Payment of tax by registered person for construction against transfer of development right and vice versa: Real estate developers usually do not have ownership of land when developing a property. It enters into an agreement with the land owner for transfer of development rights on the land. Against such development rights, the landowner can either be given share in the revenue of the total flats that will be sold, or he may be given a certain number of the flats through an area sharing agreement. In an area sharing agreement, there were quite a few areas of concern. One of the biggest concerns was that the time of supply of services in this case was very difficult to determine. If the date of joint development agreement would have been the time of supply, then determining the valuation on such date would have been very difficult. Also, the blockage of working capital for payment of taxes even before the commencement of construction was another issue which was prevailing.
To settle such issues, the government issued Notification No. 4/2018- Central Tax (Rate) dated 25th January 2018 and Notification No. 4/2018-Integrated Tax (Rate) dated 25th January 2018 regarding time of supply in case of construction service against transfer of development right and vice versa. This notification was issued under Section 148 of the CGST Act, 2017. As per the said section, the Government has been given the power to notify certain classes of persons and the special procedures to be followed by such persons including those with regard to registration, the furnishing of return, payment of tax and administration of such persons. Interestingly, only the registered persons can be covered through notifications issued under such section. As per these notifications, the Central Government has notified the following classes of registered persons:
- a) registered persons who supply development rights to a developer, builder, construction company or any other registered person against consideration, wholly or partly, in the form of construction service of complex, building or civil structure; and
- b) registered persons who supply construction service of complex, building or civil structure to supplier of development rights against consideration, wholly or partly, in the form of transfer of development rights,
as the registered persons in whose case the liability to pay integrated tax on supply of the said services, on the consideration received in the form of construction service referred to in clause (a) above and in the form of development rights referred to in clause (b) above, shall arise at the time when the said developer, builder, construction company or any other registered person, as the case may be, transfers possession or the right in the constructed complex, building or civil structure, to the person supplying the development rights by entering into a conveyance deed or similar instrument (for example allotment letter).
From the above, it can be inferred that there is a two-way supply between the landowner and the developer. The land owner will be supplying the development right against the receipt of consideration in the form of construction service. On the other hand, the developer will be supplying the construction service to the landowner against which it receives the land development rights. The time of supply has been deferred to the time when the possession or right in the complex is transferred through a conveyance deed or an allotment letter. This date will allow the valuation to be more certain as compared to the date of joint development agreement. Also, the blockage of working capital is cushioned due to the deferment in the payment of taxes especially for landowners who intend to keep flats for their own use.