GST on Real Estate – Joint Development Agreements (JDA)

Joint development agreements are becoming a common form of real estate development in India as the government formulates policies and laws that facilitate the meeting of various stakeholders to participate in mutually beneficial propositions. Therefore each party also must have a clear understanding of the joint development agreements and how they work. Let us discuss the GST on Real Estate– Joint Development Agreements (JDA).

What is a Joint Development Agreement (JDA)?

A JDA is a legal agreement that allows landowners and developers to come together to develop the land. Currently, JDA is a common form of real estate development in India across sectors.

In this arrangement, the landlord would provide the land and all the responsibility to carry out the development of the property would lie with the developers. This includes obtaining all necessary approvals for the future development and marketing of the project. The landlord can either request a specific share of the proceeds of the sale, under a so-called revenue-sharing JDA, or claim a certain portion of the built-up area under an area-sharing JDA. This will depend on the conditions in the JDA.

Why do we need joint development agreements?

Landowners have land that can generate huge monetary benefits. However, they may not have the necessary finance or know-how or both to implement large-scale development. Developers, on the other hand, may have cash flow and real estate development know-how, but may not own land in prime locations.

This situation provides an opportunity for both landlords and the development community to join hands and enter into mutually beneficial Joint Development Agreements (JDAs).

Advantages of joint development agreements

The JDA offers several benefits to both parties if they continue to cooperate. Communication and paperwork play a vital role here. The terms in the JDA must categorically clarify the rights and obligations of the builder and the lessor. Since entering into such contracts means you are in it for the long haul, consistent and clear communication between contracting parties remains key. If there are any issues regarding these two aspects, it may not take long for the whole deal to get bogged down and subsequently stuck.

Disadvantages of joint development agreements

• The property includes a long-term liability. The long life of the process is often marked by disagreements and disputes.
• During the long process, many new rules governing joint development may come into play, often posing a risk to the arrangement.
• Everything that both sides agree on paper may not be as good as originally hoped.
• Joint development agreements are complex and cannot be entered into lightly or without legal assistance.

GST applicability to Joint Development Agreements 

Transfer of development rights from the land owner to the builder

• An agreement concluded before 31 March 2019
  • The landowner should pay GST on the conveyance charge at 18%.
  • The value is determined under Rule 27 of the CGST Act.
  • Time of delivery on the date of transfer of rights.
  • An input tax credit is available.
• An agreement concluded after 31 March 2019
  • If flats are not booked before completion confirmation, GST on RCM will be paid by the builder at 5%.
  • The value is determined based on the amount charged by the builder for similar apartments.
  • Delivery time on obtaining CC/first occupation.
  • An input tax credit is not available.

Construction service by the builder to the land owner

• An agreement concluded before 31 March 2019
  • The builder will pay GST of 18% on the value of the flat handed over to the land owner
  • The value is determined under Rule 27 of the CGST Act.
  • The time of delivery is the date of transfer of ownership.
  • An input tax credit is available.
• An agreement concluded after 31 March 2019
  • The builder should pay 5% of the value of the flats handed over to the land owner
  • The value is determined based on the amount charged by the builder for similar apartments.
  • Delivery time on obtaining CC/first occupation.
  • An input tax credit is not available.

Sale of flats by the Builder

• If the apartment is booked or part of the amount received before CC is obtained, GST payable at 5%
• If not, GST does not apply.

Sale of apartments by the land owner:

• If the flats are booked before obtaining the completion certificate, GST is payable at 5%.
• If the flats remain unbooked till the completion certificate is obtained, the builder will pay GST as per RCM @ 5%.

Note: Whenever the GST rate of 5% is applied, the project is assumed to be a non-affordable housing project. For an affordable housing project, the GST rate is 1%. An affordable residential flat has been defined to extend the scope to flats with a carpet area of ​​60 sqm/90 sqm, where the consideration does not exceed Rs. 45 lakhs.

Applicability of the reverse charge mechanism

• The developer is liable to pay GST based on the transfer of tax liability on the grant of development rights only for buildings that remain unreserved on the date of completion.
• A builder is liable to pay GST on non-cement and capital goods contracts if the total contracts from the registered person during the year fall below 80% of the total contracts. E.g. If the total volume of purchases from the registered persons during the year is 60%, (80-60) only the remaining 20%, the builder should pay GST as per RCM. (Applicable tax rate is 18%)
• The builder is also liable to pay GST under the RCM if the cement is purchased from an unregistered dealer. The tax rate used is 28%.
• The builder is also liable to pay GST under the RCM on capital goods purchased from unregistered dealers. GST is payable at the rates applicable to that capital asset.

It is important to note here that the builder cannot claim ITC on GST paid under RCM.

So for builders, the applicability of GST arises at several points as given below:

• Sale of apartments (when booking before CC). The tax rate used is 5%.
• Transfer of construction rights from the land owner. GST is payable under RCM at 5% on flats that remain unbooked on CC or handover date.
• Construction service provided by the builder to the land owner at the rate of 5% GST.
• Purchase of fixed assets or cement from an unregistered dealer.
• Other project orders if the total purchase from the registered vendor is false below 80%.

Important Income Tax Provisions

• For Builder: Under Section 50C, if the value of the clue is more than 120% of the sale value, the difference between the value of the stamp and the sale value will be taxable.
  However, the assessment accepted at stamp value can be challenged if the assessment is made by the Income Tax Department and the Income Tax Officer has to refer to the Assessing Officer.

• For land owners: The owner of the land is subject to a tax of 2 points. First, when a completion certificate is obtained for his share in the properties. The difference between the stamp duty value and the indexed purchase price of the land will be taxed as a capital gain.
  And on actual sale, the difference between the selling price and the stamp duty value is taxed as a capital gain.

Final words

As the real estate sector has the most complex tax compliance and related regulations, it is necessary to work out the total related taxes and compliances to be addressed to estimate profits. Any ignorance or violation can be very costly and also have a very negative impact on sales and profitability.