GST on Plotted developemnt of land

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CA Chandrahasa Kannadka
09 Jun 2020
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1. Introduction: Urbanisation paved the way towards real estate development

around urban areas, may it be frontline metropolis or tier I Tier II semi urban areas.
Real estate development may be for residential purpose, industrial activities or
commercial purposes. The vertical development by way of high rise buildings is one kind
of development. Equally eye catching is in the arena of plotted development of land. The
country and town planning related enactments aims at orderly way for development of
plots as well. This article is to examine and critically evaluate the GST liability at various
stages of plotted development vis-a-vis various forms of activities around such
development of plotted land. The popular models are:

a. Development by Owner with his own funds and efforts including engagement of
contractors.

b. Development by Owner with advance money collected from prospective buyers.

c. Development thru third party i.e. Developer on area sharing model.

d. Development thru third party i.e. Developer on revenue sharing model.

2. Works contract: Development of plotted land involves deployment of goods and

services. Providing basic amenities like black top roads, culverts, drains, sewerage,
waterlines, electricity etc., need goods like cement, sand, steel to name a few. The services

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like landscaping, architecture, legal consultancy, plan sanction are also essentials for
carrying out the work. This is in the nature of works contract. Section 2(119) defines as
follows:

(119) “works contract” means a contract for building, construction, fabrication,

completion, erection, installation, fitting out, improvement, modification, repair,
maintenance, renovation, alteration or commissioning of any immovable property
wherein transfer of property in goods (whether as goods or in some other form) is
involved in the execution of such contract;

3. Role of contractors: If plotted development work is carried on under a contract, the

contractor is liable under GST. The transaction will fall under section 2(119) since it is
improvement of immovable property and goods like cement, steel, electrical poles, cables,
asphalting of road and similar work will be involved. The contractor is eligible to take
Input tax credit. The land owner will not be eligible to take input tax credit, because he
is in to sale of land as specified under entry 5 of schedule III.

4. Development work by land owner: In case the work is carried on by the owner of
land by sourcing materials and labour there is no involvement of contractor. Hence there
will not be a works contract. However, if the land owner entered in to agreement with the
prospective buyers and collects advance money before completion of necessary works,
whether there is works contract and GST liability is to be examined. At the outset it
appears that the owner is carrying out works contract in pursuance of agreement with the
buyers and on behalf of the buyers. The final documentation for registration will show the
sale of land only. There is no sale of building. Entry 5 under schedule III ( Sale of land
and, subject to clause (b) of paragraph 5 of Schedule II, sale of building)
specify these type of transaction is neither supply of goods nor supply of services.
Conveyance of developed plotted land sans building is outside the scope of levy under
GST. Unlike the vertical development like apartments and buildings, in plotted
development, the sale is land only with out building. There may be some indications of
construction like a cable duct or sewerage chamber inside the plot, but surely not a
building. Under registration law, this is only conveyance of land. There is no liability
under GST because of nature of conveyance as land.

5. Development thru third party i.e. Developer:In the model of involvement of

third party developer, as first step the land owner gives right of development to the
developer, in return of promise to develop the entire land and return agreed share of land
to land owner. Both the land owner and developer get agreed portion of land after
development work. The further sale to buyers may be done separately by owner and
developer. This model is area sharing agreement. The other model is revenue sharing
model wherein the developer agrees to sell entire developed land including owners
portion and both the parties share the revenue in agreed proportion.

6. Barter transaction: The transaction between land owner and developer amount to
barter. Barter means a “thing or commodity” given in ‘in return of’ another. In other
words, no value is fixed- viz., barter of wrist watch with a wall clock. Exchange (goods or
services) for other goods or services without using money is barter. Land owner

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relinquishes a portion of land in favour of developer who in turn provide development
services to land owner. There is time lag between two activities. Barter is within scope of
supply as per section 7 of CGST Act. Between land owner and developer there is inter se
transfer. The right to develop land is valuable right. The land owner generally executes
power of attorney in favour of developer giving him valuable right. This is one part of
transaction in the barter. The other part being developer in turn handing over developed
land to owner.

7. Relinquishment of part of land in favour of local authority: Another

important point for consideration is the portion of land area that is relinquished in favour
of public authority i.e. local area board or municipality. This is pre condition for land
development in to plotted area. Under land development regulations, area meant for
public parks, roads, utility services are marked in the plan sanctioned. These areas are
vested in to public authority. Does this work is within the scope of levy? There is no
consideration paid for the same by public authority. But under GST consideration may
flow from third party or from any person for that matter. Consideration need not be in
terms of money. The plan sanction itself may construed as consideration. The answer is
found in the nature of development and value enhancement on account of such orderly
development. Because of plan sanction by the authority the value of plotted land increases
in valuation. The indirect benefit flow is sufficient to address the absence of
consideration.

8. Relevant entries under schedules to CGST Act–

SCHEDULE II -[See section 7]- ACTIVITIES OR TRANSACTIONSTO BE TREATED AS

SUPPLY OF GOODS OR SUPPLY OF SERVICES:

2. Land and Building

(a) any lease, tenancy, easement, licence to occupy land is a supply of services (this
entry is restricted wherever building is involved not land alone, the conjuncture”
and” between land and building make it clear)

5. Supply of services:

The following shall be treated as supply of services, namely:—

(a) renting of immovable property:

(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—

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(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; 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

6. Composite supply:

The following composite supplies shall be treated as a supply of services, namely:—

(a) works contract as defined in clause (119) of section 2; and

SCHEDULE III -[See section 7]-ACTIVITIES OR TRANSACTIONS WHICH SHALL BE

TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

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

9. Sale of land is neither sale of goods nor supply of services under schedule
III.Clause (b) of paragraph 5 of Schedule III, squarely apply to the type of transactions
involved in plotted development of land. Hence we can safely conclude that there is no
liability on the end customer, i.e. buyer of plotted land. Whether there was agreement
prior to plotted development or otherwise the sale is only of sale of land. The activities like
road laying, drainage works, electricity supply facilities are incidental to development and
does not change character of sale of land. Even if termed as developed land there is no
transfer of building from land owner/developer to end customer. All the work done like
roads, drains, electricity supply facilities vest with public authority in terms of plan
sanction.

10. Transfer of development works in favour of local authority: The law

requires the owner to transfer the ownership on the developmental works such as roads,
drains, water supply mains, parks and open spaces, civic amenity areas, in favour of local
authority. Therefore the owner cannot have agreement for supply of service but can only
enter agreement for sale of land with customer.

11. Developer’s title to the land: Developers generally do not register land or their
share under registration Act as conveyance. However, TITLE to land does not necessarily
mean of holding registered document. The GPA executed by land owner coupled with
MOU for development give sufficient and irrefutable evidence of tittle in favour of

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developer. Developer enter in to the land, carry out development work and retain
possession of land in the course of development. These are sufficient indications of title to
the developer.

12. Revenue sharing agreement: Under this model it may be alleged that whatever
share the developer collects is equalling to the value of services of development he renders
and hence liable for tax under GST. The issue of increase in land value during the
development face is not addressed. As a consequence, the land value also indirectly build-
up in the service component. Cost plus 10% formula on the development costs may be a
fair valuation methodology to adopt to determine GST liability on development services.

13. Area sharing agreement: Under this model the agreement between land owner
and developer envisages sharing of developed land in agreed proportion after
development. Both the parties are free to sell their respective portion as they feel fit. In
this model the rights and responsibilities of the parties are defined in terms of the
development agreement. GPA is generally executed empowering developer to enter in to
land and carry out development. The barterelement is clearly visible in this model. The
valuation of development services may pose considerable constraints since the value of
land increases in the development phase and thereafter. It is difficult to capture such
increase and any formula that may fit the bill is again cost plus 10% methodology may be
suitable to the situation.

14. Authority on Advance Rulings (AAR)in Karnataka considered a situation of

revenue sharing agreement for plotted development (Advance Ruling No. KAR ADRG
119/2019 Dated:30thSeptember 2019). The Applicant is engaged in the business of
property development. The applicant submitted that he has entered into a Joint
Development Agreement on 08/11/2017 with Landowners for development of land into
residential layout along with specifications and amenities. The consideration was agreed
on revenue sharing basis in the ratio of 75% for Landowner and 25% for applicant
developer. Cost of the development shall be borne by applicant. Pursuant to JDA,
applicant had entered into an agreement with customers for sale of developed plots for
consideration. AAR held that the activities as envisaged in the agreement between the
applicant and the landowners amount to supply of service and is liable to be taxed under
GST. Rule 31 applies in the instant case and the value of the supply is equal to the total
amount received by the applicant, which is equal to 25% of the market value of each plot.
Applicant preferred appeal against the ruling. AAAR found no reason to interfere in the
order passed by AAR. The rulings under Value Added Tax regime in the case of
Continental builders and developers Bengaluru vs. State of Karnataka
(2009) 67 KLJ 259 (Tri)(FB) was cited to drive the point that development works
vested with the local authority and not transferred to buyers. This did not cut the ice with
the AAAR.

15. Valuation of development services: Rule 27 to 30, 31 read with Section 15-
The provisions of Rule 27 to 30 do not apply to the plotted development transaction,
therefore the value shall be determined as per Rule 31 of CGST Rules, applying the
reasonable means and consistent with the principles. The term “reasonable” means
having sound judgement, fair and sensible, as much as is appropriate or fair; moderate

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etc., As per Cambridge Dictionary “reasonable” mean based on or using good judgement
and therefore fair and practical. Dictionary meaning of “reasonable” is that which is
agreeable to reason not absurd, within the limits of reason. The expression “reasonable”
therefore means rational, according to the dictates of reason and not excessive of
immoderate. Applying the above principle to the facts of the case, the view is that, in order
to comply the provision of section 7 read with entry 5 of Schedule III, exclusion of land
value based on market value from total consideration or levy of tax only on the
development charges based on the market value or cost plus reasonable profit shall be the
reasonable means consistent with the principle.

Rule 27. Value of supply of goods or services where the consideration is not wholly in
money

Rule 28. Value of supply of goods or services or both between distinct or related persons,
other than through an agent

Rule 29. Value of supply of goods made or received through an agent

Rule 30. Value of supply of goods or services or both based on cost

Rule 31. Residual method for determination of value of supply of goods or services or
both .-Where the value of supply of goods or services or both cannot be determined
under rules 27 to 30, the same shall be determined using reasonable means consistent
with the principles and the general provisions of section 15 and the provisions of this
Chapter:

Provided that in the case of supply of services, the supplier may opt for this rule,
ignoring rule 30.

This valuation concept may be tested in the course of proceedings or questions that may
arise before higher judicial forum.

16. Land- whether exempted supply? –Under section 2 (47) “exempt supply”
means supply of any goods or services or both which attracts nil rate of tax or which may
be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods
and Services Tax Act, and includes non-taxable supply. Plotted development involves two
activities, development activity land and sale of plots. Sale of land is not supply in terms
of schedule III entry 5. Activity of sale of land cannot be considered as exempt supply for
the reason it is not at all supply hence the question of exemption under section 11 does not
apply.

17. Plotted development- is it composite supply- In terms of definition under

CGST, the analysis show that the activity of development of land and sale of sites does not
fit in to the definition of composite supply because land is not a supply under GST, much
less a taxable supply. Two or more taxable supplies to be involved to make it fit in to the
definition. Leading an argument that land is predominant supply in plotted development
and sale of plots is bound to fail on that count.

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Section 2(30) “composite supply” means a supply made by a taxable person to a
recipient consisting of two or more taxable supplies of goods or services or both, or any
combination thereof, which are naturally bundled and supplied in conjunction with each
other in the ordinary course of business, one of which is a principal supply.

The plotted land sold to customers is in the nature of composite supply, the main
component being land and the development services are only incidental to the same. Land
being not with in ambit of GST(neither goods nor services), the related services fall
outside the definition and stand isolated. The issue arises whether such services are
taxable. Land is not exempted under section 11 of CGST Act. By virtue of inclusion under
schedule III, it is outside GST. In such a situation the composite supply concept does not
save the development services from tax.The development services are taxable.

18. GST liability on land owner: The land owner is not liable under GST under any
circumstances. There is no construction of building is involved. Unless building
construction is involved entry no.5(b) under schedule II does not come in to picture in
the case of land owner. The construction may be out of own funds or may be out of
advance money received and used in development. Schedule III entry 5 mention Sale of
land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building- is neither
supply of goods nor services. Absence of building abundantly covers the transaction
falling under schedule III entry 5 as not supply under GST.

19. GST liability on developer: Developer is rendering services in terms of the

agreement. The consideration is in the form of portion of developed land. It is not in
terms of money. This is barter transaction. Irrespective of the fact that the materials used
are part of facilities to be vested with the local authority, in respect of the owner there is
rendering of services. The case law rendered under VAT Act in reference to Continental
builders and developers Bengaluru vs. State of Karnataka (2009) 67 KLJ
259 (Tri)(FB) may be tested under GST to be applied to claim exemption. Such claim
likely to fail since plan sanction is granted to the land owner and developer render
services to land owner. There is no privity of contract between developer and public
authority.

20. Rights arising out of land are immovable property:The term ‘immovable
property’ has not been defined under GST law. The General Clauses Act, 1987 defines
“immovable property” as to include land, benefits to arise out of land, and things attached
to the earth, or permanently fastened to anything attached to the earth. Section 2(6) of the
Registration Act, 1908 defines “immovable property” to include land, buildings,
hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise
out of land, and things attached to the earth or permanently fastened to anything which is
attached to the earth, but not standing timber, growing crops nor grass. In order to
further understand the meaning of the term ‘benefits to arise out of land’, the
observations and interpretations of the Hon’ble Supreme Court on the various judicial
rulings must be read as under:

a. Anand Behera v. State of Orissa (1955) 2 SCR 919.

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b. State of Orissa v. Titagarh Paper Mills Company Limited AIR 1985 SC 1293.

c. Shantabai V. State of Bombay AIR 1958 SC 532.

d. Bibi Sayeeda v. State of Bihar (1996) 9 SCC 516.

e. Further, Hon’ble Mumbai High Court in a case of Chhada Housing Development

Corporation v. Bibijan Shaikh Farid reported in 2007 (3) Mah. L.J.P. 402 lay down that
“the expression TDR, is transfer of development rights, which enables the FSI to be used
on any other plot of land generated from some other plot and can be used in terms of DC
Regulations in force. It is the benefit arising out of land and is immovable property.

On an understanding of the law laid down by various Courts, of the term ‘immovable
property, it can be safely stated that Development rights are the benefits arising out of the
land and the same is an immovable property. However, immovable properties are not
liable for GST, as supply of service under GST Law.

21. Title and ownership: The expression ‘title’ in the general proposition means that,
when equities are equal that he has the legal title will be preferred, includes in its broadest
sense all rights capable of being enjoyed and secured under the law(As per Aiyar’s Law
Dictionary) Hon’ble Guwahati High Court in the case of Nagen Hazarika vs Manorama
Sharma – AIR 2007 Gau 62 held that the expression ‘title’ is a broad expression in law
which cannot always be understood as akin to ownership. It conveys different forms of a
right to a property which can include right to possess such property. One holding a legal
title of lands is certainly included but rights amounting to less than the full legal title are
equally included with it. Title to land is the evidence of his right or the extent of his
interest. The apex Court in the case of Sunil Siddhartha Bhai v. CIT – AIR 1986 SC 368
observed that in its general sense, the expression ‘transfer of property’ connotes passing
of the entire bundle of rights from the transferor to the transferee. In Syndicate Bank vs
Estate Officer – AIR 2007 SC 3169, the Supreme Court held that a jurisprudential title to
a property may not be title of an owner. A title which is subordinate to an owner and
which need not be created by reason of a registered deed of conveyance may at times
create title. As per Section 3(a) of Land Acquisition Act, 1894, the expression ‘land’
includes benefits that arise out of land and things attached to earth or permanently
fastened to anything attached to the earth.

22. Conclusion:

a. Contractor is liable for tax under GST.

b. Developer is liable for tax under GST.

c. Land owner is not liable for GST.

d. Buyers of plotted land are not liable for GST.

Tags: goods and services tax, GST

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Author Bio

Name: CA Chandrahasa Kannadka

Qualification: CA in Practice

Company: BVC & Co. Bengaluru

Location: Bengaluru, Karnataka, IN

Member Since: 04 Feb 2019 | Total Posts: 6

Senior partner, over 33 years in CA practice View Full Profile

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