Booking/selling plots during development of township amounts to 'sale of land'; but services of development of land taxable @18%

The Hon'ble AAR Haryana in M/s. Informage Reality Private Limited [Advance Ruling No. HAR/HAAR/R/2018-19/15 dated October 5, 2018] has held that booking/ selling of plots to be done by the Applicant and the Landowners during the development of the township will remain a transaction of sale/transfer of land and thus, will not attract GST as per co-joint reading of Section 7 and Paragraph 5 of Schedule lll of the Central Goods and Services Tax Act, 2017 ('CGST Act'). However, the transfer value of the plots will be considered as consideration paid by the Landowners for the services of development of land rendered by the Applicant and will be regarded as Works contract services, hence, attracting 18% GST.

Facts

M/s. Informage Reality Private Limited ('Applicant') and Mr. A, Mr. B and Mr. C ('Landowners') owns a land. There was a proposal to develop a residential plotted township on the land in which the Applicant was also the technical partner. The Landowners entered into acollaboration agreement with the Applicant for getting license and development of residential plotted township tofulfill the condition of getting license of residential plotted township.

The Landowners gave 20% of the licensed plotted area to the Applicant as consideration for obtaining license, laying roads, sewerage, storm water etc.

As per the prevailing provisions of the concerned authority, for granting the license to develop residential plotted township, approximately 55% of total area entitled should be developed as residential plotted area and approximately 3% of the total area should be developed as commercial area. The rest of the area would be covered under roads, parks and other facilities. Thus, the saleable area would be approximately 55% as residential plots and 3% as commercial plots.

As per the collaboration agreement, the following activities would be done by the Applicant:

1. Applying and obtaining for license to develop the residential plotted township of the proposed land, using its technical and financial capabilities for the same.
2. Development of the residential plotted township.
3. Development will include laying of roads, sewerage lines, storm water system, providing electricity poles etc.

Thus, the Applicant will receive 20% out of the residential plots and 20% out of the commercial plots from the Landowners in consideration of providing work contract services of development of township.

Issues

• Whether GST will be applicable on booking/selling of the plots to be done by the Applicant and the Landowners during the development of the township?
• Whether share of licensed plotted area agreed to be provided by the Landowners to the Applicant is exigible to GST?

Held

The Hon'ble AAR Haryana inAdvance Ruling No. HAR/HAAR/R/2018-19/ dated October 5, 2018 has held as under:

• Observed that, the nature of the proposed agreement as described by the Applicant is a Joint Development Agreement in which the Landowners and the Applicant entered into an agreement for development of the land to make it saleable.
• Further observed that, the Applicant will be responsible for obtaining license from the concerned authority, to lay the roads, sewerage, storm water etc. The Landowners will transfer 20% of their share of developed property as a consideration towards the works contract services provided by the Applicant to the Landowners on completion or during the development work.
• Noted that, there were two kinds of transactions involved:

1. Booking/selling of plots done by the Applicant and the Landowners during and after the development (before completion of the development work) of the township.
2. Transfer of 20% share of developed plots by each of the Landowners to the Applicant.

• Held that, the first transaction amounts to sale of land. From the conjoint reading of Section 7 and Paragraph 5 of Schedule lll of the CGST Act, any transaction in the nature of 'sale of land' is not covered with in the preview of GST, hence no GST is payable on the transaction resulting in the sale of land.
• Held that, the second transaction is a works contact service. The transfer value of the plots will be considered as consideration paid by the Landowners for the services rendered by the Applicant for development of their land and will be regarded as works contract services attracting 18% GST (9% CGST + 9% SGST).

Our Comments

It may be noted that conflicting views exits on taxability of sale of developed land since Service tax regime. Even in GST regime, the Gujarat AAR in Re: Shree Dipesh Anilkumar Naik [Advance Ruling No. GUJ/GAAR/R/2020/11 dated May 19, 2020] has held that Sale of developed plot is not equivalent to sale of land but is a different transaction. Sale of such plotted development tantamount to rendering of service. The activity of the sale of developed plots would be covered under the clause ‘construction of a complex intended for sale to a buyer'. Thus, the said activity is covered under ‘construction services' and GST is payable on the sale of developed plots in terms of CGST Act / Rules and relevant Notification issued time to time.

Relevant Provisions

Section 7(2) of CGST Act

'(2) Notwithstanding anything contained in sub-section (1),

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,

shall be treated neither as a supply of goods nor a supply of services.'

Paragraph 5(b) of Schedule II of CGST Act

'(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

Explanation.-For the purposes of this clause-

(1) the expression "competent authority" means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely:-

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972; (20 of 1972.) or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;

(2) the expression "construction" includes additions, alterations, replacements or remodelling of any existing civil structure;'

Paragraph 5 of Schedule III of CGST Act

'Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.'