TAXABILITY ON DEVELOPMENT RIGHTS UNDER GST
One of the several issues that has been consider and studies in
the Industry is taxability on transfer of development rights
(hereinafter referred to as “TDR”). In this technical paper, As we all
are aware that Real Estate Industries are prune to a lot of tax
disputes and complexities of transactions. Thus, let us discuss in
detail.
Introduction to Real Estate Practice – Development Rights
The Real estate sector of the country is growing at an exponential
way and housing is the one of the crucial necessity of every citizen of
the country. With the development in the real estate sector the most
adopted model remains to be developer – land owner – customer
model. There are majorly two reasons for adopting this model:-
- The developer company itself sometimes would be capable to
acquire the complete land but cannot do so due to land ceiling
provisions applicable to the state. In such scenarios different group
companies buy the land and pool their development rights to a
single developer company.
- In other case, on the merit that investment reduces drastically for
both the developer and land owner and it is mutually beneficial
situation.
The Model:
The model of operation in such a scenario is as under:-
- a) The land owner shall acquire land on which the development is to
be undertaken. The Developer enters into an agreement with land
owner.
- b) Pursuant to this agreement, land owner transfers his
‘Development Rights’ to the developer.
- c) These development rights are generally transferred to the
developer permanently, exclusively and on irrevocable basis.
- d) The consideration charged by land owner for such transfer of
development rights may be in pure monetary terms or may be as a
revenue share arising out of the sale proceeds of the project by the
developer.
- e) The development rights of the land entitle the developer to enter
the land, develop the land, obtain license for land conversion /
development, sell the units of the projects and enter into flat buyer’s
agreement with the buyers.
What are Development Rights?
Development right is fundamentally a right to develop the land for
agricultural, residential or commercial use. Several rights one may
identify with land are development rights, possession right,
cultivation right etc.
By transferring the development rights it shall not result into
transfer of ownership of the land but only the aspectual right to
develop the land.
How was the Taxability prior to 1st July, 2014 {Prior to
Negative List Regime}?
Prior to negative list regime a service was liable to service tax only if
it was covered in the specified set of services on which service tax
was applicable. Out of several services related to real estate industry
including commercial construction, real estate agent or preferential
location services the said activity of transfer of development rights
find nearest taxability contentions in ‘Renting of Immovable
Property”. Whether it was taxable under this category or not follows
in this discussion.
As per section 65(105)(zzzz),
‘Any services provided or to be provided to any person, by any other
person, by renting of immovable property or any other service in
relation to such renting, for use in the course of or, for furtherance
of, business or commerce’
Where “Immovable property” includes—
(i) building and part of a building, and the land appurtenant thereto;
(ii) land incidental to the use of such building or part of a building;
(iii) the common or shared areas and facilities relating thereto; and
(iv) in case of a building located in a complex or an industrial estate,
all common areas and facilities relating thereto, within such
complex or estate, but does not include-
. vacant land solely used for agriculture, aquaculture, farming,
forestry, animal husbandry, mining purposes
. vacant land, whether or not having facilities clearly incidental
to the use of such vacant land;
. land used for educational, sports, circus, entertainment and
parking purposes; and
. building used solely for residential purposes and buildings
used for the purposes of accommodation, including hotels,
hostels, boarding houses, holiday accommodation, tents,
camping facilities if any,
. vacant land, given on lease or license for construction of
building or temporary structure at a later stage to be used for
furtherance of business or commerce;
Now, to understand the taxability of the transfer of development
rights it is imperative for us to discuss that whether irrevocable
transfer of development right would lead to lease or license of
vacant land.
Lease and License:
Section 105 of Transfer of Property Act, 1882 defines lease as:
“A lease of immovable property is a transfer of a right to enjoy such
property, made for a certain time, express or implied, or in
perpetuity, in consideration of a price paid or promised, or of
money, a share of crops, service or any other thing of value, to be
rendered periodically or on specified occasions to the transferor by
the transferee, who accepts the transfer on such terms” Essentially
the periodicity, perpetuity and right to enjoy such property for
certain time are the main elements of a lease.
In case of ‘Jaswantsinh Mathurasinh & anor v. Ahmedabad Municipal
Corpn & ors (1992) 1 SCC 5’ it was held by that “A lease creates a
right or an interest in the enjoyment of demised property and a
tenant or sub-tenant is entitled to remain in possession thereof until
the lease is duly terminated, and eviction takes place in accordance
with law.”
A license is defined in Section 52 of Indian Easements Act 1882 as:
‘A right to do or continue to do, in or upon the immovable property
of the grantor, something which would in the absence of such right
be unlawful, such right does not amount to an easement or an
interest in the property. {Muskett v. Hill (1839) 5 Bing (HC) 694 }
In Associated Hotels of India v. R N Kapoor {AIR 1959 SC 1262}, it
was held that
“The following propositions may, therefore, be taken as well-
established:
(1) To ascertain whether a document creates a licence or lease, the
substance of the document must be preferred to the form ;
(2) the real test is the intention of the parties-whether they intended
to create a lease or a licence;
(3) if the document creates an interest in the property, it is a lease
but, if it only permits another to make use of the property, of which
the legal possession continues with the owner, it is a licence; and
(4) if under the document a party gets exclusive possession of the
property, prima facie, he is considered to be a tenant; but
circumstances may be established which negative the intention to
create a lease.”
On an understanding of the law laid down by various Courts, of the
term ‘immovable property, it can be safely stated that TDR’s are the
benefits arising out of the land and the same is an immovable
property.
By Jointly reading above, It can be carved a view that Transfer of
TDR on Permanent basis is transfer of “Title” in “Immovable
Property” and shall be outside the Ambit of Service Tax in Negative
List.
Taxability of Development Rights under GST Regime:
As per Section 9 of the CGST Act, 2017 (CGST Act), Central GST shall
be levied on all intra-state supply of goods or services or both. The
aspect that needs discussion is the specific changes GST Law that
has brought in terms of taxability of Such Land Related
Transactions.
Hence, it would be interesting to note that Schedule III to the CGST
Act contains a negative list, enlisting activities which shall neither be
treated as supply of goods nor supply of services.
. Paragraph 5 of Schedule III covers ‘sale of land and, subject to
clause (b) of paragraph 5 of Schedule II, sale of building’.
. Paragraph 6 covers actionable claims, other than lottery,
betting and gambling.
At this point, it shall be important to understand whether the grant
of development right and subsequent transfer of interest in land by
land owner amounts to sale of land or not? It may be noted that the
expressions ‘land’ or ‘sale of land’ has not been defined under the
GST Law
Let us first analyze the word ‘sale’ as per Section 54 of Transfer of
Property Act, 1882:
‘’sale’ is a transfer of ownership in exchange for a price paid or
promised or part- paid and part-promised. Hon’ble Bombay High
Court in the case of Provident investment Co. Ltd v/s Commissioner
of income tax – AIR 1954 Bom 95 observed that a sale or transfer
presupposes the existence of the property which is sold or
transferred. It presupposes the transfer from one person to another
of the right in the property.
The apex Court in the case of Sunil Siddhartha Bhai v. CIT – AIR
1986 SC 368 observed that in its general sense, the
expression ‘transfer of property’ connotes passing of the entire
bundle of rights from the transferor to the transferee. In another
case, the transfer may consist of one of the estates only, out of all
may be a reduction of the exclusive interest in the totality of rights
of the original property is a larger interest than a share in that
property. To the extent to which exclusive interest is reduced to a
shared interest it would seem that there is transfer of interest
Syndicate Bank vs Estate Officer – AIR 2007 SC 3169, the Supreme
Court held that a jurisprudential title to a property may not be title
of an owner. A title which is subordinate to an owner and which
need not be created by reason of a registered deed of conveyance
may at times create title. The title which is created in a person may
be a limited one, although conferment of full title may be governed
upon fulfilment of certain conditions. Whether all such conditions
have been fulfilled or not would essentially be a question of fact in
each case
On an understanding of the above judgements, we can infer that the
word ‘sale’ denotes transfer of title which is irrevocable and
permanent. Hence ‘sale of land’ denotes ‘transfer of title in land.
HENCE SALE OF LAND (GST REGIME) STATUS QUO TRANSFER OF
TITLE (NEGATIVE LIST)
Since, GST is a new law and its interpretations are still developing.
Thus, Untill settled principles emerge by way of judicial precedents
and more clarity is arrived at on the above discussed issues one may
decide to:
- Either take a conservative approach by paying GST on
Developmental Right’s; or
- Pay GST under protest and make an application seeking refund
(subject to the principle of unjust enrichment); or
- Seek an Advance Ruling in all States, and if such a ruling goes in
favour of revenue, then move the Appellate Authorities / Courts for
redressal of such grievance.
It appears that this vexed issue will settle only with the intervention
of Courts or the Government.
