Transfer of Development Rights

Prior to the introduction of the GST regime, service tax was not levied on transfer of development rights as the same was excluded from the definition of “service” being transfer of ‘title’ in ‘immovable property’, by way of sale, gift or in any other manner.

With the introduction of the GST regime, the new negative list contained in Schedule III of the Central Goods and Service Tax Act, 2017 (“CGST Act“) specifically listed only “sale of land…sale of building” as being excluded from being treated as supply of goods/services. This led to some debate on whether development rights could be treated as “sale of land/building” and would continue to be exempt from payment of GST. However by Notification No. 4/2018 – Central Tax (Rate) dated 25.01.2018, the Government sought to fix the time of liability to pay GST on supply of development rights against consideration of construction services and vice versa. Reading this notification with the omission of the words “transfer of title” from the negative list, it was generally construed that GST was indeed payable on transfer of development rights.

Pursuant to recommendations by the GST Council to exempt transfer of development rights from GST taxability in certain cases, the Central Government by Notification No. 4/2019 Central Tax (Rate) (“Central Notification“), has amended notification dated 28th June, 2017, bearing no.12/2017- Central Tax (Rate) which exempts certain services from the purview of GST. The Government of Maharashtra on 30th March, 2019 by Notification No. 4/2019 State Tax (Rate) (“Maharashtra Notification“), has also issued a similar amendment to notification dated 29th June, 2017, bearing no.12/2017 State Tax (Rate) .

Exemption on transfer of development rights:

GST is no longer payable on transfer of development rights/FSI/additional FSI provided, all of the following conditions are met:

1. Transfer takes place on or after 1st April 2019;
2. Development rights are transferred for construction of residential apartments by a promoter in a project (both terms as defined under RERA), intended for sale to a buyer, wholly or partly; and
3. Consideration or part thereof for the residential apartments has been received before issuance of completion certificate (“BCC“) or before its first occupation, whichever is earlier.

Since the exemption is available only on transfer of development rights and/or FSI for construction of residential apartments, the exemption for projects as a whole is to be calculated as follows:

Consequence of a residential project not being fully sold on completion

Condition c) (above) requires receipt of consideration or part thereof from the buyers of residential apartments prior to receipt of BCC or first occupation, whichever is earlier, to avail exemption on transfer of development rights since such residential apartments would be sold prior to OC, and GST would be chargeable on the amounts paid by the purchaser.

However, if some residential apartments remain unsold even after occupation, the exemption to such extent becomes unavailable. The promoter becomes liable to pay GST, (at 1% on affordable residential apartments and at 5% on other residential apartments) on reverse charge basis, on such proportion of value of development rights, or FSI (including additional FSI), or both, as is proportionate to the un-booked residential apartments, on the date of BCC or first occupation, whichever is earlier.

Long Term Leases

The Hon’ble Bombay High Court in a judgment dated 28th March, 2018 in Builders Association of Navi Mumbai v. Union of India¹ had held that GST is payable on one-time lease premium charged for letting out plots of land on lease basis even if the lease was on a long term basis.

This judgment again created uncertainty as the one time premium under long term leases is generally regarded as equivalent to consideration for sale of land instead of rental income.

The Central Notification and Maharashtra Notification have, in a move sure to be welcomed by the real estate industry, exempted payment of GST on the one time premium on long term leases subject to the following conditions:

1. Lease is granted on or after 1st April 2019;
2. Lease is granted for 30 years or more
3. Lease is given for construction of residential apartments by a promoter in a project (both terms as defined under RERA), intended for sale to a buyer, wholly or partly; and
4. Consideration or part thereof for the residential apartments has been received before issuance of completion certificate (“BCC“) or before its first occupation, whichever is earlier.

The calculation of the quantum of exemption on the whole project is identical to the computation of exemption on the project for development rights as set out above. The consequences of apartments in a residential project developed on such leasehold land, remaining unsold are also identical. The promoter becomes liable to pay GST, (at 1% on affordable residential apartments and at 5% on other residential apartments [without input tax credit]) on reverse charge basis, on such proportion of upfront amount paid for long term lease of land as is proportionate to the un-booked residential apartments, on the date of BCC or first occupation, whichever is earlier.

Commercial real estate however continues to attract GST as earlier and the relief extended to the residential development sector has not, as of now, been extended to development of commercial real estate.

Footnote:

1. Builders Association of Navi Mumbai and Ors. vs. Union of India and Ors. [AIR2018Bom138]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.