharlal Nehru National Urban Renewal Mission or Rajiv Awas Yojana; (c) a civil structure or any other original works pertaining to the "In-situ redevelopment of existing slums using land as a resource, under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban);] (d) a civil structure or any other original works pertaining to the "Beneficiary led individual house construction/enhancement" under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana; CA YASHWANT J. KASAR 11

12 Sr. No. GST Rate Description of Service 4. 12% (da) a civil structure or any other original works pertaining to the "Economically Weaker Section (EWS) houses" constructed under the Affordable Housing in partnership by State or Union territory or local authority or urban development authority under the Housing for All (Urban) Mission/ Pradhan Mantri Awas Yojana (Urban); (db) a civil structure or any other original works pertaining to the "houses constructed or acquired under the Credit Linked Subsidy Scheme for Economically Weaker Section (EWS)/Lower Income Group (LIG)/Middle Income Group-1 (MIG-1)/Middle Income Group-2 (MIG-2)" under the Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (Urban);] (e) a pollution control or effluent treatment plant, except located as a part of a factory; or (f) a structure meant for funeral, burial or cremation of deceased CA YASHWANT J. KASAR 12

13 Sr. No. GST Rate Description of Service 4. 12% (g) a building owned by an entity registered under section 12AA of the Income-tax Act, 1961 (43 of 1961), which is used for carrying out the activities of providing, centralised cooking or distribution, for mid-day meals under the mid-day meal scheme sponsored by the Central Government, State Govern-ment, Union territory or local authorities. CA YASHWANT J. KASAR 13

14 Sr. No. GST Rate Description of Service 5. 12% Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, supplied by way of construction, erection, commissioning, or installation of original works pertaining to, (a) railways, [including] monorail and metro; (b) a single residential unit otherwise than as a part of a residential complex; (c) low-cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the 'Scheme of Affordable Housing in Partnership' framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; (d) low cost houses up to a carpet area of 60 square metres per house in a housing project approved by the competent authority under (1) the "Affor-dable Housing in Partnership" component of the Housing for All (Urban) Mission/Pradhan MantriAwas Yojana; (2) any housing scheme of a State Government; CA YASHWANT J. KASAR 14

15 Sr. No. GST Rate Description of Service 5. 12% (da) low-cost houses up to a carpet area of 60 square metres per house in an affordable housing project which has been given infrastructure status vide notification of Government of India, in Ministry of Finance, Department of Economic Affairs vide F. No. 13/6/2009-INF, dated the 30th March, 2017; (e) post-harvest storage infrastructure for agricultural produce including a cold storage for such purposes; or (f) mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages. CA YASHWANT J. KASAR 15

16 Sr. No. GST Rate Description of Service 6. 12% Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, provided] to the Central Government, State Government, Union Territory, [a local authority, a Governmental Authority or a Government Entity] by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of (a) a civil structure or any other original works meant predominantly for use other than for commerce, industry, or any other business or profession; (b) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; or (c) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in paragraph 3 of the Schedule III of the Central Goods and Services Tax Act, 2017.] CA YASHWANT J. KASAR 16

17 Sr. No. GST Rate Description of Service 7. 5% Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017, involving predominantly earth work (that is, constituting more than 75 per cent of the value of the works contract) provided to the Central Government, State Government, Union territory, local authority, a Govern-mental Authority or a Government Entity % Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 and associated services, in respect of offshore works contract relating to oil and gas exploration and production (E&P) in the offshore area beyond 12 nautical miles from the nearest point of the appropriate base line % Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (iii) or item (vi) above to the Central Government, State Government, Union territory, a local authority, a Governmental Authority or a Government Entity. CA YASHWANT J. KASAR 17

18 Sr. No. GST Rate Description of Service 10. 5% Composite supply of works contract as defined in clause (119) of section 2 of the Central Goods and Services Tax Act, 2017 provided by a sub-contractor to the main contractor providing services specified in item (vii) above to the Central Government, State Government, Union territory, a local authority, a Govern-mental Authority or a Government Entity %` Services by way of house-keeping, such as plumbing, carpentering, etc. where the person supplying such service through electronic commerce operator is not liable for registration under sub-section (1) of section 22 of the Central Goods and Services Tax Act, Provided that credit of input tax charged on goods and services has not been taken % Construction services other than (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x) and (xi) above. CA YASHWANT J. KASAR 18

19 In case of supply of service above, For in item (1); and For sub-item (b), sub-item (c), sub-item (d), sub-item (da) and sub-item (db) of item (4); For sub-item (b), sub-item (c), sub-item (d) and sub-item (da) of item (5); And for sub-item (c) of item (6), involving transfer of land or undivided share of land, as the case may be, the value of such supply shall be equivalent to the total amount charged for such supply less the value of transfer of land or undivided share of land, as the case may be, and the value of such transfer of land or undivided share of land, as the case may be, in such supply shall be deemed to be one third of the total amount charged for such supply. Explanation. For the purposes of this paragraph, "total amount" means the sum total of, (a) consideration charged for aforesaid service; and (b) amount charged for transfer of land or undivided share of land, as the case may be including by way of lease or sub-lease CA YASHWANT J. KASAR 19

20 In case of service supplied by main contractor to a Government entity, the concessional rate is available only if the service has been procured by Government Entity in relation to work entrusted to it by the Central Government, State Government, Union Territory or Local Authority as the case may be. In Case of Item Sr.No. (3), (6) and (7) in the above table,the concession is only to sub-contractor and not to sub-sub-contractor. But, in case of Item Sr. No. (4), (5) and (8), the concessional rate applies to sub-contractor or sub-sub-contractor also ie. The concessional rate of 12% is applicable to sub-contractor or even sub-sub-contractor if he is providing works contract service of construction, as the service is exempt, irrespective of person to whom it is provided. CA YASHWANT J. KASAR 20

21 Pradhan Mantri Awas Yojana CA YASHWANT J. KASAR 21

22 RECOMENDATIONS MADE BY THE GST COUNCIL FOR HOUSING SECTOR TO PROMOTE AFFORDABLE HOUSING FOR MASSES COME INTO FORCE - PIB PRESS RELEASE, DATED In its 25th Meeting held on 18th January, 2018, the GST Council had made several important recommendations for the Housing Sector which have come into force with effect from 25th January, The recommendations are expected to promote affordable housing for the masses in the country. One of the important recommendations made is to extend the concessional rate of GST of 12% (effective rate of 8% after deducting one third of the amount charged for the house, flat etc. towards the cost of land or undivided share of land, as the case may be) in housing sector to construction of houses constructed/acquired under the Credit Linked Subsidy Scheme (CLSS) for Economically Weaker Sections (EWS)/Lower Income Group (LIG)/Middle Income Group-1 (M1G-1)/Middle Income Group-2 (M1G-2) under the Housing for All (Urban) Mission/Pradhan Mantri AwasYojana (Urban). CA YASHWANT J. KASAR 22

23 Credit Linked Subsidy Scheme (CLSS) is one of the components of Housing for All (Urban) Mission/Pradhan Mantri Awas Yojana (PMAY) (Urban). Under this component, subsidy would be provided on home loans taken by eligible urban poor (EWS/LIG/MIG-L MIG-II) for acquisition and construction of house. Credit linked subsidy would also be available for housing loans availed for new construction and for addition of rooms, kitchen, toilet etc, to existing dwellings as incremental housing. The carpet area of houses constructed under this component of the mission would be up to 30 square meters for EWSA, 60 Square Meters for LIG, 120 sqm for MIG I and 150 Sqm for MIG II. The benefit of Credit Linked Subsidy Scheme may be taken by the Economical Weaker sections or Low/Middle Income Groups for purchase of houses under any project. The maximum annual income for eligibility of beneficiaries under the scheme can be up to Rs.18 lakhs. It covers a very large section of population which aspires to own a home. CA YASHWANT J. KASAR 23

24 So far, houses acquired under CLSS attracted effective GST rate of 18% (effective GST rate of 12% after deducting value of land). The concessional rate of 12% was applicable only on houses constructed under the other three components of the Housing for All (Urban) Mission/Pradhan Mantri AwasYojana (Urban), namely (i) ln-situ redevelopment of existing slums using land as a resource component; (ii) Affordable Housing in partnership and (iii) Beneficiary led individual house construction/enhancement. The exemption has now been recommended for houses acquired under the CLSS component also. Therefore, the buyers would be entitled to interest subsidy under the Scheme as well to a lower concessional rate of GST of 8% (effective rate after deducting value of land). The GST Council has also recommended that the benefit of concessional rate of GST of 12% (effective GST rate of 8% after deducting value of land) applicable to houses supplied to existing slum dwellers under the in-situ redevelopment of existing slums using land as a resource component of PMAY may be extended to houses purchased by persons other than existing slum dwellers also. This would make the in-situ redevelopment of existing slums using land as a resource component of PMAY more attractive to builders as well as buyers. CA YASHWANT J. KASAR 24

25 The third recommendation of the Council is to include houses constructed for 'Economically Weaker Section (EWS)' under the Affordable Housing in partnership (PMAY) under the concessional rate of GST of 8% (effective rate after deducting value of land). This will support construction of houses up to 30 sqm carpet area. The Fourth Recommendation of the Council is to extend the concessional rate of 12% to services by way of construction of low cost houses up to a carpet area of 60 sqm in a housing project which has been given infrastructure status under notification No. 13/06/2009 dated 30th March, The said notification of Department of Economic Affairs provides infrastructure status to Affordable Housing. CA YASHWANT J. KASAR 25

26 Affordable Housing has been defined in the said notification as a housing project using at least 50% of the FAR/FSI for dwelling units with carpet area of not more than 60 sqm. The recommendation of the Council would extend the concessional rate of 8% GST (after deducting value of land) to construction of flats/houses of less than 60 sqm in projects other than the projects covered by any scheme of the Central or State Government also. In addition to the above, in order to provide a fillip to the housing and construction sector, GST Council has decided to give exemption to leasing of land by Government to Governmental Authority or Government Entity. [Government Entity is defined to mean an authority or board or any other body including a society, trust, corporation, (i) setup by an Act of Parliament or State Legislature; or (ii) established by any Government, with 90% or more participation by way of equity or control, to carry out any function entrusted by the Central Government, State Government, UT or a local authority]. CA YASHWANT J. KASAR 26

27 Also, any sale/lease/sub-lease of land as a part of the composite sale of flats has also been exempted from GST. Therefore, in effect, the Government does not levy GST on supply of land whether by way of sale or lease or sub-lease to the buyer of flats and in fact, gives a deduction on account of the value of land included in the value of flats and only the value of flat is subjected to GST. It may be recalled that all inputs used in and capital goods deployed for construction of flats, houses, etc attract GST of 18% or 28%. As against this, most of the housing projects in the affordable segment in the country would now attract GST of 8% (after deducting value of land). As a result, the builder or developer will not be required to pay GST on the construction service of flats etc. in cash but would have enough ITC (input tax credits) in his books to pay the output GST, in which case, he should not recover any GST payable on the flats from the buyers. He can recover GST from the buyers of flats only if he recalibrates the cost of the flat after factoring in the full ITC available in the GST regime and reduces the ex-gst price of flats. The builders/developers are expected to follow the principles laid down under Section 171 of the GST Act scrupulously. The above changes have come into force with effect from 25 January CA YASHWANT J. KASAR 27

28 Construction of residential, commercial or industrial complex Following is 'supply of service' as per para 5(b) of Schedule II of CGST Act. Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier. CA YASHWANT J. KASAR 28

29 Explanation. For the purposes of this clause- (1) the expression "competent authority" means the Government or any authority authorized to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely (i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; or (ii) a chartered engineer registered with the Institution of Engineers (India); or (iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority. (2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure. CA YASHWANT J. KASAR 29

30 Residential Complex "Residential complex" means any complex comprising of a building or buildings, having more than one single residential unit - para 2 of Notification No. 12/2017-CT (Rate) and No. 9/2017-IT (Rate) both dated , effective from Single Residential Unit "Single residential unit" means a self-contained residential unit which is designed for use, wholly or principally, for residential purposes for one family - para 2 of Notification No. 12/2017-CT (Rate) and No. 9/2017-IT (Rate) both dated , effective from The tax rate is 12% - SGST - 6% and CGST - 6%. Occupancy certificate granted in Mumbai is equal to completion certificate In Mumbai i.e. Brihanmumbai Municipal Corporation (BMC), occupancy certificate is granted. Sale after such occupancy certificate (even before completion certificate) will be sale of immovable property and outside service tax net - PIB (Press Information Bureau), Ministry of Finance dated CA YASHWANT J. KASAR 30

31 Is Completion certificate essential for builder or developer or first occupation sufficient? If entire consideration is received 'after its first occupation', a builder or developer is not liable to pay GST, even if completion certificate or occupancy certificate is not obtained from authorities. The words 'after its first occupation' are confusing. 'Occupation' by whom? The 'occupation' should be of that particular flat which is being sold or any flat in that complex? In many places, there is delay in issuing completion certificate However, the customers start occupying the flats. CA YASHWANT J. KASAR 31

32 No separate tax for supply of land or undivided share of land as part of composite supply of flats When a builder sales flat to buyer, he also transfers to him undivided share of land by way of lease or sub-lease : the service falls under heading In such cases, the value of service for GST is Nil, if the amount charged for such lease or sub-lease is one-third of total amount charged for composite supply or less than one-third of total amount charged - Sr No. 16(ii) of Notification Nos. 11/2017-CT (Rates) and 8/2017-IT (Rates) dated inserted w.e.f The detailed wording is quite clumsy, but its essence is that such leasing of land may be during (a) construction of complex (b) low cost housing, scheme or (c) residential complex for Government, Local Authority, Governmental Authority or Governmental Entity. Even otherwise, since supply of flat is a composite contract, there should not be any separate tax on lease of land. CA YASHWANT J. KASAR 32

33 Supply (Chapter III-Sec. 7) Ø Supply includes all forms of supply such as Sale, Transfer, Barter, Exchange, License, Rental, Lease or disposal made or agreed to be made for a consideration. ØIncludes Importation of service, for a consideration whether or not in the course or furtherance of business. ØFirst identify whether the transaction is for Goods or Services ØThis will enable to decide the rules in relation to point of taxation i.e., Time of Supply and Place of Supply (for levy of tax) ØAs per Schedule II (5) - Construction Activity is being described as Service, hence all the provisions of Place of Supply & Time of Supply relevant to Services shall apply to Construction Activity. CA YASHWANT J. KASAR 33

34 Time of Supply of Services - Point of Taxation Sec. 13 Liability to pay GST on Supply of Services shall arise at the earliest of the following dates: Ødate of issue of invoice / demand note or Ødate of provision of service or Øthe date of receipt of payment or Øin absence of above, date on which recipient shows the receipt of service in Books of A/c In case of Continuous Supply of Services, Time of Supply shall be... Øthe due date of ascertainable from Contract or Øthe date on which the supplier receives the payment with respect to the supply CA YASHWANT J. KASAR 34

35 Place of Supply Significance ØWhether Supplies are intra-state or inter-state / inter-national ØWhich tax to pay - CGST & SGST or IGST? ØAchieving the objective of destination based taxation ØITC of IGST allowed to purchaser in his state i.e., destination State Location of Supplier Place of Supply Intra-State or Inter State Tax Applicable Maharashtra Maharashtra Intra-State CGST+SGST Karnataka Maharashtra Inter-State IGST CA YASHWANT J. KASAR 35

36 Place of Supply Exception for Immovable Properties In case of Immovable Properties, the Place of Supply shall be deemed to the Location of Immovable Property Few Illustrations: Location of Service Provider Recipient of Service Immovable Property Location Place of Provision of Services (Tax Applicable) Maharashtra Gujrat Gujrat Gujrat (IGST) Maharashtra Gujrat Madhya Pradesh Madhya Pradesh (IGST) Maharashtra Singapore Maharashtra Maharashtra (CGST+SGST) Maharashtra Dubai Dubai Dubai (Will be treated as export of service) CA YASHWANT J. KASAR 36

37 Valuation Sec. 15 Transaction value is the price actually paid or payable for the said supply of goods or services between un-related parties and price is the sole consideration. Transaction value includes... ØTaxes other than GST ØExpenses incurred by recipient in relation to supply ØIncidental expenses charged at the time or before the supplycommission, packing or amount charged for anything done by the supplier ØInterest, late fee or penalty for late payment of consideration CA YASHWANT J. KASAR 37

38 Input Tax Credits (ITC) ITC means... IGST / CGST / SGST/UTGST charged in the invoice on any supply of goods or services which are used in the course of furtherance of business. Conditions for claiming ITC ØRegistered Person should posses tax invoice / Debit Note issued by Supplier ØGoods or Services must be actually received by him. ITC is not available on Mobilisation Advances provided to Contractors ØSupplier should have paid the taxes ØSupplier should have filed valid Return u/s 39 ØMatching of Invoice CA YASHWANT J. KASAR 38

39 ØIn case the claimant (i.e., Receiver) fails to pay consideration to supplier within 180 days from date of invoice the ITC availed earlier, will be added to the output tax liability along with interest ØOn making payment towards supply he will be entitled for credit of Input Tax. ØIf Depreciation is claimed on ITC, ITC shall be disallowed ØConfirm the availability of ITC / Reversal of ITC, where Project is completed and some units are unsold the Balance credit needs to be reversed ØITC of 1 Project could be utilised for the other Project (carried out in same firm); subject to availability as discussed above ØRefund, due to excess ITC Not allowed CA YASHWANT J. KASAR 39

40 Negative List Under ITC / Blocked Credits Sec. 17 ØMotor vehicles, ØFood and beverages, ØBeauty treatment, health services, ØMembership of a club, health and fitness centre, ØRent-a-cab, life insurance, health insurance ØTravel benefits extended to employees ØTax paid for Goods or Services used for Personal Consumption ØITC reversal in case of goods lost, stolen, destroyed in fire / flood / etc. or where goods have been distributed as free samples / gifts CA YASHWANT J. KASAR 40

41 Works Contract For Immovable Property Sec. 17(5)(c) &(d) The ITC on inward supplies of works contract service is allowed only when the same is used for supply of works contract service. ITC on goods and services is denied when such inward supplies is used for construction of an immovable property on his own account other than Plant and Machinery even when such immovable property is used in course or furtherance of business. Eg.: Immovable property is let out or used for business purpose like mall, theatre or factory etc. CA YASHWANT J. KASAR 41

42 ITC on Cancellation of Agreement As per Sec. 31(3)(e)... where advance payment has been received for which receipt voucher is issued but subsequently no supply is made and no tax invoice is issued then Registered person may issue Refund Voucher against such payment and claim the ITC paid as refund However this provision is applicable when no service is started. If construction for the said unit is begun then this will be treated as continuous supply of service and in such case, credit note is required to be issued for cancellation of agreement (Applicable only if within 6 months) CA YASHWANT J. KASAR 42

43 Reversal of ITC on Sale of Completed Flats Section 17(2) provides that where goods or services are used partly for effecting taxable supplies and partly for exempt supplies, ITC credit attributable to taxable supplies can only be taken Sale of completed flat will be exempt supply for the purpose of reversal of ITC u/s 17(2) of the Act If the supply is not taxable, then ITC will have to be reversed When to reverse the tax? at the stage of completion of project or at the point when such completed flats/units are sold? CA YASHWANT J. KASAR 43

44 Purchaser of flat is not liable to tax even if he sales before occupation or completion The Purchaser of flat is not liable to tax even if he sales before occupation or completion, for two reasons : (a) He is not supplying construction service, as deeming provision requires supply of construction service (b) He is not in the business of sale of flats CA YASHWANT J. KASAR 44

45 No refund of ITC even if input tax credit more than GST payable on outward supply In case of inverted duty rates (i.e. input tax credit more that tax payable on outward supply), there is provision of refund of excess credit under section 54(3) of CGST and SGST Act. However, in case of service of construction of complex [specified in Item 5(b) of Schedule II of CGST Act], refund of unutilized ITC will not be available - Notification No. 15/2017-CT (Rate) dated CA YASHWANT J. KASAR 45

46 Supply of some flats/shop/commercial unit free of cost to the landowner It is normal practice to give some flat/commercial unit/industrial gala/shop free to the land-owner, who has given the land for construction. Really, the flats/shops are not given free but are in lieu of land cost. In my view, GST should be payable in respect of free flats/shops given to the land owner. See also CBE&C circular dated and Para of CBE&C's 'Taxation of Services : An Education Guide' published on , where the same view has been expressed. In LCS City Makers P Ltd. v. CST (2012) 36 STT 228 = 23 taxmann.com 169 = 68 VST 318 (CESTAT). It has been held that service tax is payable even when consideration is received in form of land - same view in Direktorna Direktsia Obzhalvane I Upravlenien aizpalnenieto v. Orfey Balgaria EOOD (2013) 38 STT 289 (ECJ) * Southern Properties v. CCE (2015) 52 GST 413 = 61 taxmann.com 423 (Mad HC DB). CA YASHWANT J. KASAR 46

47 Valuation of flats given free to land owner Value of service in respect of flats given free to land owner will have to be found out on basis of value of service of identical or similar flat/shop or on basis of cost of construction plus reasonable profit. In Southern Properties v. CCE (2015) 49 GST 695 = 54 taxmann.com 116 (CESTAT), a prima facie view has been held that valuation should on basis of value of similar flats and not on basis of value of land. As per CBE&C circular dated , the first method i.e. value of similar service should be used. CBE&C had issued a 150 page booklet titled 'Taxation of Services : An Education Guide' on , explaining salient aspects of the new provisions relating to negative list of service tax. In para of the Education Guide, valuation of flats given to land owner shall be on basis of value of land. Thus, there was conflict in views expressed in circular dated and the Education Guide released on CA YASHWANT J. KASAR 47

48 The issue was discussed by High Level Committee set up by Ministry of Finance. On basis of their opinion, it has been clarified that valuation of flats given to land owner should be on basis of value of similar/identical flats or on basis of cost plus profit, as stated in circular dated CBE&C Instruction No. 354/311/2015-TRU dated This principle should apply under GST also. CA YASHWANT J. KASAR 48

49 Joint Development by land owner and builder/developer In some cases, the land owner and builder/developer may have a joint venture for the construction project. In some cases, they may form a separate legal entity or they may operate as UJV (Unincorporated Joint Venture). In such cases, GST will be payable. Para 2.7 of CBE&C Circular No. 151/2/2012-ST dated states as follows - Joint Development Agreement Model: Under this model, land owner and builder/developer join hands and may either create a new entity or otherwise operate as an unincorporated association, on partnership/joint/collaboration basis, with mutuality of interest and to share common risk/profit together. The new entity undertakes construction on behalf of landowner and builder/developer. Clarification: Circular 148/17/2011-ST dated 13/12/2011, particularly paragraphs 7, 8, 9 apply mutatis mutandis in this regard. CA YASHWANT J. KASAR 49

50 Time of supply in case of land development rights Usually, land owner provides land for which he is given some flats/industrial galas etc. Thus, when the builder/developer gets land from the land owner, this can be said to be 'advance received' and SGST may become payable immediately. However, CBE&C, vide its Circular No. 151/2/2012-ST dated had clarified that service tax will be payable by the builder/developer on the 'construction service' involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter) - this view has been confirmed in CBE&C Instruction F No. 354/311/2015-TRU, dated This principle has also been confirmed in case of transfer of TDR by land owner to builder/developer in Notification Nos. 4/2018-CT (Rate) and 4/2018-IT (Rate) both dated Thus now it is well settled that GST on such flats given to land owner will be payable only when these flats are handed over to land owner. CA YASHWANT J. KASAR 50

51 NOTIFICATION NO.4/2018-CENTRAL TAX (RATE), DATED In exercise of the powers conferred by section 148 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby notifies the following classes of registered persons, namely : (a) registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and (b) registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights, CA YASHWANT J. KASAR 51

52 as the registered persons in whose case the liability to pay central tax on supply of the said services, on the consideration received in the form of construction service referred to in clause (a) above and in the form of development rights referred to in clause (b) above, shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter). CA YASHWANT J. KASAR 52

53 Taxability of FSI / Development Rights, etc. Under General Clauses Act Immovable property is defined to include land, benefits to arise out of land and things attached to earth or permanently fastened to anything attached to earth Term Land and Building is not defined under GST Whether under GST regime rights in land and/or building can be regarded as land and/or building? If yes, sale of development rights, FSI, etc. will not be treated as supply liable to GST If not, then development potential, FSI, etc. will be exposed to GST liability CA YASHWANT J. KASAR 53

54 Taxability of Transferable Development Rights ( TDR ) Taxability of TDR can be examined in two different situations: - When granted by a local authority - When sold by one developer to another CA YASHWANT J. KASAR 54

55 Taxability of TDR when granted by a local authority: Let us examine the taxability of TDR granted by a local authority in pursuance of Development Control Regulations ( DCR ). In lieu of the area relinquished or surrendered by the owner of the land, the Government allows construction of additional built-up area. The landowner can use extra built-up area, either himself or transfer it to another who is in need of the extra built-up area for an agreed sum of money. TDR is, thus, an instrument issued by the government authorities which gives the right to person to build over and above the permissible Floor Space Index (FSI) within the permissible limit of DCR. The TDR certificates can also be traded in the market for cash. Developers purchase and utilise them for increasing their development rights. Against this factual background, it is to be considered whether TDR is goods or services and whether the supply thereof is taxable under the GST laws or not. CA YASHWANT J. KASAR 55

56 FSI vs. TDR Not all development rights are TDR as grant and use of FSI is development right, a specie of right in land embedded in the same piece and parcel of land and cannot be divested to another piece of land to load development potential on it. FSI is not transferable for use of development on another piece of land unlike TDR which is transferable for use on any other piece of land and therefore tradable by its very name and nature. Secondly, TDR is initiated and issued by a local authority unlike FSI which a private land owner also owns or possess as incorporeal right in his land with development potential as per prevailing town planning or DCR. CA YASHWANT J. KASAR 56

57 Is TDR an Immovable Property? We shall now examine whether TDR or right to obtain extra FSI is an immovable property or not. The expression immovable property has not been defined under the GST law. It is, therefore, relevant to note the definition of immovable property under other enactments. Some of these enactments are General Clauses Act, 1897, Transfer of Property Act, 1882, Maharashtra Stamp Act, Registration Act, 1908, The Real Estate (Regulation and Development) Act, The definition of immovable property contained these legislations are given in the previous article and hence not repeated here. A perusal of the definitions in the aforesaid enactments would show that they are more or less similar. Thus, the definition of immovable property not only includes land but also the benefit arising out of land and the things attached to the earth or permanently fastened to anything attached to the earth. The scope of the term immovable property is not restricted to mere land or a building but extends even to the benefits arising out of land. The benefit to arise of land is that benefit whose origin can be traced to existence of land. It owes its source to land. Such benefit is inextricably linked to land. The expression development right is not defined in DCR issued under the Maharashtra Regional and Town Planning Act, However, a careful perusal and harmonious reading of various provisions of the DCR as also various judicial pronouncements show the artificial manner in which development rights are carved out of the land. This would establish that development rights are the rights in immovable property. CA YASHWANT J. KASAR 57

58 Section 7(2) of the CGST Act reads as under: S.7(2) Notwithstanding anything contained in sub-section (1), (a) activities or transactions specified in Schedule III; or (b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council, shall be treated neither as a supply of goods nor a supply of services. Serial no. 5 of Schedule III of the CGST Act specifying activities or transactions which shall be treated neither as a supply of goods nor a supply of service reads as under: 5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building. Therefore, by virtue of section 7(2) read with Schedule III, sale of land and sale of building are treated neither as supply of goods nor as supply of services. Issue is can one state that as serial no. 5 of Schedule III uses the expression land and building, the benefit of this entry is not available to right in land or building? The answer is : no CA YASHWANT J. KASAR 58

59 We have already explained that transfer of immovable property is not liable for GST as it is neither goods nor service. Immovable property, by definition, includes even right in immovable property. Therefore, just because right in immovable property has not been specifically stated in Schedule III, it doesn t mean that they are liable for GST. It is a wellsettled legal principle that exemption doesn t pre-suppose a charge. Even otherwise, the expression land and building in Schedule III includes even right in land/building. This is evident from Entry 18 of List II of Seventh Schedule of The Constitution read with Entry 49 of the same list. It is, therefore, viewed that TDR/FSI is neither goods nor services and hence, cannot be subjected to levy of GST. CA YASHWANT J. KASAR 59

60 Can TDR be considered as an Actionable Claim? The entire issue of the taxability of TDR can be looked at from a different perspective also. TDR is a right which has been conferred by the Government. It is transferrable by endorsement and delivery. When it is transferred and can be used on any other land, there is no connection with any particular land. TDR can change many hands before it is used in a particular land for availing construction right. Section 3 of the Transfer of Property Act, 1882, defines actionable claim as a claim to any debt, other than the debt secured by mortgage of immovable property or by hypothecation or pledge of movable property or to beneficial interest in movable property. It means that any beneficial interest in a movable property is actionable claim if the same is not in the possession of the claimant. Movable property has been defined in section 3 (36) of the General Clauses Act, 1897, as property of any description except immovable property. TDR is not a right in respect of an immovable property as defined in section 3 (26) of the General Clauses Act 1897, and, therefore, it is a beneficial interest arising out of a movable property as per the section 3 (36) of the Act. This right is intangible, and it cannot be said that it is capable of being in physical possession of anyone. Any movable property that can be possessed, can be handed over by the owner to another for use. But in case of intangible property, the right to use such property can be transferred by an agreement and the transferee can enforce the right, in case of dispute, by going to the Court. Therefore, TDR should be construed as an actionable claim. Therefore, its arrangements are transactions in actionable claims. Support can be taken from the Apex Court s decisions in Sunrise Associates vs. Government of NCT of Delhi, 2006 (145) STC 576 (SC) and Vikas Sales ([1996] 102 STC 106 (SC)) (1996) 4 SCC 433. CA YASHWANT J. KASAR 60

61 Applying the ratio of Sunrise Associates case (supra), it can be construed that TDR is an intangible valuable right which can be sold and purchased independent of land and should be considered as an actionable claim. Actionable claim is also out of the scope of supply in terms of paragraphs 6 of Schedule III of the CGST Act. Accordingly, GST is not payable by any person when he transfers TDR to another. In view of the above, TDR whether as immovable property or actionable claim remains outside the scope of levy of GST. CA YASHWANT J. KASAR 61

62 GST on Re-Development Of Society Building, SRA And JDA Implications of GST on the builders / developers, a co-operative housing society (society), its members, landlords, tenants and unauthorised occupants (viz. slum dwellers on encroached land) The most important issue is that whether there is any change under GST regime from the earlier service tax regime? Under service tax,, immovable property was outside the scope by way of definition of activity. The term activity was of wider and unrestricted implication. However, in case of GST, a supply is liable to tax only if made in the course or in furtherance of business. This has resulted in interesting debate and complexities. CA YASHWANT J. KASAR 62

63 GST on re-development of society building Let us say, a Co-operative Housing Society registered under the Maharashtra Cooperative Societies Act, 1960 and its members (for the sake of brevity, the Society and Members are collectively referred to as SM ) decide to redevelop the existing building which is in dilapidated condition and is required to be redeveloped as per prevailing Development Control Regulations [DCR]. In case of re-development of the dilapidated building, the municipal regulations in Maharashtra presently allow approx. 3:1 FSI instead of 1:1 which is allowed under normal circumstance. CA YASHWANT J. KASAR 63

64 The key contents that are incorporated in the Development Agreement with the developer (DA) are discussed below: Society and Members (SM) shall allow the developer to reconstruct building by demolishing the existing one with some additional area, may be by way of constructing additional floors. The developer shall do so by employing his funds and at his attendant cost and risk. To avail the benefit of extra construction is permitted under DCR, the developer is required to purchase necessary Transferable Development Right (TDR) from permissible sources. As per the terms of DA, the developer may be required to construct some extra area for the existing members which is to be given to them free of cost to incentivise the project. Out of the total constructed area after utilising full potentiality of FSI and TDR, the remaining area after allotment to the existing members as warranted by DA belongs to developers which is known as Developer s free sale portion and he can sell it at his discretion and price. SM undertakes to enrol and register the purchasers of such free sale portion as the members of the society upon fulfilment of necessary formalities. The newly enrolled members are entitled to the same rights as of existing members and also have undivided share in the title of the land in the similar manner. In addition to re-development, the developer shall pay to SM cash consideration in form of corpus fund, hardship allowance, rent for alternate accommodation till permanent alternate accommodation is granted in the new building, brokerage, shifting allowance etc. CA YASHWANT J. KASAR 64

65 In the above background, we will examine the incidence of GST from the point of view of: a.thesociety and its members b.the developer Taxability of development right in the hands of SM The issue here is that the SM is supplying development right to the developer to re-develop the building, putting up extra area / floor by using permissible FSI, TDR etc. in return for newly constructed flats with some additional area free of cost and some cash consideration mentioned above in terms of DA. Under GST law, SM may not be liable to tax for the following reasons: Supply not in the course or furtherance of business: For the purpose of determining the liability under GST, it is necessary to look into Charging Section 91 according to which central goods and services tax is leviable on all intra-state supplies of goods or services or both. Thus, supply of goods or services or both is the vital element for charge of tax. Section 7 (a) defining supply require that the supply for a consideration by a person should be in the course or in furtherance of business. S.7 - For the purposes of this Act, the expression supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. CA YASHWANT J. KASAR 65

66 Supply of goods or service or both for the purpose of levy of GST u/s. 7, has to be in the course or furtherance of business. The society and / or members cannot be said to be in the business of grant of development right, whether the re-development of a society building is undertaken by virtue of compulsion on account of dilapidated condition or not. A society or its members cannot be said to be involved in supply of development right to the developer in the course or in furtherance of business by entering into development agreement. By agreeing to get a new flat in lieu of the old flat, the members of society have not made any supply. CA YASHWANT J. KASAR 66

67 Whether the amounts paid by developer to SM in terms of DA like hardship allowance, rent, shifting allowance, contribution to the corpus of the society, brokerage and such other amounts as agreed upon can be treated as consideration in the hands of SM so as to attract the levy of GST? The consideration flowing from a developer to the SM, in whatever form, is not against any taxable supply. All payments from the developer to the SM is flowing out from DA. Appointing developer to re-develop the existing building is not a taxable supply as we have discussed earlier. The developer makes payment to the members of society in satisfaction of the obligation to the society and its members. Viewed in this manner, the allotment of a new flat, the payment of compensation being rent for alternate accommodation and hardship allowance is also governed by the principle of mutuality. Payment of corpus fund to the society by the developer is also in satisfaction of the obligation flowing out from DA as a part of design of the re-development arrangement. Therefore, the SM are not liable for GST as they have not effected any supply under the DA. CA YASHWANT J. KASAR 67

68 It may be argued that the developer makes payment to the members and /or the society as compensation for the act of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act treated as supply of service as per section 7(1)(d) read with paragraph no. 5(e) of Schedule II. However, there is no stipulation in the DA which requires the members of society to agree to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act; for which a consideration is stipulated. The essential ingredient of the contract is redevelopment. Therefore, the members or the society are not liable to GST even under this entry. There is no supply made by SM to developer though they have been compensated. CA YASHWANT J. KASAR 68

69 Whether the DA involves any taxable supply by developer to SM under GST? Developer is constructing the building, a part of which will be given to the members of SM. The other part of the building will be sold by it for a consideration. For the construction of the building for the members of SM, developer is not receiving any monetary consideration from them, but a right from SM is received to load TDR on its plot so that the developer would be able to construct extra area in the building for selling in the market. There are common facilities and common spaces which are owned and used jointly by the owners of these units. These units do not have any independent existence. Therefore, construction of entire building is necessary before handing over the units to the members. In other words, developer cannot construct the building for selling to new customers unless he would construct that part of the building which would be allotted to SM. Hence, the developer is constructing the entire building in order to sell a part of the building. Effectively, the developer is providing service to both SM and the buyers of additional flats under DA as a part of a single supply. The entire revenue in this arrangement flows from the buyers of additional flats, a part of which is paid by developer to the members of SM by way of construction and monetary consideration. The proportionate ownership of the land obtained by the developer from SM would be passed on to the flat buyers. For all these efforts, the developer would be remunerated by way of sale consideration from the additional flats constructed for sale. CA YASHWANT J. KASAR 69

70 Support may be found from the definition of consideration contained under CGST Act. 2(31) consideration in relation to the supply of goods or services or both includes (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government: Thus, it can be said that the SM by virtue of entering into DA, induces developer to supply works contract service and to sell additional area to outsiders to recoup the cost of construction and other monetary consideration. In turn they undertake to make the purchasers as members by allotting undivided share in land. The sale consideration will also be the consideration for re-construction of the existing building. CA YASHWANT J. KASAR 70

71 Availment of input tax credit (ITC) and reversal thereof attributable to the units allotted free of cost to SM. Units allotted free of cost to SM are not without consideration. The consideration flows from other persons. The service provided by developer is taxable. Hence, ITC under the law is available fully and can be used for the GST payable on the sale of under constructed flats from free sale area. Without receiving such inputs and input services, it would be impossible to construct that part of the building on which GST is payable. Therefore, it cannot be said that the entire inputs and input services used for construction of the building are not used for providing taxable supply. Therefore, ITC is eligible. It has been discussed earlier that there is a single supply to SM and the purchasers of free sale area. CA YASHWANT J. KASAR 71

72 Leviability of GST in case of Slum Rehabilitation Authority (SRA) Projects In case of slum encroached private land, the landlord approaches the Slum Rehabilitation Authority (SRA), a governmental authority covered under Article 243W of the Constitution which declares the land as slum land and issues order for rehabilitation of slum dwellers (in pursuance of DCR 33(10) of Brihan Mumbai Municipal Corporation, and similar regulations in other metropolitan cities). The landlord approaches a developer to develop the land and SRA grant extra FSI to the developer for construction of rehabilitation of slum dwellers as per DCR. The developer constructs a building for slum dwellers and another for landlord including free sale area and for himself to recover the cost of construction. As an incentive to construct building for slum dwellers, SRA may issue TDR in form of DRC (Development Right Certificate) which can be used on another plot or even may be sold in open market by endorsement and delivery. Registration of document of transfer of DRC with local authority is a regulatory requirement. Stamp duty is paid for transfer of TDR as moveable property but is not required to be registered under Registration Act as conveyance. Over and above this, the developer may pay cash consideration to the landlord. CA YASHWANT J. KASAR 72

73 In another scenario, the land may belong to the Government that has been encroached upon by the slum dwellers. In such a case, the Developer may agree to develop the land, construct the building for the slum dwellers and allotment of units therein free of cost to the slum dwellers in terms of the agreement entered into with SRA. As against this, the Developer would be granted TDR as may be permitted by the town planning regulations on the recommendations of SRA which can be exploited by the Developer to construct another building, the units in which can be freely sold by him. The Developer may even decide to sell TDR in open market. A perusal of the regulations relating to slum rehabilitation schemes would show that it is an integral scheme. The developer is required to carry out the work of construction of tenements for slum-dwellers. Some portion of the built-up area is also allotted to the Land Owner as per terms of DA. The remaining constructed area belongs to the developer which is freely saleable by the Developer to recover the cost of construction of the entire project along with his margin for the risk and reward. CA YASHWANT J. KASAR 73

74 Therefore, it is a single contract for construction under an integral scheme. The entire supply involves consideration. Just because the scheme states that certain share in the built-up area is to be handed over free of cost to slum dwellers and land owner, it is not free in the legal sense. There is consideration for the built-up area handed over to all them. It is to be noted that the FSI / TDR that is sanctioned to the developer would enable him to construct units out of which portion of it is available to him as freely saleable area. Alternatively, the developer would be able to sell TDR in open market and monetize the same. Once an area is declared as slum area and SRA frames slum rehabilitation scheme, Regulation 33(10) of DCR is required to be followed. Once the redevelopment / construction is carried out in accordance with Regulation 33(10), there are various conditions to be fulfilled. Therefore, different events cannot be broken to ascertain the GST liability. The supply is only one. Section 2(31) of the CGST Act defines consideration, the relevant portion of which is reproduced below: S.2(31) consideration in relation to the supply of goods or services or both includes (a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government; (b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government. CA YASHWANT J. KASAR 74

75 The above would show that consideration is linked to supply. The expression consideration should not be read in isolation of supply and scope of supply should not be read independent of the word consideration. Consideration can move even from third person as per the definition of consideration as given in section 2(31). This concept is also recognized u/s. 2(d) of the Indian Contract Act, Whether the landlord can be considered to have made any supply in the above case and whether the free of cost area allotted by the developer to the landlord in the newly constructed building (with or without additional cash payment to the landlord) would constitute consideration in the eyes of law? In the first scenario, the landowner whose land has been encroached by the slum dwellers engages the developer to construct a building for rehabilitation of the slum dwellers as mandated by the authorities to make the rest of the land free from such encumbrance and another building or buildings which is to be shared by the developer and landlord in agreed manner. Effectively, the land owner is sharing his land with the developer as against which the constructed area is being shared between them as per the terms of DA. Hence, landowner is transferring his ownership right in the land for area of construction of his share as well as construction of the building required for rehabilitation of the slum dwellers. Transfer of land is specifically excluded from the meaning of supply on which GST is not payable. However, the building constructed by developer for landlord is in form of works contract service, depending on the, terms of contract that whether the land is transferred to the developer or mere development right is granted. In the first case, the service may be termed as Construction Service covered in Entry 5(b) of Schedule II of CGST Act and in later case, it may be termed as Works Contract Service covered in Entry 6(a) of the same Schedule. CA YASHWANT J. KASAR 75

76 Alternatively, it can be argued that the Developer constructing building for Landlord and slum dwellers is, in lieu of, free sale area received by Developer. Viewed from this angle, the consideration is the market value of land portion received by the Developer and GST is payable. In this scenario, if the development right is considered taxable under GST, the land owner may issue invoice for transfer of development right. Based on this, the developer shall be entitled to avail ITC against under constructed flats sold from free sale area. In case of Government land, TDR is issued against construction of building for slum dwellers which may be encashed by selling the same in open market. In such a case, the realized value of TDR may be liable as consideration for construction of SRA building. It may be pointed out here that SRA being covered by Article 243W of the Constitution, neither SRA nor the Developer will be liable to GST in respect of issue of TDR by SRA. CA YASHWANT J. KASAR 76

77 Leviability of GST on Joint Development Agreement (JDA) JDA signifies a landlord entering into Development Agreement with a Developer to develop his land having development potential (FSI) and JV is formed. The landlord contribute his land into JV and transfer the same by virtue of JDA or promise to convey the land to the society of the purchasers of flats as may be formed by the JV. The landlord may have a passive or active role in JV. In most of the cases, landowner is not having any active role in the venture except giving his land for construction through this arrangement. Contribution in form of land is a form of sale of land and outside the scope of GST. Even when the development right is granted instead of transfer of land per se, it is normally in form of available FSI of the same plot of land on which it is consumed. Grant of FSI is certainly the right arising out of the land and even on better footing than TDR which is transferrable. Thus, grant of development right is outside the scope of GST. CA YASHWANT J. KASAR 77

78 We may, however, hasten to say here that the joint control of the partners over a venture is the essential criterion for considering such association as joint venture. The landowner has no role to play after handing over the land to the developer for construction, whether the revenue is shared or developed area is shared between the owner and the developer. Hence, there is no joint venture between the landowner and the developer. The landowner is giving up part ownership of the land to the developer in exchange for getting share in revenue of constructed area Generally, two models are in vogue in case of JDA between the landowners and a Developer, viz: 1. Revenue Sharing Model 2. Area Sharing Model. CA YASHWANT J. KASAR 78

79 1) Revenue Sharing Model: In case of a landlord entering into Joint Development Agreement with Developer wherein development right of the land is granted to JDA for exploiting full potential of land on the following terms and conditions: - Value of land (FSI value) is credited to the landlord s capital account; - All expense from plan approval to construction cost, supervision, etc. is to be borne by JDA to be funded by the Developer. In most of the cases landlord has no further role to play; - Upon completion of construction, net profit will be shared between the Landlord and Developer in agreed ratio. CA YASHWANT J. KASAR 79

80 Taxability of Share of Revenue in the hands of Owner: Issue may be checked up whether there is a supply of goods / service between two joint developers? Revenue share to owner / developer is a consideration in lieu of development potentials received from owner / developer If transfer of development potentials are considered to be supply then revenue share will be liable to GST If transfer of development rights are not considered to be supply then revenue share will not liable to GST CA YASHWANT J. KASAR 80

81 2) Area sharing Model: Alternative structure of the transaction is that the landlord appoints the developer by transfer of development right of the entire portion of the land and in turn the developer agrees to give agreed percentage of constructed area to the landlord. Balance area shall be retained and sold in open market by the Developer. Can the relationship between the landlord and the developer in area sharing model be considered as barter so as to constitute supply and attract the levy of GST? In area sharing model, the landowner is giving development right to the developer in exchange for getting share of constructed area (works contract service). This is a case of barter. Taking conservative view, both the landlord and developer will be required to pay GST, however albeit with entitlement of input tax credit. CA YASHWANT J. KASAR 81

82 In revenue sharing model, no service is provided by the developer or JV to the landlord. In fact, the JV sell the flats and the revenue is to be distributed between the developer and the landlord in the agreed ratio. The amount received by the landlord is towards sale / transfer of land which is outside the scope of GST as per Sch. III of CGST Act. Hence, no GST liability can arise on revenue sharing model. Time of payment of GST on supply of under on development right NN. 4/2018 CT (Rate) dtd By virtue of this notification, the liability of payment of GST is deferred from the date of supply of development rights, i.e. date of entering into DA/JDA to date of grant of possession or right in the constructed complex by entering into conveyance deed or similar instrument (eg. Allotment letter). However, the notification can be said to be a facilitation measure. The developer is not prevented from making payment even before grant of such possession and avail input credit of the same against the sale of under constructed units. CA YASHWANT J. KASAR 82

83 From the GST perspective, the issues relating to the Real Estate/ Construction Sector are varied and complex. We have made an attempt to deal with certain crucial issues and shed light on the legal position and principles set by the judiciary. What is required is a very critical examination of the issues and the interpretation of relevant statutory provisions in light of the principles of the law settled by various judicial pronouncements. Needless to say, the readers may apply the views expressed in this article based on the fact of this case and after obtaining expert opinion. CA YASHWANT J. KASAR 83

84 Thank You! CA Yashwant J. Kasar B.Com, FCA, DISA, CISA, PMP, FAIA Cell: yashwant@ykc.co.in CA YASHWANT J. KASAR 84