GST on Real Estate: Development Rights, FSI and long term lease

With effect from 1^st April 2019, CBIC vide a series of notification reduced the GST rates for real estate projects. Apart from various conditions to be fulfilled along with the new rates such as reversal of ITC, RCM on unregistered purchase; the notifications also introduced some changes in the taxation of development rights and Floor Space Index (FSI) applicable for all projects after 1^st April 2019 and also to the ongoing project that have opted to pay tax at the new rate. This article is analyses the impact of these amendments in the context of Development rights and FSI.

Development Rights

Development right is fundamentally a right to develop the land for residential or commercial use. Land like any other asset possesses a bundle of rights attached to it such as possession, easement, lease, development right etc. By transferring the development right, it does not result in the transfer of ownership of the land in toto but only the right to develop the land.

Under a development agreement, the landowner transfers his rights of developing a land to the developer against the consideration in the form of construction service of residential or commercial apartment or any other form including cash.

Can Development rights be taxed under GST?

Schedule III of CGST Act, 2017 which prescribes certain supply to be treated neither as supply of goods nor supply of service includes sale of land and building and hence not leviable to GST.

Further, schedule II of CGST Act, 2017 makes it mandatory to treat any lease, tenancy, easement, license to occupy land as a supply of service.

Apex court in the case of Safia Bee has held that land includes rights in or over land, benefits to arise out of land. Even as per Section 3(a) of Land acquisition Act, 1894, land includes benefits that arise out of land. As per section 3(26) of General Clause Act, 1897, immovable property” shall include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

On an understanding of the law laid down by various courts including the Bombay High court in Chadda Housing Development Corporation Vs. Bibijan Shaikh Farid 2007(3) Mah. L.J.P 402, development right is held to be a benefit arising out of land and hence is an immovable property.

It may be recalled that Notification No. 4/2018 dated 25th January 2018 was issued to effectively demand GST on Development Rights though it is trite of law that notifications cannot override the statutory provisions. Development right being a benefit arising from the land has to be treated as immovable property and hence not leviable to tax under GST.

However the Authority for Advance Ruling in Shri Patrick Bernardinz D’Sa 2018-TIOL-292-AAR-GST, has held GST was payable on development rights.

Floor Space Index (FSI)

FSI is the original development or construction potential of a plot of land. In simple words, FSI is the proportion of construction of all floors to the total area of plot of land. It is determines the maximum area which can be constructed on particular piece of land. For example, if a plot of land is admeasuring about one thousand square meters, and the permissible FSI is 1, then about one thousand square meters of construction is permissible on that plot of land.

Rate of Tax

In case of development agreement entered on or after 1^st April 2019, for the construction services provided by the developer to the Landowner, the Developer would be liable to pay GST at the rate as below:

Construction service relating to affordable housing apartment – effective rate of 1%
Construction service relating to residential apartment – effective rate of 5%
Construction service relating to commercial apartment – effective rate of 12%

In case of Development agreement entered before 1^st April 2019, the Developer shall be liable to pay GST at the rate of 12%.

These rates are after 1/3^rd deduction for the value of land.

Valuation

Where a landowner transfers development right or FSI (including additional FSI) to a promoter on or after 1^st April 2019, against consideration in the form of construction of apartments, the value of construction service in respect of such apartments shall be deemed to be equal to the Total Amount charged for similar apartments in the project from the independent buyers, other than the person transferring the development right or FSI (including additional FSI) on the nearest date on which such development right or FSI (including additional FSI) is transferred to the promoter, less the value of transfer of land, if any.

ITC to landowner

As per notification no.3/2019, the land owner shall be eligible for ITC of taxes charged by the developer as mentioned above provided the land owner further supplies such apartments to his buyer before issuance of completion certificate or date of first occupation whichever is earlier and the tax paid by him is not less than the amount of tax charged from him by the developer on construction of such apartment.

Exemption

CBIC vide notification no.4/2019 has exempted the following services:

Development rights and FSI

Service by way of transfer of development rights or Floor Space Index (FSI) (including additional FSI) on or after 1^st April 2019 for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate or first occupation, whichever is earlier.

The amount of GST exemption available for construction of residential apartments in the project under this notification shall be calculated as under:

GST payable on TDR or FSI (including additional FSI) or both for construction of the project x carpet area of the residential apartments in the project ÷ Total carpet area of the residential and commercial apartments in the project).

However the exemption shall not be available where the apartments are sold after completion and the promoter shall be liable to pay tax on RCM basis on such proportion of value of development rights, or FSI (including additional FSI), or both, as is attributable to the residential apartments, which remain un-booked on the cut-off date in the following manner:

GST payable on TDR or FSI (including additional FSI) or both for construction of the residential apartments in the project but for the exemption contained herein] x (carpet area of the residential apartments in the project which remain un- booked on the cut-off date ÷ Total carpet area of the residential apartments in the project.

The tax calculated as above cannot exceed an amount equal to 1% in case of affordable housing apartment and 5% in case of residential apartment other than affordable housing apartment on the remaining un-booked apartment on the cut-off date. The value of apartment remaining un-booked on the cut-off date shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the cut-off date.

The aforesaid liability will arise on, earlier of:

date of completion; or
date of first occupation

Upfront premiums

upfront amount called as premium, salami cost, price, development charges or by any other name in respect of services by way of granting of long term lease of 30 years or more on or after 1st April 2019 for construction of residential apartments by a promoter in a project, 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.

The amount of GST exemption available for construction of residential apartments in the project under this notification shall be calculated as under:

GST payable on upfront amount payable for long term lease of land for construction of the project x (carpet area of the residential apartments in the project ÷ Total carpet area of the residential and commercial apartments in the project).

However the exemption shall not be available where apartments are sold after completion and the promoter shall be liable to pay tax on RCM basis on such proportion of upfront amount paid for long term lease of land, as is attributable to the residential apartments, which remain un-booked on the cut-off date in the following manner:

GST payable on upfront amount paid for long term lease of land for construction of the residential apartments in the project but for the exemption contained herein x (carpet area of the residential apartments in the project which remain un- booked on the cut-off date ÷ Total carpet area of the residential apartments in the project.

The aforesaid liability will arise on, earlier of:

date of completion; or
date of first occupation

Reverse Charge Mechanism

CBIC vide Notification No.5/2019 has introduced RCM on services supplied by any person by way of transfer of development rights or FSI for construction of project by a promoter and services by way of long term lease exceeding 30 years by any person against consideration in the form of upfront amount for construction of project by a promoter.

Thus effectively the liability to pay GST will be on the developers and not on the landowners

Time of supply

As per notification no.6/2019, the promoter receiving the development rights or FSI on or after 1^st April 2019 or who receives long term lease of land on or after 1^st April 2019 against consideration in the of upfront amount shall be liable to pay GST on

the consideration paid by him in the form of construction service of commercial or residential apartments in the project, for supply of development rights or FSI (including additional FSI);
the monetary consideration paid by him, for supply of development rights or FSI (including additional FSI) relatable to construction of residential apartments in project;
the upfront amount (called as premium, salami, cost, price, development charges or by any other name) paid by him for long term lease of land relatable to construction of residential apartments in the project; and
the supply of construction service by him against consideration in the form of development rights or FSI(including additional FSI).

The liability shall arise on the date of issuance of completion certificate or date of first occupation whichever is earlier.

As per notification no.4/2018, where the development agreement is entered before 1^st April 2019, the liability shall arise when the developer transfers possession or the right in the constructed complex by entering into a conveyance deed or similar instrument.

Illustration

Mr. A (Landowners) enters into a joint development agreement with Mr.B(Developer) on 10/4/2019 for construction of 10 residential apartments with a carpet area of 2000 sq ft each. 3 apartments are allocated to Mr.A and remaining 7 are allocated to Mr.B. The completion certificate was obtained on 15/7/2020 and the first occupation was on 1/8/2020. Out of the 7 apartment, Mr.B sold 4 apartments on 1/6/2020 and the remaining 3 apartments were sold on 20/7/2020. Mr.A sold the entire apartments allotted to him on 1/5/2020 at Rs.2 crore each. The value of apartment sold to independent buyers on 10/4/2019 was 1 crore and on 15/7/2020 was 1.5 crore.

Tax treatment in the hands of Mr.B (Developer)

Construction of residential apartments by Mr.B to Mr.A shall be liable to GST at 5% vide Notification No.3/2019 calculated as:

3 apartments x 1 crore x 5% = Rs. 15 lakhs

With respect to the development rights transferred by Mr.A to Mr.B, GST is exempt to the extent of 4 apartments which were sold before 15/7/2020 ( being earlier of date of issuance of completion certificate and date of first occupation) vide Notification No.4/2019
With respect to the development rights transferred to the extent of the 3 apartments remaining un-booked as on 15/7/2020, Mr.B will have to pay GST on RCM vide notification 4/2019 read with notification 5/2019, calculated as:

[1 crore x 10 x 5%] x (3 x 2000) / (10 x 2000) = Rs. 15 lakhs

However it shall not exceed 5% x 3 x 1.5 crores = Rs. 22.5 lakhs

Therefore Mr.B has to pay Rs. 15 lakhs as GST on RCM on 15/7/2020 i.e cut off date.

3. On the sale of 3 remaining apartments, no GST will be payable by Mr.B as it is covered under Schedule III of CGST Act and not leviable to GST.

Tax treatment in the hands of Mr.A (Landowner)

With respect to the 3 apartments sold by him before the cut-off date he shall be liable to pay GST, calculated as follows:

3 apartments x 2 crore x 5% = Rs. 30 lakhs

As per notification No.3/2019, Mr.A can take ITC on tax charged by Mr. B for construction of the apartment since Mr.A further supplies such apartments before the cut-off date i.e 15/7/2019. Therefore, net tax payable by Mr.A will be only Rs.15 lakhs (30-15 lakhs). However, it is pertinent to note that on reading the conditions specified for the new rate of tax under same notification i.e. notification No.3/2019 one of the conditions is outward tax liability should be discharged by debiting the electronic cash ledger. Therefore, there is no clarity in this regard as to whether ITC can be utilized or not for paying outward tax liability on the further sale of apartment.

DISCLAIMER: While every effort has been taken to provide correct information, the authors/ publishers will not be liable for any loss, expense, liability, detriment or deprivation suffered arising out of any action based on the information provided above. The readers are expected to cross-check the facts and information with government circulars and notification.