Introduction
A
typical transaction in this business will entail three parties, namely; builder
(or developer), land owning party and flat buyer. The developer enters into a
development agreement with landowner, whereby the developer acquires the
development rights with respect to the land.
The
agreement for transfer of development rights executed between developers and
landowners involve payment of consideration by the developers to the landowners
for transfer/acquisition of development rights. Such consideration may be in
monetary terms or by way of ownership rights of certain percentage of the
developed area.
Therefore,
an opinion has been sought for the GST on Transfer of Property under Tripartite
Agreement.
Stages
for discussion are as follows:
Transfer
of Development Rights (TDRs)
Transfer
of some flats to the landowner as a consideration for land
Sale/transfer
of flats by the landowner
Sale/transfer
of flats by the developer or builder
Time
of Supply
Valuation
Input
Tax Credit
STAGE-I: TRANSFER OF
DEVELOPMENT RIGHTS (TDRs)
What
are development rights?
In
order to determine the taxability of the transfer of development rights, it is
important to first analyze the legal nature of development rights. Accordingly,
A
landowner enjoys various rights with respect to the land, such as cultivation
rights, easement rights etc. One of such rights is the right to develop such
land into an agricultural, industrial, commercial, residential or for any other
purpose.
In
other words, these are rights to modify an immovable property by carrying out
improvements, constructing building thereon etc.
Modus-operandi for
TDRs
Following
steps are undertaken with respect to transfer of development rights:
Developer
is given permission to enter the land for the purpose of carrying out the
development activity. However, ownership in land continues with the
landowner (i.e. license to occupy land);
Developer
enters into an agreement with a landowner, wherein the right to develop the
land is permanently and irrevocably transferred by the landowner to the
developer (i.e. sale of land);
As
a consideration for sale of development right, a fixed consideration or a share
in sales proceeds or ownership of certain developed area is given by the
developer to the landowner;
Accordingly,
the developer acquires exclusive, permanent and irrevocable rights for
development and subsequently transfers (by way of sale, lease, license, etc. to
end customers) the entire or certain percentage of the developed area (i.e.
apartment, units, plots etc.)
The
developer is allowed to further assign the development rights to any other
person, but the landowner is precluded from doing so.
Relevant
provisions under GST Act, 2017
Definition
of goods
Section
2(52) of the CGST Act, 2017, “goods” means every kind of
movable property other than money and securities but includes actionable claim,
growing crops, grass and things attached to or forming part of the land which
are agreed to be severed before supply or under a contract of supply.
Definition
of services
Section
2(102) of the CGST Act, 2017, “services” means anything other
than goods, money and securities but includes activities relating to the use of
money or its conversion by cash or by any other mode, from one form, currency
or denomination, to another form, currency or denomination for which a separate
consideration is charged.
Scope
of supply
Section
7 of the CGST Act, 2017, (1) 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, licence, rental, lease or disposal made or agreed to be made for a
consideration by a person in the course or furtherance of business;
import
of services for a consideration whether or not in the course or furtherance of
business;
the
activities specified in Schedule I, made or agreed to be made without a
consideration; and
the
activities to be treated as supply of goods or supply of services as referred
to in Schedule II.
(2)
Notwithstanding anything contained in sub-section (1),––
activities
or transactions specified in Schedule III; or
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.
(3)
Subject to the provisions of sub-sections (1) and (2), the Government may, on
the recommendations of the Council, specify, by notification, the transactions
that are to be treated as-
a
supply of goods and not as a supply of services; or
a
supply of services and not as a supply of goods.
IV.
Schedule-II- Activities to be treated as supply of goods or supply of services
Clause
2(a) of the Schedule-II, any lease, tenancy, easement, license to occupy
land is a supply of services.
Clause
5(b) of the Schedule-II, 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.
Schedule-III-
Activities or transactions which shall be treated neither as a supply of goods
nor a supply of services
Clause
5 of the Schedule-III, Sale of land and, subject to clause (b) of
paragraph 5 of Schedule II, sale of building.
Taxability
of Development Rights under GST regime
In respect to the taxability of TDRs, there are two situations, as follows:
Where
TDRs of the land transferred but ownership in land continues with the
landowner (i.e., license to occupy land) , and
Where
TDRs of the land transferred permanently and irrevocably transferred by the
landowner to the developer (i.e., sale/transfer of land).
As
per ‘Clause 2(a) of Schedule-II of the CGST Act, 2017 read with
Section 7 of the said Act merits consideration. Under the said clause, any
lease, tenancy, easement, licence to occupy land is a supply of services.
Accordingly, GST is applicable on license to occupy land being a supply of
service.
On
other hand, as per ‘Clause 5 of Schedule-III of the CGST Act, 2017 read
with Section 7 of the said Act, under the said clause, Sale of land and,
subject to clause (b) of paragraph 5 of Schedule II, sale of building
shall be treated neither as a supply of goods nor a supply of services. Accordingly,
GST is not applicable on sale of land.
Thus,
acquisition of development rights with respect to a vacant land (not intended
solely for residential property) is subject to GST if it qualifies as: (i)
lease of vacant land; or (ii) tenancy of vacant land; or (iii) easement of
vacant land; or (iv) license of vacant land.
Thus,
to assess the applicability of GST on acquisition of development rights, it is
important to discuss the concept of ‘lease’, ‘tenancy’, ‘easement’ and
‘license’.
What
is the concept of ‘lease’, ‘tenancy’, ‘easement’ and ‘license’?
Lease
The
term ‘lease’ of immovable property is defined as a transfer of a right to enjoy
property for a limited period or in perpetuity for a consideration, whether
periodic or otherwise.
Section
105 of the Transfer of Property Act, 1882 defines lease as: “A lease of
immoveable property is a transfer of a right to enjoy such property, made for a
certain time, express or implied, or in perpetuity, in consideration of a price
paid or promised, or of money, a share of crops, service or any other thing of
value, to be rendered periodically or on specified occasions to the transferor
by the transferee, who accepts the transfer on such terms."
Tenancy
As
per Duhaime's Law Dictionary, the term ‘tenancy’ means ‘a contract by
which the owner of real property (the landlord), grants exclusive possession of
that real property to another person (tenant), in exchange for the tenant's
periodic payment of some sum of money (rent)’.
Accordingly,
tenancy is the right to occupy real property permanently, for a time which may
terminate upon a certain event, for a specific term, for a series of periods
until cancelled (such as month-to-month), or at will (which may be terminated
at any time). Some tenancy is for occupancy only as in a landlord-tenant
situation, or a tenancy may also be based on ownership of title to the
property.
Easement
As
per section 4 of the Easement Act, 1882 easement defined as an easement is
a right which the owner or occupier of certain land possesses, as such, for the
beneficial enjoyment of that land, to do and continue to do something, or to
prevent and continue to prevent something being done, in or upon, or in respect
of, certain other land not his own.
Accordingly,
easement is a right of use over the property of another. Traditionally the
permitted kinds of uses were limited, the most important being rights of way
and rights concerning flowing waters. The easement was normally for the benefit
of adjoining lands, no matter who the owner was (an easement appurtenant),
rather than for the benefit of a specific individual (easement in gross).
License
The
term ‘license’ is defined as a grant of right to do over immovable property
which otherwise for such grant of right would be unlawful. It is defined in
section 52 of the Indian Easements Act, 1882 as:
“Where
one person grants to another, or to a definite number of other persons, a right
to do, or continue to do, in or upon the immovable property of the grantor,
something which would, in the absence of such right, be unlawful, and such
right does not amount to an easement or an interest in the property,
the right is called a license"
The
determinative test of whether a right is prima facie a lease of
immovable property is whether the effect of the instrument of lease is to give
the holder the exclusive right of occupation of the land, though subject to
certain reservations, or to a restriction of the purposes for which it may be
used.
In
case of license, only a right to use the property in a particular way or under
certain terms is given which permits another person to make use of the
property, of which the legal possession continues with the owner. There is no
creation of interest in property and merely permission is granted to undertake
an activity.
Whether
acquisition of development rights constitutes a license of vacant land?
With
respect to license, as per the definition and various judicial precedents, it
is a settled position that there cannot be a license, if the activity
creates an interest in the property.
If
as per the terms of the agreement, the developer has all the rights required
for development and transfer (by way of sale, lease, license, etc. to end
customers) of the property against a fixed consideration. Further, such rights
are granted in exclusivity.
In
other words, by the activity of permanent and irrevocable transfer of
development rights in lieu of a fixed fee, the owner not only gives permission
to develop the land, but allows the developer to construct, sell and collect
sales proceeds at its own will, i.e. without any intervention from the owner.
In
light of above, it is clear that the transaction, i.e., ‘Development rights’
creates an interest in the immovable property and thus, it does not tantamount
to ‘license’ of immovable property (i.e. land) by the landowner to the
developer. Accordingly, it is to be considered as sale of land.
Having
discussed that in the instant case the transfer of development rights does not
constitute license of vacant land, it is important to discuss the nature of
development rights.
What
is the legal nature of the transaction involving transfer of development
rights?
From
the discussions in the preceding paragraphs, it is clear that a transaction
involving transfer of developmental rights is not a license of a vacant land.
Given the extent and nature of rights transferred, it can be said that the
transactions involves outright transfer i.e. ‘sale’ of development rights.
Whether
development rights can be treated as an ‘immovable property’?
The
term ‘immovable property’ has not been defined under the GST law. However, as
per the General Clauses Act, 1987, ‘immovable property’ also includes benefits
arising out of land, and things attached to the earth, or permanently fastened
to anything attached to the earth.
The
Courts in India have consistently held that any right associated with an
immovable property also partakes the nature of ‘immovable property’.
Accordingly, benefits arising out of land are also in the nature of immovable
property.
The
Courts have also held that rights to develop property and avail benefits
arising from such developed property are benefits arising out of land, which
cannot be severed from the land. Accordingly, it could be argued that
development rights should qualify as ‘immovable property’.
Reliance
is placed on the below-mentioned judicial precedents in support of the above
paragraph:
The
Hon’ble Bombay High Court in Chheda Housing Development Corporation v.
Bibijan Shaikh [Farid] 2007 (2) TMI 664 - Bonbay High Court,
observed that Transferable Development Rights (TDR) being a benefit arising
from the land must be held to be an immovable property.
In Sadoday
Builders Private Limited v. Joint Charity Commissioner [ 2011 (6) TMI 936 - Bombay High Court], the Hon’ble Bombay High Court
was dealing with Section 36(1)(c) of the Bombay Public Trusts Act, 1950 which
necessitated taking permission of the Charity Commissioner for sale of
immovable property. The Court held that transferable development rights are
benefits arising out of land and must be considered as immovable property.
In State of Orissa v. Titaghur Paper
Mills Co. Ltd.[ 1985
(3) TMI 226 - Supreme Court of Ibdia ],the Supreme Court held that bamboo
contract was neither a contract for the sale of goods or lease or the grant of
an easement. Rather the
same conferred upon the company a benefit to arise out of land, namely, the
right to cut and remove bamboos which would grow from the soil coupled with
ancillary rights and was thus a grant of a profit which is a benefit arising
out of land.
In Shakti
Insulated Wires Limited v. JCIT, it was held that the developmental rights are
embedded in the ownership of land only. These were valuable rights inherent in
the ownership of land.
Basis
the ratio laid out in the above judgments it can be said that development
rights a benefit arising from the land and, thus, qualify as ‘immovable
property’.
Whether
a permanent transfer of development rights is akin to transfer of title in
immovable property?
‘Sale’
is defined as transfer of ownership in exchange for a price paid or promised or
part paid or part promised. Therefore, with respect to an agreement for
transfer of development rights whereby such rights are transferred permanently
on an irrevocable basis, a view may be taken that the transfer of development
rights under such agreement constitutes a ‘sale’ of immovable property
In
other words, it can be said that an agreement for transfer of development
rights constitutes transfer of title in immovable property, accordingly excluded
from the definition of ‘service’.
It
may be noted that Transfer of an immovable property should be made through a
registered instrument, per the Registration Act, 1908. Whether any stamp duty
is payable on such a transfer would depend on the relevant Stamp Duty law
applicable.
STAGE-II: TRANSFER OF SOME
FLATS TO THE LANDOWNER AS A CONSIDERATION FOR LAND
Taxability of transfer of
flats to the landowner by the developer as a consideration
The
transfer of development rights by landlord to developer involves payment of
consideration. Such consideration is generally given in kind by way of
ownership rights of certain percentage of the developed area. The developer
receives consideration normally in two ways:
From
landowner, in the form of land /development rights; and
From
other buyers, in the form of money.
For
instance assume, GKC developers limited enters into a agreement with land owner
Mr. Nagarjuna whereas in lieu of this agreement a total of 1000 residential
units will be constructed by GKC ltd on the land provided by Mr. Nagarjuna,
whereas 40% of the units i.e. 400 units shall be given to Mr. Nagarjuna and
rest 600 units shall be taken by GKC ltd. Both can commercially sell the units
in the open market. Land owner gets 400 units of flats in lieu of the land
given and Developer gets 600 units of flats in lieu of the construction work
done.
Based
on above, redevelopment transaction is a barter transaction between landowner
and developers. Here developer is providing construction service to landowner.
Value of construction service shall be ascertained on the basis of flats given
to landowner in exchange of development rights given by him to builder.
Further,
as per decisions taken in 14th Meeting of the GST Council held on May 18-19,
2017 in Srinagar, J&K; 18 sectoral groups have been constituted
representing various sectors of the economy in order to ensure smooth roll-out
of GST. One such sectoral group is "MEDIA & ENTERTAINMENT SECTORAL
GROUP" which has issued some FAQs on GST in respect of Construction of
Residential Complex by Builders/Developers. In these FAQs, following
clarification has been given in respect of land owner's share of the
flats/houses:-
"Q.16)
Whether GST is payable on the owner's share of the flats/houses/portion of the
building constructed by the builder/developer and given to the land owner as
per the development agreement?
Ans.
16:- The builder/developer is liable to pay GST even on the share of the land
owner and given in lieu of the land received for the development, besides GST
on the builder/developer's share of the complex/building.”
In
the above transaction, the builder/developer receives consideration for the
construction service provided by him, from two categories of service receivers:
(a) from landowner: in the form of land/development rights; and (b) from other
buyers: normally in cash. Thus, the builder is liable to pay GST not only on
his portion of the complex/building, but also on the share of the land owner.
