Mystery of "Time of supply" under JDA Unveiled!

[Pragya Singh]

Introduction:

Real Estate is an important part of the economy and is accountable for extensive part of development investment, advancement of the nation’s infrastructure. The taxation of the real estate segment has also been challenging and litigated in many aspects. There are many open issues in relation to the determination of point of taxation and valuation under both direct and indirect taxes. In this article I have dealt with the determination of time of supply in case of issue of development rights and supply of construction service as consideration under a joint development agreement.

In a Joint Development Agreement (JDA) the land owner gives development rights to the developer/builder to develop the land owned by the landowner. The built up area of the complex shall be shared by the land owner and the builder upon an agreed ratio. The developer/builder shall in consideration for the built up area given to the landowner receive the proportionate land. The builder generally does not register the land received in his name but gets the same directly registered in the name of the buyers.

Point of Taxation under Service Tax:

Under the pre GST regime, Service Tax on services provided by the builder to the landowner were stalled with a lot of confusions and disputes with respect to the point in time when the service tax was payable and the value on which such tax was payable. The various aspects were dealt with by circulars and education guide. Reference may be drawn to the Circular No.354/311/2015 Dt. 20.01.2016 read with Circular No. 151/2/2012-ST dated 10.2.2012, wherein it was clarified that, “Service tax is liable to be paid by the builder/developer on the ‘construction service’ involved in the units to be given to the land owner, at the time when the possession or right in the property of the said units are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter)”.

Time of Supply under GST:

Section 13 of the CGST Act, 2017 deals with the provisions relating to the determination of time of supply of services. The time of supply shall be

1. Date of issue of invoice or the date of receipt of payment whichever is earlier
2. In cases where the invoice is not issued within 30 days of completion of service, it shall be the date of completion of service or the date of receipt of payment whichever is earlier.
3. In cases where the time of supply cannot be determined as per the above two clauses, then it shall be the date on which the recipient shows the receipt of services in his books of accounts.

Further it is also relevant to refer to the following definition of “continuous supply of service” under Section 2 (33) of the Act and Section 31 (5) dealing with issue of invoices.

“continuous supply of services” means a supply of services which is provided, or agreed to be provided, continuously or on recurrent basis, under a contract, for a period exceeding three months with periodic payment obligations and includes supply of such services as the Government may, subject to such conditions, as it may, by notification, specify;

31(5) Subject to the provisions of clause (d) of sub-section (3), in case of continuous supply of services, -

(a) where the due date of payment is ascertainable from the contract, the invoice shall be issued on or before the due date of payment;

(b) where the due date of payment is not ascertainable from the contract, the invoice shall be issued before or at the time when the supplier of service receives the payment;

(c) where the payment is linked to the completion of an event, the invoice shall be issued on or before the date of completion of that event”

It may be observed that the builder would not be raising any invoice and would not claim any payment from the landowner. The service being provided by the builder is a continuous supply of service. It may be observed that clauses (a) and (b) of sub section (2) of section 13 are not applicable in this case, as neither any invoice is raised by the builder on landowner, nor any payment received. As per clause (c) the time at which the landowner shows the receipt of service in his books of accounts would be the time of supply. If the landowner is retaining such units for his own use, he would recognise the same as his capital assets and if the landowner is going to again sell such units, he would recognise the same as his stock in trade. So it can be taken that the builder would be liable to pay GST at the time, when the landowner recognises the receipt of units from the builder. However from builder’s point of view it would be very difficult to conclude when the landowner recognises receipt of service. Thus the determination of time of supply was no less than a mystery.

These confusions have been resolved by Notification No. 4/2018-Central Tax (Rate) dated 25th January, 2018. The clarification brought out in this notification is similar to what existed in the Pre GST Era. As per the notification, the time of supply in case of issue of development rights and construction services in its consideration shall rise 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).

Conclusion:

The clarification provided by the notification is welcomed by the industry however the valuation aspects also need to be considered by the GST Council as the projects generally run over 2 to 3 years and it may be possible that the open market value of the construction may vary significantly over the construction, allotment and handover period.