The ongoing debate surrounding the imposition of GST on Development Rights through Joint Development Agreement (‘JDA’) continues seeking resolution. The intricacies of the concept persist, making discussions a fascinating aspect of legal discourse. Recently, in the case of Prahitha Constructions[1], the Telangana High Court held that mere transfer of development rights pursuant to a JDA cannot indicate an automatic transfer of ownership or title rights, therefore, transfer of development rights is amenable to GST and cannot be brought within the purview of Entry 5 of Schedule III of the GST. The Developer has filed a Special Leave Petition in the Supreme Court against the said decision, and for the time being, no stay has been granted by the court.
Moreover, there have been other judicial decisions as well as advance rulings in the past which have attempted to clarify the concept of Development Rights, yet there is no definite answer on this burning issue. However, a definitive ruling on the issue of taxability of development rights under GST can be expected in the future considering the said issue is now pending before the Apex Court.
While delving into the intricacies of development rights, it’s imperative to look at the terms and conditions of the JDA which are agreed upon between the developers and landowners. Development rights consistently cultivate a symbiotic relationship, offering advantages to both the parties. For landowners, it ensures a valuable asset which they can market, while simultaneously affording developers substantial benefits. For developers, development rights reduce their capital expenditure by relieving them from incurring hefty acquisition costs at the upfront and accordingly making development rights operationally feasible within a defined parameter. Underlying this system, there are two fundamental rights granted to developers – (i) the right to develop the property; and (ii) the subsequent right to sell the developed property.
This dual-phase operation of development rights is the reason which has sparked debate concerning the tax treatment of development rights. One perspective regards it as a service to the landowner while another views it as an outright sale of land. Thus, it becomes imperative to scrutinize both viewpoints to gain clarity on the matter.
Narrowed approach under provisions of GST Law
In the erstwhile service tax regime, Section 65B (44) of the Finance Act defined ‘service’ as an activity carried out by one person for another in lieu of a consideration, but inter-alia excluded a transfer of title in goods or immovable property. Thus, the provision under service tax regime explicitly excluded the transfer of title in immovable property from its purview. While ‘title’ is often misconstrued as synonymous with ownership, it doesn’t exclusively connote ownership. As elucidated by the Hon’ble Supreme Court in Syndicate Bank v. Estate Officer and Manager[2], a jurisprudential title to a property may not necessarily entail ownership rights but a title could be subordinate to an owner and might not necessitate a registered deed of conveyance, still confers a legal claim. The overarching principle is that land is made up of bundle of rights. It establishes that title can be transferred in various ways, with ownership being just one facet of those methods.
The CESTAT, Chandigarh in DLF Ltd. v. Commissioner of Service Tax, Gurugram[3] held that development rights would fall within the ambit of ‘immovable property’ and would consequently not be subject to service tax as ‘immovable property,’ encompasses not only ‘land’ but also ‘any benefits arising out of land’.
However, the shift from the service tax regime to the GST regime marked a significant change in the treatment of development rights. Under the GST law, it is only the ‘sale of land’ and ‘sale of building’ which has been excluded from the tax net and not transfer of title in immovable property.[4]
Beyond the bench: Alternative views on the taxability of transfer of development rights under GST law
Entry 5 of Schedule III under the CGST Act and the notifications[5] issued by the GST Council, regarding the taxation of the Development Rights carry substantial weight in signaling the government’s stance on the matter. In furtherance to which there have been further reinforcements through the categorical stance taken by various advance ruling authorities. However, despite the clear intent to tax, there have been divergent views regarding the applicability of GST on transfer of development rights.
One prominent school of thought believes that development rights serve as a condition precedent for the sale of land. It is often argued that the implication and effect of execution of the JDA is to be taken into consideration. By virtue of the execution of the JDA, the developer acquires development rights of property which ultimately results in sale of land proportionate to the amount of revenue/developed area shared by the developer. In other words, the development rights form an integral part of the bundle of rights associated with land ownership, and considering when a landowner transfers these rights with a commitment to convey land to the customer once developed, the development rights can be said to be a founding stone for the sale of land in future. Accordingly, it is believed that in a transaction involving transfer of development rights pursuant to a JDA, the essential supply is that of the land and the transfer of development rights is intrinsically linked to the eventual sale of the land.
It is also believed that the development rights unlike any other rights in form of licensing or leasing of right are inherently irrevocable and permanent in nature. Furter, unlike any other rights, development rights confer upon developers the exclusive authority to utilize and dispose of the property according to their discretion. It is certain that there will be a sale of land subsequent to conferment of development rights. Thus, the treatment of transfer of development rights as a supply of service from the developer to the landowners could distort the application of GST, as it fails to recognize the integral role of development work in facilitating sale of land.
Moreover, it has been pointed out that the GST is a contract-based levy. Therefore, the supply must be identified from the intention of the parties on the basis of express terms and conditions of the contract. In light of the same, it is often argued that the parties to a JDA agree to contribute mutually in the form of land and development work and share the revenues out of sale of developed land/apartments to the prospective customers. Accordingly, the ultimate purpose of a JDA is to derive benefits through the sale of land.
Coupled with the above points, the question of taxability of development rights is further complicated in cases involving transfer of development rights in pre-GST regime for which full/part consideration in money or kind has been received in the GST regime. In such cases, the perpetual confusion persists if the service has been supplied already or the time of supply has already occurred in the pre-GST regime.
Conclusion
The divergent perspectives on the treatment of development rights; whether as a service or an outright sale, have led to confusion in the realm of land transactions. Therefore, while finality is anticipated from the constitutional courts in GST regime, it is prudent for businesses to take an informed call on the taxability of development rights.
Further, the taxability of development rights hinges on the specific terms and conditions outlined in the JDA. There is no universal tax approach for taxability of JDAs and their treatment depends on the nuances of each agreement. Therefore, the legal examination of the underlying documentation also assumes much importance.
[The authors are Executive Partner and Associate Partner, respectively, in Indirect Tax Advisory practice of Lakshmikumaran & Sridharan Attorneys, New Delhi]
[1] Prahitha Constructions v. Union of India, Writ Petition No. 5493 of 2020
[2] Syndicate Bank v. Estate Officer and Manager, MANU/SC/3661/2007
[3] DLF Ltd. v. Commissioner of Service Tax, Gurugram, MANU/CJ/0033/2019
[4] Entry 5 of Schedule III of the Central Goods and Service Tax Act, 2017
[5] Notification No. 4 of 2018-Central Tax (Rate) dated 30.09.2019
