Taxability of Joint Development Agreement under GST

In the real estate industry, it is a common practice for landowner(s) and developer(s) to come together and jointly develop a property. It helps the developers to ease out funding requirement towards land acquisition as also share economic risk and rewards of the project with the landowner. The Joint Development Agreement (‘JDA’) are structured in different manners to suit the requirements of both the parties and the most common being area share arrangement, revenue share arrangement or combination of the two coupled with some upfront deposit.

Under the GST, the term ‘supply’ is defined in very wide terms which also includes barter/ exchange of goods or services; whereas the term ‘services’ is defined to be anything other than goods. Further, entry no. 5 of Schedule III of the CGST Act, 2017, excludes sale of land from the scope of supply. There was certain ambiguity regarding taxability of transfer of development rights under JDA, as to whether the same are liable to GST or not. However, the Notification no. 4/2018, clarifies that the transfer of development rights from the landowner to a developer is taxable. 

Recently, the Authority for Advance Ruling (‘AAR’), Karnataka, in the case of Maarq Spaces Pvt. Ltd. (order no. KAR ADRG/199/2019) has said that the activities envisaged under the JDA between a developer and land owner amounts to a supply of service to the latter and is therefore liable to be taxed under GST at 18%.

In this case, the taxpayer and landowner entered into a JDA for development of land into residential plot, along with amenities. The revenue sharing ratio between the taxpayer and landowner is 25% and 75%. The cost of development was borne by the taxpayer. The taxpayer also entered into an agreement with customers for sale of developed plots for consideration. The taxpayer sought an advance ruling on whether: 

• The activity of development and sale of land attract tax under GST? 
• If yes, whether the value of land and supply of services can be determined as per Rule 31 (i.e. residual method) of the CGST Rule?

The taxpayer contested 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.

The AAR observed that the core competence of the taxpayer lies in the field of conversion of raw piece of land into a well-developed residential layout and not in the sale of land. The activities undertaken include survey of the land, preparing a detailed map of the proposed layout, clearing/leveling the site, carrying out the construction of roads, designing and creating common amenities, etc. The activity of sale of plot is incidental to the main activity of development of land. Further, there were various provisions in the agreement which indicates that the taxpayer has no right over the land and consequently it is not engaged in sale of land as per entry no. 5 of Schedule III of the CGST Act. Hence, the activities amount to supply of services and is liable to GST. With respect to valuation, Rule 31 of the CGST Rule will be applicable and the value of supply will be 25% of the market value of each plot received by the taxpayer.

In a similar ruling in the case of Nforce Infrastructure Pvt. Ltd. [20 G.S.T.L. 184], the Authority has held that the taxpayer was supplying construction service to the supplier of development right against consideration in the form of transfer of development rights. 

It should be noted that an Advance Ruling is binding only on the taxpayer who had sought it and the concerned Revenue Authorities. However, the above-mentioned Advance Rulings provide clarity about the issues being faced and have persuasive value in matters before the Revenue Authorities

Based on the aforesaid rulings, it can be said that where merely land development activities are undertaken under a JDA, the same are likely to be taxed under GST. 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. Thus, it would be relevant for the taxpayers to agree upon exact scope of services under a JDA to determine its taxability.

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