The 18% Goods and Services Tax (GST) tax on the transfer of development rights under joint development agreements (JDAs) between developers and landowners is being contested by real estate developers. They contend that since there is no land sold as part of the JDA, the rights are not transferred in a taxable manner.
A developer appealed a Telangana High Court decision that JDAs ought to be taxed earlier this week in the Supreme Court (SC). The Supreme Court will hear the case on September 9 after sending a notice to the Center for a response.Since the Telangana High Court judgment has not been stayed, landowners and developers will be required to pay taxes after valuing the services until the case is resolved.
A joint development agreement (JDA) is essentially a contract that binds a landowner and a real estate developer to collaborate on a project on the landowner's land. Under this agreement, the landowner supplies the property, and the real estate developer builds the building and any associated infrastructure. "GST may be applied to land sales to third parties. But since there isn't a transaction in a JDA, it's not taxable," said Tata Realty managing director Sanjay Dutt.
According to Dutt, real estate development will become unprofitable if a GST is applied to joint ventures. "It will result in additional expenses that the developers must recoup from purchasers," he declared.
The director of Ajmera Realty & Infra India, Dhaval Ajmera, said that services are subject to GST. "As a joint development does not include any services, there should be no GST applied to this," he stated. "Why pay GST when we are already paying stamp duty on agreements in JDAs?" he questioned.
Development rights are essentially incidental to the sale of land, according to tax specialists. Any agreement made under a JDA is just a supporting role to the developer's eventual conveyance of property in exchange for construction services. The JDA is thus not taxed.
The founder of Rastogi Chamber, Abhishek A. Rastogi, argued before the supreme court on behalf of a developer that the question of whether the incidental and ancillary right to the sale of land would be subject to GST is immaterial in this barter transaction since the supply of land is exempt from the GST's application. He emphasized that the projects will become "unviable and lead to tax cascading" if the sale of land is subject to extra taxes.
According to Shareen Gupta, a partner at JSA Advocates & Solicitors, the GST charge on the sale of development rights is still a complex matter. "There seems to be a prima-facie case for the industry, given that the legislation by itself does not categorically tax such transactions under the Act, and instead seeks to impose tax basis notifications issued in respect of valuation and time of supply for such services," the spokesperson added.
On the other hand, she added, it is also possible to claim that land development, including building on the property and leasing, might be viewed as a service subject to GST.
