GST on Joint Development Agreement (JDA)

Abdulla Petiwala

A Joint Development Agreement (“JDA”) is an agreement between the landowner and a developer for construction of building (commercial, residential or both); wherein the landowner agrees to transfer the Transferable Development Rights (“TDR”) or Floor Space Index (“FSI”) and the developer agrees to consume the TDR/FSI and construct a building. The consideration for the said transfer could be in terms of cash, apartments or share in profit.

JDA are agreements wherein

• The landowner transfers the rights in the land to the developer with or without the transfer of land.
• The developer agrees to undertake construction activity on the said land and utilise the TDR/FSI.
• The developer has an irrevocable PoA to enter the property and utilise the TDR/FSI for the construction activity, obtain permissions etc.
• The owner, by permanent and irrevocable transfer of TDR/FSI, in effect gives permission to develop the land and also allows the developer to construct, sell and collect sales proceeds without any intervention from the landowner as per the JDA.
• The consideration to the landowner would be in terms of cash or constructed apartments or share in profit from the development project.

The JDA typically encompasses two distinct transactions; i.e. between:

1. Landowner and Developer – Transfer of TDR/FSI by landowner to developer for a consideration (cash or kind)
2. Developer and Landowner – Construction activity by developer to landowner for a consideration (apartments for sale)

GST on Transfer of FSI:

Transaction 1 – Transfer of TDR/FSI by landowner to developer for a consideration (cash or kind)

GST on FSI was first introduced in 2018 wherein the liability to pay GST was on the registered landowner, for the FSI transferred to the developer for which consideration was received in the form of apartments. The GST was payable at the time of entering into a “Conveyance” for transfer of such apartments. (Noti 4/2018 – CGST Rate)    

Effective 01-Apr-19 the liability to pay GST on purchase of FSI from landowner has been shifted to the developer under reverse charge mechanism. (Noti 5/2019 – CGST Rate)

The liability to pay GST on the TDR/FSI by the developer shall be at the time of obtaining of Occupation Certificate (OC), where the consideration is in the form of :

• construction service of commercial or residential apartments or
• monetary consideration paid for supply of FSI relatable to construction of residential apartments or
• any combination of (a) and (b). (Noti 6/2019 – CGST Rate)

The FSI used for the purpose of construction and sale of residential property on which GST is collected at the prescribed rate is not taxable. (Noti 4/2019 – CGST Rate)

Thus the FSI on the residential apartments constructed and booked upto the date of obtaining Occupation Certificate (OC) would not be liable to GST.

GST on Transfer of apartments as consideration for FSI:

Transaction 2 – Transfer of constructed property by developer to landowner as consideration for FSI (apartments for sale)

The developer is liable to collect GST on the flats sold/booked during the construction phase upto the date of obtaining the OC.

For the apartments constructed by the developer vide and agreement entered into with the registered landowner, the GST is to be paid by the developer, in order to enable the developer to avail the rates as prescribed under Noti 11/2017 as specified in items (i), (ia), (ib), (ic) and (id).

The value of the apartment shall be the total value charged for similar apartments as on the date of the transfer of TDR/FSI less the value of the land at 1/3^rd of such total value. (Note 2A to Noti 3/2019 – CGST Rate)

Thus, in effect the consideration for FSI paid in terms of apartments vide the agreement entered into with unregistered landowner would not be liable to GST.

To Sum Up

The liability of GST on developer and landowner on sale of FSI and on supply of construction service to each other as also to third parties would be:

GST on Developer:

• GST on the consideration for FSI paid to landowner.
• The GST payable on un-booked residential apartments not to exceed 5% for un-booked residential apartments on date of OC
• GST on transfer of apartments to registered landowner as consideration for FSI.
• GST on the sale of apartments before date of OC.

GST on registered landowner:

• GST on sale of apartments received as consideration for transfer of FSI
• The GST payable would be net of the ITC (the GST paid by the developer on such apartments)

Determination of the value of consideration:

1. The value of construction service for the purpose of consideration for transfer of FSI by a registered landowner is to be taken as the value of similar apartments transferred nearest to the date on which such FSI is transferred less the value of land. (para 2A to notification 11/2017).

• The value of un-booked apartments for determination of GST payable on FSI by developer shall be (i + ii):
• Consideration for transfer of FSI in terms of apartments shall be deemed to be the value of similar apartments nearest to the date of transfer of FSI. (para 1A to notification 12/2017)
• Value of un-booked apartments on the date of OC shall be deemed to be value of similar apartments nearest to the date of OC. (para 1B to notification 12/2017)

• The GST payable on the FSI attributable to residential apartments booked upto the date of OC are exempt from GST.

• The GST payable on the un-booked residential apartments is not to exceed 5% of the value of the un-booked residential apartments on date of OC.

Difference between TDR and FSI:

Whilst TDR and FSI have been used jointly and /or interchangeably under the GST Act the basic difference between the two is that FSI is the original development potential of a land the TDR is an external development potential, that can be permitted to be used on any plot of land. The town planning authority or the state government, from time to time frames or makes the rules governing the TDR and its utilisation.

FSI stands for Floor Space Index. In simple words, it is the area of construction permissible on particular plot of land. FSI is the proportion of construction of all floors to the total area of plot of land.

TDR is an abbreviation of Transferable Development Rights. TDR is also a kind of FSI.  The government at times acquires the required land belonging to private party to build or expand the public utilities like ground, garden, bus stand, roads, etc..; the compensation for such acquisition is paid in terms of money or TDR.

TDR is nothing but the development potential or FSI of the area of land TDR is given in form of DRC i.e. Development Rights Certificate. TDR or DRC is negotiable and can be transferred for consideration. The owner of acquired land can either use the TDR for himself or can sell it in an open market.