GST: Second sale of apartment by the landowner in a joint development

If the landowner in a joint development agreement (JDA) sells his share of flats before the occupancy certificate (OC) is received for them, does this sale attract GST? This article argues that such a sale will not attract GST in most cases. The discussion takes place in the context of JDAs for construction of residential / commercial complexes.?

2. ?In this discussion we will consider the following material:

? Schedule II of the CGST Act, items 5(b) and 6 thereof;

? Notification 11/2017-CT(Rate), explanation to item (3) thereof;

? The definition of ‘promoter’ in RERA;

? The definition of ‘works contract’ in section 2(119) of the CGST Act;

? Case law on works contract;

? The advance ruling in the case of Vinod Kumari Goyal.

The discussion will traverse the following issues:

? Construction as a service to a buyer before issue of the occupancy certificate;

? Landowner as ‘promoter’ under RERA and GST;

? Whether a reseller of a flat provides ?the service of construction;

? Construction in works contract mode in joint developments;

? One-time supply of works contract service, which is used up in construction of the resultant immovable property.

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Service of ‘construction’ in sale of flat: the OC as a marker

3. ?Construction is a service if done for another person for a consideration. Sale of a constructed structure is not a service, because immovable property is outside the purview of GST.

?4. ?However, Schedule II of the CGST Act, in item 5(b) taxes the construction of immovable property, even if it is sold as immovable property, if any payment had been received towards it before the occupancy certificate (OC) was received. In other words, it is deemed that the structure was constructed for the person who ?paid this amount towards its purchase. ?The wording is as follows:

“5.?The following activities shall be treated as supply of services, namely…

(a) …?

(b)?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.”

It is notable that the service identified here is ‘construction’ of the structure. The OC is the marker to end the construction phase: transactions initiated after that are recognised as payment for purchase of immovable property.

?5. ?Item 5(b) as extracted above is commonly taken to mean that second sale of an apartment before OC is received for the complex is liable to GST all over again. This may not be correct in all situations. It is necessary to look at the role of the second seller to decide this point.

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Notification 11/2017-CT(Rate): “landowner-promoter”

6. ?Notification 11/2017-CT(Rate) ?refers to GST on ?re-sale of the flats by the “landowner-promoter”while setting out rate of tax and conditions for the transactions in a JDA. Conditions prescribed in the fourth proviso to s. no. 3 (various kinds of construction of complex) ?include the following:

“(i) the developer- promoter shall pay tax on supply of construction of apartments to the landowner-promoter, and

(ii) such landowner – promoter?shall be eligible for credit of taxes charged from him by the developer promoter towards the supply of construction of apartments by developer- promoter to him, provided the landowner- promoter further supplies such apartments to his buyers before issuance of completion certificate or first occupation, whichever is earlier,and pays tax on the same which is not less than the amount of tax charged from him on construction of such apartments by the developer- promoter.”

7. ?“Landowner-promoter” is defined in Explanation (ii) in column 5 of the notification 11/2017-CT(Rate) as follows:

(ii) “landowner- promoter” is a promoter who transfers the land or development rights or FSI to a developer- promoter for construction of apartments and receives constructed apartments against such transferred rights and sells such apartments to his buyers independently.

Thus, to come within the purview of the above entry in notification 11/2017-CT(Rate), the landowner has to be a ‘promoter’ ?in the JDA. Further, as per Explanation (i) to the notification, the term ‘promoter’ has the same meaning here as in the Real Estate (Development & Regulation) Act 2016 (RERA).

‘Promoter’

8. ?Section 2(zk) of Real Estate (Development & Regulation) Act 2016 (RERA) defines who is considered as ‘promoter’ of a construction project. Some states have also issued circulars to amplify the meaning. Notifications in GST use the expression ‘promoter’ in the same meaning by referring to the definition in RERA.

?9. ?As per section 2(zk) of RERA, ‘promoter’ means-

(i) a person who constructs or causes to be constructed an independent building or a building consisting of apartments, or converts an existing building or a part thereof into apartments, for the purpose of selling all or some of the apartments to other persons and includes his assignees; or

(ii) a person who develops land into a project, whether or not the person also constructs structures on any of the plots, for the purpose of selling to other persons all or some of the plots in the said project, whether with or without structures thereon; or?

(iii) any development authority or any other public body in respect of allottees of-

(a) buildings or apartments, as the case may be, constructed by such authority or body on lands owned by them or placed at their disposal by the Government; or

(b) plots owned by such authority or body or placed at their disposal by the Government, for the purpose of selling all or some of the apartments or plots; or

(iv) an apex State level co-operative housing finance society and a primary co-operative housing society which constructs apartments or buildings for its Members or in respect of the allottees of such apartments or buildings; or? (v) any other person who acts himself as a builder, coloniser, contractor, developer, estate developer or by any other name or claims to be acting as the holder of a power of attorney from the owner of the land on which the building or apartment is constructed or plot is developed for sale; or

(vi) such other person who constructs any building or apartment for sale to the general public. Explanation.-For the purposes of this clause, where the person who constructs or converts a building into apartments or develops a plot for sale and the persons who sells apartments or plots are different persons, both of them shall be deemed to be the promoters and shall be jointly liable as such for the functions and responsibilities specified, under this Act or the rules and regulations made thereunder.

?10. ?It seems from this definition that if the landowner sells plots or apartments (arguably, selling does not include re-selling), he is termed a promoter. However, circulars issued by various states have mostly posited revenue-sharing as the criterion that would make the landowner a ‘promoter’ in the project and make him responsible for the project under RERA along with the developer. Some states have narrower criteria.

?11. ?Notification 11/2017-CT(Rate) applies to the landowner-promoter as defined above. If he is held liable under RERA for the functions and responsibilities under that Act, he may also be liable to pay GST on the supply of construction service to his buyer.

?12. However, some ambiguity remains on the GST liability of the reseller. This is because of (i) ?GST being applicable on the service of construction, not on the sale of apartments, per se; and (ii) the particular features of taxation of construction in the works contract mode.

?Taxability of “supply” of constructed apartments?

GST on supply of apartments?

13. Returning to notification 11/2017-CT(Rate), which is the only official allusion to GST on the re-sale of landowner’s apartments, we see that it skirts the issue of whether the landowner-promoter supplies the service of construction.

?14. Thus, the notification 11/2017-CT(Rate) provides that

? the developer will pay GST on supply of construction?of apartments in the landowner’s share to the landowner; and that

? the “landowner-promoter” may take this as input tax credit if he further supplies “such apartments”?to buyers before issue of the OC and pays GST on the same.

It appears, according to the notification, that the developer pays GST on the supply of construction, while the “landowner-promoter” pays GST on the supply of apartments. In law, only supply of construction service attracts GST, not supply of apartments. To this extent, the notification is ultra vires?the CGST Act.

?AAR: reseller re-supplied the service of construction / works contract

15. However, the Authority for Advance Rulings in GST (AAR) held that the landowner (Vinod Kumari Goyal, the applicant before it) had, indeed, supplied the service of construction to her buyer to whom she sold her share of flats in the joint development. In para 10.5 of Advance Ruling No. KAR ADRG 28/2023, decided on 24-8-2023, it said:

“The developer is providing construction services to the applicant and the applicant is providing again?the construction services to the prospective customers. Hence there are two supplies involved, first from the developer to the applicant and the second from the applicant to the prospective customers.”

There is no factual basis for this conclusion except that fact that there are two transactions. It was also wrongly assumed that they were both of the same nature. The ruling confuses the reader by using the expressions “construction” and “works contract” interchangeably, as if they are synonymous. The actual ruling at the end, based on the findings extracted above, is that

“The applicant is acting as a supplier of works contract service to the prospective purchasers of apartments…”.

?16. The AAR failed to accord proper consideration to the question before it. It was required to determine whether the second transaction, the sale from landowner to buyer, was a supply under GST. In terms of item 5(b) of Schedule II to the CGST Act, did a supply of construction service take place? The narration in the ruling, in para 5.3, states that the developer of the project was in process of seeking completion certificate from the local authority. The ruling does not take cognizance of this important fact in its discussion. It is evident that the complex was de facto?complete, and the developer had initiated the process of getting the completion certificate. ?In these circumstances, can it be said that the landowner supplied the service of construction to her buyer? This is not discussed. Furthermore it is not clear whether the developer would be a party to the agreements made for sale of the flats. This is commonly done because the developer in a JDA ?would be responsible for obtaining the OC.

?17. The advance ruling also dismisses, without any discussion or reasoning, the contention of the applicant that the transfer of property in goods, which is the characteristic of a works contract, had taken place by incorporation in the project and cannot again be subjected to tax. This argument merits closer examination, which we accord to it below.

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Works contract cannot be re-supplied

Works contract: relevant provisions in GST law and the Constitution

18. In GST law there is a distinct subset of ‘construction’, which is called ‘works contract’. In this mode of construction, the builder uses his own material to construct the immovable property. The material may change its form and get merged in the structure that it is used to make. Whether in this merged and melded form, or in recognizable form, the ownership of the material gets transferred to the buyer along with the immovable property. The definition of “works contract” in the CGST Act is:

Section 2(119):?“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’. (emphasis added)

?19. As per Article 366(29A)(b) of the Constitution of India, a tax on the sale of goods includes “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”. Thus, the goods, or chattels, like cement, steel, etc., involved in construction of a building by the developer in a JDA are considered as sold to the person to whom the building or a unit thereof is transferred. This attracts tax as a sale of goods. In a works contract, there is a sale of goods as well as a service of construction, which makes it a ‘composite supply’ as stipulated in item 6 of Schedule II to the CGST Act. Without the supply of goods in the process of execution of the works, the contract would merely be one of construction service.

?Transfer of property in the goods in a works contract

20. In the context of construction and sale of apartments it is important to understand when, and in what form, the goods involved in execution of a works contract are considered to be transferred, and to whom. ?We may take the help of the apex court to do this. In Larsen & Toubro Ltd vs State of Karnataka, 2014 (34) STR 481 (SC), ?a three-member bench of the Supreme Court considered similar questions when it answered a reference on whether goods used in construction of a complex for sale could be subjected to sales tax by the states in the pre-GST tax regime. ?Firstly ,the Court observed that -

?“Where a contract comprises of both a works contract and a transfer of immovable property, such contract does not denude it of its character as works contract.” [para 101(iii) of the judgment]

?21. Coming to taxability, the Court ruled that the goods used in the construction do attract tax in terms of Article 366(29A) of the Constitution read with the rules framed by the state, and that their value was to be determined at the time of their incorporation in the works:,

“Since, the taxable event is the transfer of property in goods involved in the execution of a works contract and the said transfer of property in such goods takes place when the goods are incorporated in the works, the value of the goods which can constitute the measure for the levy of the tax has to be the value of the goods at the time of incorporation of the goods in works and not the cost of acquisition of the goods by the contractor.” ?(para 68: emphasis added)

Thus, the goods are recognised to be a taxable part of the works contract at the point when they are incorporated in the works. WIthout this act of incorporation of goods in the works, the contract will not have the character of a works contract. At this point, the goods acquire taxability in the hands of the contractor, though the tax may actually become payable ?at a later date when the immovable property is transferred.

?22. Self-evidently, the execution of the contract is a one-time process. The contract for construction does not get re-executed, and the goods do not go back to their original form and get incorporated in the contract again each time the immovable property is sold. In other words, a works contract cannot be re-supplied. In Larsen & Toubro (supra, para 97), the Supreme Court held that when flats are built for sale, what is supplied to the buyer is a works contract plus an immovable property. Thus, we can infer that the first transfer of the flat from developer to buyer / landowner is supply of a works contract; but when the same flat is resold, this cannot be a re-supply of works contract service, as the goods have been incorporated in the contract and transferred in the form of immovable property. The works contract service is consumed and extinguished in the first supply from the developer: what remains is the immovable property in the form of the flat, which the landowner re-sells and which cannot attract GST. (The only exception here would be the rare case where, for some reason, the landowner received semi-constructed flats and had to carry out further construction work on it before re-sale.)

?Points for landowner

23. There are takeaways here for a landowner who is entering into a joint venture for development of his property:

• GST is not leviable in most cases of sale of his share of flats, even if sold before issue of OC for the flats. ?
• Responsibilities and liabilities under RERA and under GST will devolve only upon a ‘promoter’ as defined in RERA.
• The landowner must ensure that the JDA captures his role correctly.
• Also, the joint development agreement ?must give clarity on who is responsible for the construction of the complex and for getting the OC. ?

Upon taking these steps, the landowner can be spared any unpleasant surprises in the form of tax demands at a later date. ?