The land developer's role is limited to aiding and assisting the landowners in the sale of plots.
The Karnataka bench of the Authority on Advance Rulings (AAR) has said that the activities envisaged under the joint development agreement (JDA) between a property developer and a land owner wherein the former is involved in converting a barren land into something that is marketable and habitable amounts to a supply of service to the latter and is therefore liable to be taxed under GST at the rate of 18 percent.
The AAR ruled that the core competence of the applicant in this case - Maarq Spaces Pvt Ltd, engaged in the business of property development, lies in the field of converting a raw piece of land into a well-developed residential layout by engaging in activities such as survey of the land, preparing a detailed map of the proposed layout, clearing/leveling the site, carrying out the construction of roads, laying of sewage/water pipelines, designing and creating common amenities, the order said.
These activities change the nature of the barren land and give it a character of a marketable land. Thus, the activities undertaken by the land developer amount to a supply of service to the landowners and is liable to be taxed appropriately under the provisions of the CGST/KSGST Acts, the order said.
The land developer will receive 25 percent of the amount collected from the person who buys the plot. This amount constitutes its consideration for their services rendered to the landowners, it said.
The applicant has no right in the title of the land and therefore the applicant cannot be considered as the sellers of the plots. Their role is limited to aiding and assisting the landowners in the sale of the plots. They are only service providers in the whole process, be it development of the raw land into residential plots or their sale after the development. Therefore the entire amount received by them is liable to be taxed, the order noted.
Also, since the entire cost of development is borne by the applicant, it clearly indicates that the company is engaged in activity of providing a certain service to landowners and that landowners will compensate the applicant for the same.
"The activities to be undertaken by the applicant are in the nature of development of land into residential layout. The agreement provides that the applicant can enter into sale agreements. However this activity is incidental to the main activity of development of land. The sale is entrusted to the applicant as the applicant has invested huge sums in the development of the land and it is a measure to protect his financial exposure in the matter. Here it becomes evident that the core competence and the activity actually carried out by the applicant is that of development of land and not the sale of land," the order said.
It gave this direction while rejecting the applicant Maarq Spaces Pvt Ltd plea that it is primarily engaged in sale of land, which is not liable to be taxed under GST.
The applicant had said that as per the agreement he signed with the landowner, a consideration was agreed on revenue sharing basis in the ratio of 75% for landowner and agreement holder and 25 percent for applicant. The cost of the development was to be borne by the applicant. After the JDA, the applicant entered into an agreement with customers for sale of developed plots for consideration.
Maarq Spaces sought an advance ruling on whether the activity of development and sale of land attract tax under GST and if the answer is in the affirmative, for the purpose of taxable value, whether provision of rule 31 can be made applicable in ascertaining the value of land and supply of service.
It had argued that the development activity is bundled with sale of land and is integrally connected with sale of land, therefore the sale of developed plot is nothing but sale of land and does not attract tax under GST.
“In view of this order where merely land development activities are undertaken under a JDA, the same are likely to be taxed by GST authorities. However, where development of land is naturally bundled with sale of land and sale is the principal supply in the bundled transaction, the transaction may be construed as composite supply not liable to GST.” said Harpreet Singh, Partner, KPMG
"Thus, one would need to see the exact scope of services/ supply under each JDA to determine the taxability. Where applicable, GST at 18 percent would be an additional cost in the transaction," added Singh.
Under a JDA, the land belongs to the owner with the developer doing the construction. Once the developer has performed his obligation and completed the project, the two parties share revenues or the areas in a pre-requisite ratio.To illustrate, if under the revenue-share model the ratio is 25:75 and apartments in a project are sold for Rs 100 crore, out of the total revenue realised, 25 percent will go into an escrow account as part of the landlord’s share. Under the area-share agreement in the same ratio, 25 percent of the apartments may form part of the landlord's share and the rest will go to the builder.LIVE NOW... Video series on How to Double Your Monthly Income... where Rahul Shah, Ex-Swiss Investment Banker and one of India's leading experts on wealth building, reveals his secret strategies for the first time ever. Register here to watch it for FREE.