Joint Development Agreements (JDAs) are arrangements where two or more parties collaborate to develop a property. However, the tax implications of these agreements can be intricate, and it's crucial to understand how GST (Goods and Services Tax) applies to them. In this article, we will explore crucial aspects of GST related to JDAs, including tax liability, input tax credits, and their implications for the involved parties. Stay informed and make informed decisions by reading this article's insights.

What is JDA?

A Joint Development Agreement (JDA) is a contract between a landowner and a real estate developer to work together on a project on the landowner's property. The developer is responsible for constructing the building and the necessary infrastructure, while the landowner provides the land. JDAs can be categorized into two main types:

  • Area Sharing Joint Development Agreement (JDA)
  • Revenue Sharing Joint Development Agreement (JDA)

Taxation of JDA under GST

GST on a Joint Development Agreement (JDA) is charged at 18% of the value of the contract. A JDA is a contract between a real estate developer and the landowner to build projects on the latter’s land. As per the contract, the landowner provides the land, and the developer manages the construction side of the project.

Scope of Taxation of JDA under GST

After the completion of a property's construction, the developer will sign an allotment letter or conveyance deed to transfer the building's ownership to the landowner. If there is a joint development agreement in place, the landowner will be required to pay 18% Goods and Services Tax (GST) on the agreement. Three types of transactions can occur in every JDA, and accordingly, the GST is applied to those transactions:

  • When a landowner transfers development rights to a developer, either wholly or partly in the form of construction services.
  • When a developer transfers construction services to a landowner, either wholly or partly in the form of a transfer of development rights.
  • The sale of the developed land by the developer or landowner.

GST for Transfer of Development Rights by Landowner Residential Projects

Before March 2019: If the parties sign the Joint Development Agreement (JDA) before March 31, 2019, the landowner is required to pay a Goods and Services Tax (GST) of 18%. The value on which GST is charged is determined by Rule 27 of the Central Goods and Services Tax (CGST) Rules and Section 15 of the CGST Act of 2017. The concerned party is responsible for paying the tax on the date of transfer of possession of the constructed building.

If the landowner owns a property worth Rs. 1,00,000, they have to pay Rs. 18,000 (18% of the property value) when transferring its possession. If the JDA was made on or after April 1, 2019, the GST should be paid by the developer under the reverse charge mechanism. For non-affordable housing, a GST of 5% is applicable, while for affordable housing, a GST of 1% is applicable. It's worth noting that the reverse charge mechanism is used for discharging GST in this scenario.

The applicable rate of GST has to be paid by the developer on a reverse charge basis. The value on which the GST is charged is determined by the value of the development rights of residential apartments. This applies only to the apartments that remain unbooked until the date when the completion certificate was issued or the first apartment was occupied, whichever is earlier.

Commercial Projects

The transfer of development rights attracts an 18% GST, which the landowner is obligated to pay. The applicable amount on which the GST is levied is determined by CGST Rule 27 and Section 15 of the CGST Act. This GST payment is mandatory and applies to transactions that occurred either before or after March 2019.

For example, if the value of a commercial building is Rs. 10,00,000, then the landowner will have to pay 18% GST, or Rs. 1,80,000. The GST remains the same, whether the deal was signed before or after March 2019.

Transfer of Construction Services by Developer to the landowner Residential Projects

Before March 2019: the developer is required to pay a Goods and Services Tax (GST) of 12% on this particular transaction. The value on which the GST is levied is determined as per Section 15 of the Central GST Act and Rule 27 of the Central GST Rules. It is important to note that the GST rate is 12% if the developer pays under the old scheme. If they choose to pay under the new scheme, they must pay 1.5% GST for affordable housing or 7.5% for non-affordable housing.

If we consider the old scheme, a building worth Rs. 1,00,000 would have required the developer to pay 12% GST, which would amount to Rs. 12,000 in total.

From March 2019 onwards, developers are responsible for paying either 1.5% GST for affordable properties or 7.5% for non-affordable properties, based on the value of services provided, as determined by the amount charged from the independent buyer. The obligation to pay this tax arises either on the first occupation of the project or on the date of completion, whichever occurs first. If we assume that the value of the property is Rs. 50,00,000 and it is not classified as affordable, then the developer will be required to pay a GST of Rs. 3,75,000, which is equivalent to 7.5% of the property's value.

Commercial Projects

If a developer provides construction services to a landowner, they are required to pay 12% GST, regardless of whether the services were rendered before or after 2019. The value of the supply is determined by Section 15 of the CGST Act, in conjunction with CGST Rule 27. The payment must be made on the date of possession transfer, which is achieved by entering into a conveyance deed.

Starting from March 2019, the developer will be liable to pay 12% GST on their services. The value of the service will be determined based on the amount charged to independent buyers closest to JDA. The payment liability will be applicable on the date of first occupation or completion of the project, whichever comes earlier.

For instance, let's consider a commercial property worth Rs. 1,00,00,000. Before 2019, a developer buying this property would have to pay Rs. 12,00,000 in GST. However, if the developer sold this property to independent buyers for the same amount after March 2019, they would still have to pay Rs. 12,00,000 in GST. The amount of GST charged would vary according to the value of the service.

Normal Sale of Developed Area by the Landowner to Developer

Before March 2019: The value of a transaction is determined by Section 15 of the CGST 2017. The payment of GST is due either on the date of invoice or on the payment date, whichever comes first. The GST rate applicable is 12% of the value of the supply. After March 2019: The value of the transaction is determined by the CGST Section 15. For affordable properties, the GST is 1.5%, while for non-affordable properties, it is 7.5%. In case the transaction value is not covered under either of these categories, the GST is set at 12% of the transaction value. The payment is due on the invoice date or the payment date, whichever comes first.

Suppose the value of a property is Rs.10,000. Before March 2019, the landowner would have paid Rs.1,200 as GST. However, after March 2019, since the property is considered affordable, they would only have to pay 1.5% or Rs.150 as GST.

Conclusion

Understanding the taxation of Joint Development Agreements (JDAs) under GST in India is crucial for both landowners and real estate developers. It involves various transactions and rules and determines their respective GST obligations. As it is a multifaceted topic, having a clear understanding of the tax implications of JDAs is of utmost importance.

The GST rules provide clear guidance, regardless of whether the JDA involves residential or commercial projects, the specific transaction within the JDA, or the timing of the agreement's execution.

These rules help ensure that the tax treatment aligns with the changing landscape of real estate development in India, providing transparency and consistency in the tax regime. As the real estate sector continues to grow, it is increasingly important for all parties involved to understand GST in JDAs.