High GST Rate Throws Cold Water On Joint-Development Projects

Skyrocketing land rates and an increase in regulatory compliances make joint development projects an easy choice for both real estate developers and landowners — the number of such projects have significantly risen in the past decade, especially in mega cities of Delhi and Mumbai. In such a scenario, the landowner provides the land while the builder takes care of the money, the legal aspect and the construction work. By way of a joint development agreement (JDA), a builder is able to lower the cost of the project development while a landlord does not have to run from pillar to post to get approvals or break a sweat in carrying out the construction work. In the end, it emerges a win-win situation for both the parties.

However, developers are now wary of getting involved in such projects since the new Goods and Services Tax (GST) regime has significantly increased the cost. Under the new tax regime, JDAs are taxed at 18 per cent.

Note here that GST is applicable only on the purchase of under-construction properties through works contracts. While the standard rate has been reduced to 5 per cent from the effective rate of 12 per cent. For buyers of affordable homes, the rate has been further reduced to one per cent from 8 per cent. The new rates will be applicable from April 1, 2019. The decision was taken in the GST Council meet held on Feb 24. There will be no input tax credit benefit for developers on the new applicable rates. 

What has changed?

Under JDAs, real estate projects could be co-developed either by sharing area or by sharing revenue. In the former case, developers allow the landowner ownership of a certain part of the redeveloped project. In the latter case, the developer shares part of the revenue they generate from a redeveloped project.

While the revenue-sharing model remained outside the ambit of the erstwhile service tax regime, the area-sharing model attracted tax. Under GST also, only the area-sharing model attracts an 18 per cent standard levy ─ the government notified the same in January this year which did not sit comfortably with the developer community.

At the time of “supply”, each party involved in the traction ─ the landowner (when he transfers the development rights, which is considered a “service”), the developer (when he provides construction “service” to land owners) and the end-user (when he avails of the “services” at the time of purchase) ─ has to pay GST on joint development projects. The time of "supply" is the time when possession is transferred or the area is demarcated.

Following the January notification, real estate developers moved the Bombay High Court against the GST Council, the Centre and the Maharashtra government, saying the notification flouts the norms laid under the GST regime, which excludes the sale of land and building from its purview.