#### Overview of GST on Real Estate

####GST Rates

1. Standard GST Rates:

- Real estate developers are required to pay GST on the construction consideration.

- Typically, GST is charged at 18% on the construction services provided by the developers.

2. GST for Customers:

- Developers may charge customers 5% GST on the total consideration, while paying 18% GST to the government.

- GST is not levied on the consideration for the land component.

3. Input Tax Credit (ITC):

- Developers can avail ITC on the GST paid.

#### Notification No. 3/2019 – CTR and Notification No. 11/2017 – CTR

- Notification No. 3/2019 – CTR amends Notification No. 11/2017 – CTR.

- Notifications issued under various sections of the CGST Act, 2017:

- Section 9(1): Power to notify GST rates.

- Section 11(1): Power to grant exemptions.

- Section 15(5): Power to determine the value of supply.

- Section 16(1): Availability of ITC subject to prescribed conditions and restrictions.

#### Key Points and Legal Interpretations

1. Power to Notify Rates:

- Section 9(1) allows for the notification of GST rates without specifying conditions or restrictions.

2. Exemption Powers:

- Section 11(1) allows exemptions but does not create a deeming fiction where the option is not exercised.

3. Non-Availability of ITC:

- Specified only through Section 17(5), not via a rate notification.

- Section 16(1) does not deny ITC.

4. Valuation Rules:

- Section 15(5) requires framing rules for valuation for notified supplies.

5. Works Contract Tax (WCT):

- Developers previously followed WCT, paying 18% GST under Entry 3(ii) of Notification No. 11/2017 – CTR.

- Entry 3(ii) was deleted by Notification No. 3/2019.

- Entry 3(xii) serves as a residual entry for construction services.

#### Conditional Exemption and Choices

- Conditional Exemptions:

- Section 11 allows conditional exemptions, which developers can choose to ignore.

- Developers can opt out of the 5% rate and instead discharge GST at 18%, availing ITC.

- Impact on Construction Services:

- Construction services generally attract an 18% GST rate.

- Developers can argue that the 5% rate is not mandatory, enabling them to avail ITC and discharge GST at 18%.

- Residual Services:

- Construction services not explicitly covered by other entries fall under residual services, attracting the standard GST rate.

- The undivided share of land is not liable for GST.

#### Valuation Overview and Key Points

1. Notification No. 3/2019:

- Standard provision allows for a 1/3rd deduction of the total consideration towards the value of land.

- This deduction simplifies the calculation but may not always be beneficial.

2. Typical Considerations:

- Land consideration: Rs. 10,000 per sq. ft.

- Construction consideration: Rs. 5,000 per sq. ft.

- Taxable Value post-deduction: 10,000 per sq. ft. (post 1/3rd deduction of total consideration).

#### Key Legal Interpretations and Case Laws

1. Supreme Court Decision in Wipro Ltd.:

- Inclusion of land value in the consideration for GST is impermissible.

- Land value should ideally be determined on an actual basis rather than a fixed deduction.

2. Munjal Manishbhai Bhatt v. UoI:

- The legislative intent is to tax construction activity, not the supply of land.

- The value of land and construction should be based on actual considerations if ascertainable.

- Fixed deduction of 1/3rd is ultra vires and violative of Article 14 (Right to Equality) of the Constitution if actual values are known.

#### Implications of Legal Interpretations

1. Actual Basis for Land Value:

- When the actual land value is ascertainable, it can be adopted instead of the 1/3rd deduction.

- Applying GST to the land component is impermissible.

2. Deeming Fiction and Mandatory Deductions:

- Deeming fiction for mandatory 1/3rd deduction applies only when actual values are not ascertainable.

- Taxable persons can opt out of this deduction if actual land and construction values are known.

3. Valuation Rules and Flexibility:

- The value of construction services can be determined using valuation rules.

- Taxable persons have the option to use actual values for land and construction to ensure fair taxation.

4. Court Rulings:

- The court has indicated that the value of land can be determined on an actual basis where ascertainable.

- Para 2 of Notification No. 11/2017 – CTR, which mandates a 1/3rd deduction, is not mandatory and should be optional.

#### Practical Application

- For Developers:

- Developers can adopt the actual value of land and construction if these values are clearly ascertainable.

- This ensures no GST is levied on the land component, aligning with legal precedents and legislative intent.

- For Tax Authorities:

- Authorities should accept the actual values provided by developers when they are ascertainable.

- The fixed deduction rule is not applicable if real values can be determined, thus promoting fair taxation practices.

### GST on Joint Development Rights

#### 1. Joint Development Agreements (JDA) Before 01.07.2017

1. Landowner Share:

- If a Joint Development Agreement (JDA) is executed before 01.07.2017, the share given to the landowner is not liable to GST.

- Relevant Case: CCE & ST v. Sri Lakshmi Promoters - No service tax applicable if the JDA is before 01.07.2010, irrespective of the date of sale agreement or possession.

- State of Karnataka v. Lease Plan India Ltd. - Further reinforces that provisions post-dated to the JDA do not affect the taxability of pre-GST agreements.

2. Applicability of Notifications:

- Notification No. 4/2018 or No. 6/2019 do not apply to development rights transferred before GST implementation.

#### 2. GST on Landowner Share in a Joint Development Agreement

1. Models:

- Revenue Share Model:

- Developer constructs and markets all units; shares revenue with the landowner.

- Relevant Case: Mormugao Port Trust v. Commissioner of Cus. C. Ex & ST - Revenue sharing is not considered a service transaction.

- Cricket Club of India v. Commissioner of Service Tax - Mere money flow without specific service does not constitute a service.

- Area Share Model:

- Developer constructs and allocates a share of the constructed area to the landowner.

- Relevant Case: Vasantha Green Projects v. Commissioner of Central Tax - Developer’s construction for the landowner is not separately taxable if included in the sale value of units.

- Faqir Chand Case - JDA with shared control and profit implies a joint venture, not a service transaction.

#### 3. Specific Notifications

1. Notification No. 4/2018:

- Applies to registered persons supplying development rights or construction services against such rights.

- Liability arises when possession or rights are transferred via a conveyance deed or similar instrument.

2. Notification No. 6/2019:

- Extends to promoters receiving development rights or FSI for construction from 01.04.2019 onwards.

- GST liability arises on the date of completion certificate issuance or first occupation, whichever is earlier.

- Tax payable under reverse charge mechanism as per Notification No. 13/2017.

#### 4. Validity and Scope of Notifications

1. Section 148 of the CGST Act, 2017:

- Authorizes the Government to notify special procedures but not to determine taxability.

- Notifications can outline processes but cannot impose new tax liabilities.

#### 5. GST on Landowner Share: Options

1. Tax Position Options:

- No tax on the share received by the landowner.

- Rate Determination:

- Similar apartment rate nearest to development right transfer date, less 1/3rd for land.

- GST at 18% on construction carried out for the landowner, similar to a contractor arrangement.

- Value Determination:

- Comparable market rate.

- Guideline value of the land.

- Agreed value between parties.

- Cost of construction plus a 10% margin.

### Development Rights and GST

#### 1 Notification No. 4/2019 – CTR (Exemption) and 5/2019 – CTR (RCM)

1. Exemption for Residential Projects:

- Development rights are exempt from GST under specific conditions.

- Exemption applies unless the completion certificate (CC) is obtained and there are unbooked units.

2. GST Liability on Unbooked Units:

- If there are unbooked units at the time of CC issuance, the promoter must pay GST on the development rights under the reverse charge mechanism (RCM) at 18%.

- GST is payable upon issuance of the CC or first occupation, whichever comes first.

- The liability is calculated based on the carpet area of unbooked units relative to the total carpet area of the project.

3. Valuation of Development Rights:

- The value of development rights for GST purposes is deemed to be equal to the value of similar apartments sold by the promoter nearest to the date of transfer of development rights.

#### 2 Development Rights as Immovable Property

1. Nature of Development Rights:

- Development rights attached to immovable property are considered benefits associated with the land, thus categorizing them as immovable property.

- Relevant Cases:

- Chheda Housing Development Corpn.

- Anand Behara

- DLF Commercial Projects

#### 3 Development Rights and GST

1. Supply in the Course of Business:

- To qualify as a business transaction, the activity must be viewed as such from both parties’ perspectives.

- A one-time sale of land does not automatically constitute a business transaction.

- Relevant Cases:

- Bhanushali Housing Co-operative Society Ltd. - The seller’s intent to carry on a business using the land is crucial.

- Devineni Avinash v. Principal CIT - A JDA does not necessarily imply the landowner is conducting a business.

#### 4 Valuation of Development Rights

1. Challenges in Valuation:

- The selling rate for customers is a common valuation tool but may not be directly applicable to development rights.

- Development rights are not easily measured in terms of square feet.

- Issues arise when the development rights are related to retained land or when both parties lease the constructed area.

- The owner provides the right to sell undivided share (UDS) as well as the right to develop.

2. Valuation Mechanism:

- There is no straightforward computation mechanism for development rights.

- Relevant Case: CIT v. B.C. Srinivasa Setty - If a computation mechanism fails, the levy must fail.

#### 5 GST on Development Rights – Options

1. No Tax Position:

- Adopt a position where no tax is levied on development rights.

2. Valuation as per Notification:

- Follow the valuation method prescribed in the notification, even with computation challenges.

3. Computation Challenges:

- Address and resolve issues related to computation difficulties.

4. Possible Changes in the Future:

- Stay updated on potential changes in GST laws and notifications that may affect the treatment of development rights.

5. RCM and No ITC:

- Note that under RCM, the recipient of the service pays the tax, and no input tax credit (ITC) is available for the promoter.

### Sale of Plots: GST Implications and Considerations

#### 1 Sale of Plots Overview

1. Plot Development and Sale:

- Developer purchases land from the landowner.

- Land is developed into plots.

- Developer sells the plots.

- Transactions can occur under Joint Development Agreements (JDA) between the landowner and developer.

2. Revenue Sharing:

- Percentage of revenue shared with the landowner under certain agreements.

- Conveyance of plots attracts stamp duty and registration.

3. GST Considerations:

- When both parties sell plots, GST may not apply.

- Revenue-sharing arrangements between developer and landowner raise questions regarding GST liability.

- Income tax and capital gain treatment vary based on the transaction structure.

#### 2 Circular No. 177/09/2022

1. Developed Land Sale:

- Sale of developed land falls under Schedule III of the CGST Act, 2017, exempting it from GST.

- Services provided for land development, like levelling or laying drainage lines, are taxable at applicable rates.

#### 3 Development Charges

1. Tax Treatment:

- Development charges collected before land sale may not attract service tax/GST.

- The concept of self-service is crucial, implying that development is essential for marketability.

- Tribunal rulings support non-taxability of land development charges.

### Slum Rehabilitation

#### Slum Redevelopment

1. Project Dynamics:

- Government/Municipality owns the land.

- Developer constructs units for slum dwellers in exchange for Transfer of Development Rights (TDR) or Floor Space Index (FSI).

- GST levy is on construction supply for consideration.

2. GST Valuation:

- Consideration includes TDR, valued based on similar contracts.

- General contract rates by the Slum Rehabilitation Authority (SRA) can be the basis for GST valuation.

#### 2 Other Considerations

1. Regulatory Challenges:

- National Anti-Profiteering Authority scrutiny.

- Reconciliation challenges, especially with unbilled revenue.

- Impact of completion certificates and occupation certificates on Input Tax Credit (ITC).

2. Potential Future Changes:

- Options like optional GST rates with ITC.

- Integration of stamp duty and registration into GST.

- Tax implications on land and potential amendments to GST laws.