Requirement of GST Registration for landowners in respect of Land given on Development

[Shilpi Jain]

Development Agreement cum General Power of Attorney (DAGPA/JDA) is the most popular way in which properties are being developed. It is a registered agreement executed between a person owning land (i.e., landowner) and a person who would undertake the construction (i.e., developer). The landowner agrees to allow the developer to develop a real estate project on such land at his own cost, in return for a share in the constructed units in such project.

Under JDA, there are 2 transactions:

1. Developer providing development services on the said land to the extent of the units / apartments handed over to the landowner.
2. Landowner providing development rights to the Developer i.e. the right to enter into the land and perform the development.

Assuming both these transactions are liable to GST, from 01-04-2019 the developer is liable to pay GST in respect of both these transactions. On the 2^nd transaction, the developer is liable to pay GST under reverse charge mechanism (RCM)[1].

However, there is one more transaction which the landowner would undertake with the units that it gets under the JDA. That is, either selling the units before or after completion, or leasing the said units.

Is there double taxation?

Would there be a tax liability on this transaction of sale or lease by landowner? This question arises since, if developer has already discharged GST liability on units handed over to the landowner, then why the landowner is required to again discharge GST on sale of the same units to customers. For understanding this, the below example would be relevant:

A manufacturer sells goods to stockiest who then sells it to the wholesaler and then to the retailer, then finally to customer.

Here, the same goods are changing 5 hands. In spite of this, GST would be liable on each of these transactions.

Thus, GST is a tax on transactions (i.e. supply) and not on goods or services involved.

In the same way, even though it is the same property which the developer constructs, which is then sold by the landowner, but since these are 2 different transactions, each of them would have to checked for existence of liability of GST.

Thus, even though the developer may have paid GST on the units handed over to the landowner, such liability is the developer’s liability which is discharged for the services provided to the landowner.

Subsequent sale by the landowner to the customers again, must be separately evaluated to identify the existence of GST liability. If this is not done, the department would demand GST from the landowner for sale of units to customer made before completion certificate or first occupation, whichever is earlier[2] (hereinafter referred to as ‘Completion date’).

Registration requirements

In this backdrop, let us first look at, when is one is required to take registration under GST.

Registration is required if aggregate turnover in a financial year exceeds Rs. 20 lakhs[3] (in case of special category States, 10 lakhs[4]).

Aggregate turnover[5] means all taxable supplies (excluding inward supplies taxable under RCM), exempt supplies, exports and inter-State supplies of persons having same PAN number. It excludes CGST, SGST, UTGST, IGST and cess.  

Thereby, all incomes of the landowner i.e. on sale of apartment, on lease of apartments or interest income, etc. all have to be considered to check if the aggregate turnover exceeds Rs. 20 lakhs. Basis this, the liability to take registration under GST has to be checked.

When not liable for registration

In the following cases, no registration is required

1. If a person is only engaged in making supplies of taxable goods or services or both, the total tax on which recipient is liable to pay under reverse charge mechanism (RCM), such person is exempted from obtaining registration[6] under GST.
2. Any person engaged exclusively in supply of goods or services or both, which are not liable to tax or wholly exempt under the Act or IGST[7].

Taxability of incomes

The following are certain categories of incomes which generally a landowner would have. Given is its nature of taxability:

Incomes not liable

Sl. No	Nature of Income	Taxability
1.	Sale of apartments after Completion Date	No GST liability[8]
2.	Lease of residential units to registered persons	Liable under RCM[9]
3.	Lease of residential units for use as residence	Exempt[10] or Liable under RCM[11]
4.	Interest Income	Exempt[12]
5.	Transfer of development rights	Developer liable under RCM[13]
6.	Sale of shares	No supply

Taxable incomes

1. Lease of commercial units - Taxable
2. Sale of units before Completion Date – Taxable
3. Other incomes (where no exemption available) – Taxable, etc.

No registration case

Thus, if there is no sale of units by landowner before Completion Date or there is no other taxable income in the hands of the Landowner, then he is not liable to take registration under GST.

If there exist incomes like sale of units after Completion Date (exempt), lease of residential units (exempt as stated above), interest income (exempt) and transfer of development rights (no liability in hands of landowner), landowner would not be liable for registration since all are exempt/not taxable in the hands of the landowner.

Registration requirement

However, even if one rupee of taxable income is earned by landowner, he would be liable to take registration under GST if aggregate of all his incomes is more than Rs. 20 lakhs. In such case landowner will be liable to pay GST on taxable income.

If the landowner is liable for registration under GST since he has incomes liable to GST and if he is proposing to sell his commercial or residential units before Completion Date, it would be relevant to note that he would be eligible to claim input tax credit[14] of the GST charged by the developer for the development services.

In such case, it is suggested that the landowner takes GST registration before developer issues invoice for such services in order to be eligible for such credit[15].

Landowner does NOT wish to be registered under GST

If as per above, a landowner is required to take registration, it is best to take registration and comply with the law. However, if it is not feasible for the landowner to do so, it is suggested to do the following:

1. There is an option available to appoint anyone else (say developer) as an agent of landowner (i.e., units belonging to landowner would be sold by developer on behalf of landowner as an agent). In these kinds of transactions, the agreement of sale (AOS) would still be between the Landowner and customers, and the Developer only acts as an agent (as he has no title over the Landowner’s share of units).
2. Thus, developer should take a separate registration only to discharge the GST liability w.r.t the sale of landowner’s units. Separate registration is required for the following reasons:
   1. The Developer in his own capacity is required to pay GST for the units handed over to Landowner.
   2. For the same units, when sold to the customers of landowners before Completion Date, the Developer would be required to pay GST as an agent of the Landowner.
   3. In such a scenario, the developer, as a supplier[16], should issue invoice from the existing registration to the new registration w.r.t area handed over to the Landowner.
   4. This will enable taking ITC in the new registration and discharging GST liability on customer sales of landowner units.
   5. If there are any units unsold on Completion Date pertaining to the Landowner’s share, proportionate GST charged by the developer would be required to be reversed in the new registration[17].

Thus, only if separate registration is taken by the developer, the above compliances can be done with clarity and it would be easy to depict these to the department. It is also suggested that an intimation is made by the developer to the department regarding the sale made by it on behalf of the Landowner indicating the various compliances done by the developer under the new registration.

One could say that compliance under GST for the Landowners is fairly simple and straightforward from 01-04-2019 wherein

1. The landowners have to discharge GST to the department on the sale made to customers.
2. GST w.r.t the JDA transaction is required to be reimbursed to the developer (if so, agreed with the developer), the credit of which will be available to the landowner to set off against the GST liability on customer sales.

Thus, landowner is required to take registration under GST only if he plans to sell units before Completion Date (assuming he has no other taxable incomes under GST). Though, it is important that landowners understand the law and comply with it at the appropriate time and manner.

The views expressed are strictly personal and cannot be regarded as an opinion. For any queries or feedback please write to [email protected] or [email protected]

 

[1] Entry no. 5B of Notification no. 13/2017 – Central Tax (Rate) dated 28-06-2017

[2] Para 5b of Schedule II of Central Goods and Services Tax Act, 2017 (herein after referred as ‘Act’)

[3] Section 22(1) of the Act

[4] Proviso to section 22(1) of the Act

[5] Section 2(6) of the Act

[6] Section 23(2) of Act read with notification no. 5/2017 – Central Tax dated 19-06-2017.

[7] Section 23(1)(a) of the Act

[8] Para 5 of Schedule III of the Act

[9] Entry no. 5AA of Notification no. 13/2017 – Central Tax (Rate) dated 28-06-2017

[10] Entry no. 12 of Notification No. 12/2017 - Central Tax (Rate) dated 28-07-2017

[11] Entry no. 5AA of Notification no. 13/2017 – Central Tax (Rate) dated 28-06-2017

[12] Entry no. 27 of Notification No. 12/2017 - Central Tax (Rate) dated 28-07-2017

[13] Entry No. 5B of Notification no. 13/2017 – Central Tax (Rate) dated 28-06-2017

[14] Clause (ii) of 2^nd Proviso to conditions of Notification no. 8/2017 – IGST (rate) dated 28-06-2017 read with rule 42 of Central Goods and Service Tax Rules, 2017 (hereinafter referred as ‘Rules’)

[15] Section 16(1) of the Act

[16] Section 2(105) of the Act

[17] Rule 42 of Rules

Discussions to this article

[Sadanand Bulbule]

Meaningful analysis Madam.

Gratitude.