The arrangement of Development Agreement [‘DA’] or Joint Development Agreement [‘JDA’] has emerged as a popular arrangement wherein property owner and developer enter in to a joint development agreement to develop the property. Generally, under this type of arrangement, in lieu of land owner surrendering his land in favour of the developer may get monetary or non-monetary consideration in the form of either lump sum consideration or certain percentage of future sales proceeds of project to be developed or certain percentage of built-up area in the future project or mix of the above, depending upon the terms and conditions agreed upon between them. In case of handover of a percentage of built-up area as his allocated share, the landowner may keep for personal use or may even rent out or sell outright to the prospective buyers.
The tax provisions on Joint Development Agreement related transactions are really confusing and tax-ing. Let us try to understand the tax implications on this arrangement under the GST laws and the Income Tax Laws:
The landowner is liable to charge 18% of GST on the supply of development rights. [S.No. 16(iii) of Notification No. 11/2017-CT(R) dt. 28.06.2017]
However, GST is applicable @ 18% on supply of development rights to developer by land owner w.e.f. 01.04.2019 under RCM. I may be understood that transfer of development right is not taxable in the hands of landowner w.e.f.01.04.2019. [Notification No. 13/2017-CT (R) dt. 28.06.2017 as amended by Notification No. 05/2019-Central Tax (Rate)] Dated: 29th March 2019, addition of fresh entries 41A and 41B]
As per Para 3 of Entry No. 41 A, Maximum Amount of Exemption available for Service by way of transfer of development rights (herein refer TDR) 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 shall be:
(GST payable on TDR 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)
The amount of GST exemption available for construction of residential apartments in the project under this notification shall be calculated as provided in Sr Nos. 41A and 41B.
In cases where landowner further sells his share of constructed area or flats allotted by the builder and he receives any amount as advance from the prospective buyers during the construction stage then the landlord will be liable to pay GST on it. No GST is applicable if such sales are made after completion of construction.
In case of further sales of area/flats by the landowner, he will be liable to pay tax @ 1% or 5% depending on the nature of the residential apartments viz: affordable or non-affordable category. However, if the developer opted for the existing system of 8%/12% then the landowner has also to opt for the same. (Refer FAQs dated: 14.05.2019). Further, he is also entitled to claim ITC charged by the builder in both the situation (old rates and new rates) on the consideration value against the transfer of development right in land.
The landowner will be liable to pay GST on receipt of advance /booking amount from the customers against sales as per provisions of section 13.
The promoter shall be liable to pay tax at the applicable rate, on reverse charge basis, on such proportion of value of development rights as is attributable to the residential apartments, which remain un-booked on the date of issuance of completion certificate, or first occupation of the project, as the case may be.
[Exempted GST payable on TDR or FSI (including additional FSI) or both for construction of the residential apartments in the project as calculated in above manner] x (carpet area of the residential apartments in the project which remain un- booked on the date of issuance of completion certificate or first occupation / Total Carpet Area of the Residential Apartments in the project)
Provided further that said tax payable under reverse charge shall not exceed 1% of the value in case of affordable residential apartments and 5% of the value in case of residential apartments other than affordable residential apartments remaining un-booked on the date of issuance of completion certificate or first occupation
Prior to 01.04.2017, the capital gain was chargeable to tax under the provisions of section 45 of the Income Tax Act, 1961 in the year in which the transfer takes place except in certain cases. The definition of ‘transfer’ u/s 2(47) (v), inter Alia, includes any arrangement or transaction whereby any rights are handed over in execution of part performance of a contract of nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) even though the legal right has not been transferred. In such a case, execution of Joint Development Agreement between the owner of immovable property and the developer triggered the capital gain tax liability in the hands of the owner in the year in which the agreement is entered into and the possession of the immovable property is handed over to the developer for development of a project.
The taxing authorities consider this as the point of time u/s 45(1) at which the landlord was supposed to pay the Capital Gain tax as against the fact that the landlord, in real, never received any consideration at that point of time. Contrary to that, the actual receipts or consideration starts accruing only after the property starts developing or developed. The taxable event was never triggered merely on the signing of the agreement. It caused genuine hardship to the landowners to pay capital gain tax from his pocket in absence of realization of actual consideration. Not only this, the authorities determined the fair market value of the project including land as deemed consideration u/s 50D for such transfer when the project is just on papers at the time of signing of JDA, with no real existence. The above provision of law as existed till 31.03.2017 was ambiguous and caused several litigations.
To put these controversies at rest, Finance Act 2017 introduced section 45(5A) with following legislative intent-
Under the existing provisions of section 45, capital gain is chargeable to tax in the year in which transfer takes place except in certain cases. The definition of ‘transfer’, inter alia, includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred. In such a scenario, execution of Joint Development Agreement between the owner of immovable property and the developer triggers the capital gains tax liability in the hands of the owner in the year in which the possession of immovable property is handed over to the developer for development of a project.
With a view to minimize the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.
It is further proposed to provide that the stamp duty value of his share, being land or building or both, in the project on the date of issuing of said certificate of completion as increased by any monetary consideration received, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset. It is also proposed to provide that benefit of this proposed regime shall not apply to an assessee who transfers his share in the project to any other person on or before the date of issue of said certificate of completion.
It is also proposed to provide that in such a situation, the capital gains as determined under general provisions of the Act shall be deemed to be the income of the previous year in which such transfer took place and shall be computed as per provisions of the Act without taking into account this proposed provisions.
However, significantly, the key points of the newly inserted sub-section 5A is applicable only to the Individual and HUF assessments. Corporate and Firm landowners have still been left out to deal with the endless litigation, woes and misery of the earlier tax regime.
Another interesting discussion is regarding the event of conversion of land into stock in trade by the landowner, prior to execution of JDA. Under the applicable laws, it seems that the incidence of tax under long term capital gain and business portion of such transaction, shifts to the year of completion or sale, whichever is earlier. The provisions of section 2(47) are applicable only in case of capital asset. As per section 2(14), capital asset does not include stock-in-trade. Therefore, once the capital asset is converted into stock-in-trade, the provisions of section 2(47) become irrelevant and do not apply. This view is supported by various judicial pronouncements.
Though the liability of landowners in terms of the newly inserted sub-section is postponed till the completion of the project still one has to be very careful in drafting the JDA. A small slip may give an impression to the AO that there is a ‘transfer’ on the date of the agreement itself as per section 2(47) read with section 53A of the Transfer of Property Act, 1882. The various clauses of the agreement should be drafted as per the spirit of the law so that one may not unnecessarily interpret it to be ‘transfer’ within the four walls of section 2(47).
Beware of GAAR:
GAAR is in itself a subject matter of complete commentary. However, it would be unfair if I fail to caution the readers, at least in summary manner, about its possible application to the arrangements in the form of development agreements.
General Anti Avoidance Rules [GAAR] inserted in Income Tax Act- Chapter X-A vide sections 95 to S. 102 read with Rule 10U, 10UA, 10UB and 10UC of Income Tax rules are the provisions empowering the I.T. Authorities to curb efforts of tax payers to avoid payment of tax by adopting tax planning methods which are mainly aimed at obtaining tax benefits without commercial substance.
As a general rule, tax evasion is illegal but tax avoidance is legal and one is entitled to arrange his affairs in such a manner that his tax liability is minimum. The GAAR is there to unsettle this settled judicial principle.
Provision of TDS introduced w.e.f.1-4-2017 for JDA:
A new section 194IC has been inserted whereby deduction of tax at source (TDS) @ 10% is made applicable by the developer on any sum by way of consideration paid/payable (not being consideration in kind) to the resident individual/HUF landowner under the agreement referred to in Section 45(5A). Further no threshold limit is provided meaning thereby it is applicable irrespective of quantum of payment.