Taxation of development agreement in parity with stamp duty valuations

CA Nitesh Mukadam | Last updated: 21 June 2021

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The taxation of development agreements has become complex due to stamp duty valuations now being based on the maximum potential Floor Space Index (FSI). Previously, valuations considered the higher of the developer's consideration or basic FSI. Now, the notional value of the maximum potential FSI, which may need to be purchased later, is used. This impacts tax liabilities under the Income Tax Act (Sections 50C and 43CA) and GST, often leading to higher tax payments for both landowners and developers.

Taxation of a development agreement is the most complex issue in recent times because nowadays stamp duty valuations of the development agreements are based on maximum potential FSI. The structure of the development agreement and consideration involves two flows of consideration.

One flow is from developer to landowner in form of consideration in kind with the monetary consideration if any and the second flow is from landowner to developer in the form of FSI

Earlier the stamp duty valuation was done in following manner:

Value of consideration given by developer to landowner in kind with monetary terms if any including valuation of supporting services like alternate accommodation etc. OR
Valuation of basic FSI transferred by landowner to the developer

Development Agreement Tax: Stamp Duty Valuation Impact

whichever is higher

Whereas now stamp duty valuation is done for the maximum available potential FSI transferred by a landowner to a developer. Such value is much higher than the said earlier value. This value includes the notional value of the FSI which is actually not available with the landowner at the time of development agreement but potentially it might be available to the developer in future and that too developer have to purchase the same from local sanctioning authorities or from the market at his cost.

At the time of development agreement, FSI available with the landowner is only the basic FSI and the developer can consume maximum potential FSI at later stage after loading the FSI's/TDR purchased by him from local sanctioning authorities or from the market. It means at the time of development agreement, there is no availability of maximum potential FSI but on which stamp duty valuation is done which is a notional valuation.

As per section 50C of the income tax act, "Special provision for full value of consideration in certain cases.

(1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the "stamp valuation authority") for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer". means stamp duty value should be considered as sale consideration in hands of landowner. same logic is applicable in case of 43CA as follows:

Section 43CA. Special provision for full value of consideration for transfer of assets other than capital assets in certain cases.

(1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer.

Further as per the GST act, valuation of development rights is also considered the stamp duty value for paying off the liability of GST on the development rights under reverse charge in the hands of the developer.

In effect, it is clear that we have to pay off the tax liabilities under Income Tax Act and GST Act on the notional value as per the above said stamp duty calculations.

Considering the above scenario, it looks like in most of the cases landowners and developers are end up with paying relatively higher taxation.

The author can also be reached at canitesh.mukadam@gmail.com

Disclaimer: This article is for the purpose of information and shall not be treated as solicitation in any manner or for any purposes whatsoever. For the benefits of reader a short glimpse of provisions is presented in own language as per my capabilities. It shall not be used for any legal advice or opinion. Readers are advised to kindly go through to the original government publications and published laws and judicial pronouncements. It will be highly appreciable to highlight errors or providing suggestions for effective improvements.

FAQ :

Previously, stamp duty valuation was based on the higher of the developer's consideration or the basic FSI. Now, it's based on the maximum potential FSI transferable, even if not immediately available.

The maximum potential FSI includes notional value that might be available to the developer in the future, often requiring them to purchase it separately.

Sections 50C and 43CA of the Income Tax Act are relevant, as they deem the stamp duty value as the full consideration for capital assets and other assets, respectively.

Under the GST Act, the stamp duty value is used for calculating the GST liability on development rights when paid under the reverse charge mechanism by the developer.

These changes often result in landowners and developers facing higher taxation liabilities due to the notional valuation of potential FSI.

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