GST Applicability on Collaboration Agreement (JDA)

[deepak gulati]

First of all we all should know about various transactions embedded under Collaboration Agreement:-

1. Supply of Development Rights by Landowner
2. Supply of Construction services by Builder against development rights
3. Sale of flats by builder or landowner – pre completion
4. Sale of flats by builder or landowner – post completion

But there were frequent amendments in provisions governing taxability of works contract from day one of GST Regime.

We would like to throw some light on these changing provisions and would like to summarize applicability of GST on certain transactions involved in Collaboration Agreement.

For the sake of convenience, we have bifurcated GST provisions in 3 phases as follows:-

Phase – I Provisions between 01.07.2017 to 24.01.2018

During the abovementioned period, time of supply is not specifically defined and hence governed by general provisions of Time of Supply which will be the completion of individual event encrypted in the said continuous contract of construction.

SERVICE	GST  RATE	TAXABLE VALUE	Time of Supply
CONSTUCTION  SERVICE (composite supply)	12% on a single residential unit, otherwise rate is 18%.	Cost of provision of construction service + 10% of cost OR Fair Market Value.	Should be treated as continuous service and accordingly completion of event as per agreement will determine time of supply
DEVELOPER RIGHTS (under Forward Charge)	18% on transfer of Development Rights.	Value of Construction service + upfront cash paid by builder	It should be at the time of transfer of possession from landowner to builder for construction
SALE OF FLAT Pre-completion(Land is a part)	12% on a single residential unit, otherwise rate is 18%.	2/3rd of Sales Value of flat.	Time of supply should be the date of agreement for sale of flats

Phase – II        Provisions between 25.01.2018 to 31.03.2019

ASCERTAINING GST RATE & TAXABLE VALUE OF WORKS CONTRACT

SERVICE	GST  RATE	TAXABLE VALUE	Time of Supply
CONSTUCTION  SERVICE (composite supply)	12% on a single residential unit, otherwise rate is 18%.	Cost of provision of construction service + 10% of cost OR Fair Market Value.	It will arise on completion of construction services by entering into conveyance deed or allotment letter
DEVELOPER RIGHTS (under Forward charge)	18% on transfer of Development Rights.	Value of Construction service + upfront cash paid by builder	It will arise on completion of construction services by entering into conveyance deed or allotment letter
SALE OF FLAT Pre-completion           (Land is a part)	12% on a single residential unit, otherwise rate is 18%.	2/3rd of Sales Value of flat.	This will be treated as continuous supply of service, hence time of supply will be governed by terms of contract

Phase – III      Provisions Applicable after 01.04.2019

SERVICE	GST RATE	TAXABLE VALUE	TIME OF SUPPLY
Taxability of Transfer of Development Rights by Landowner (covered under RCM and to be paid by Builder)
In case where sale of flats is taxable	Exempt	N.A.	N.A.
In case where sale of flats is exempt	Rate will be 18% subject to max 5% or 1% of value of flats sold	Value of construction service + upfront cash paid by builder	It will be the date of Completion Certificate or its first occupation whichever is earlier.
Taxability of Construction Services (GST to be paid by Builder on forward Charge Basis)
Where supplied w.r.t residential complex, etc.-	18%	Cost of construction of land owner’s portion	It will be the date of Completion Certificate or its first occupation whichever is earlier.
Where supplied w.r.t single residential unit	12%	Cost of construction of land owner’s portion	It will be the date of Completion Certificate or its first occupation whichever is earlier.
Taxability of Sale of Flats
Pre-completion	(i)Affordable housing projects-1.5%, (ii)Residential projects-7.5% (iii)others-18%	Value of flat (-) 1/3rd (deemed value of land)	This will be treated as continuous supply of service, hence time of supply will be governed by terms of contract
post-completion	Exempt	N.A.	N.A.

Additional Conditions for flats to be sold @ 1% / 5% GST

GST Payable @ 1% / 5% should be paid in cash i.e. no ITC is allowed to the builder.   In case any flat is sold post completion, builder has to compulsorily pay RCM on development charges. RCM @18% (except cement which is taxed @ 28%) to be paid in case purchases from unregistered dealers is >20% of total purchases.

Conclusion

One can easily conclude that it’s very difficult for Professionals, developers & landowners to determine the exact tax liability in case of collaboration agreements due to number of amendments made in the said provisions. Therefore, agreements should be studied thoroughly so that one can conclude whether the agreement under question falls under Phase-I, Phase – II or Phase – III.

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By Deepak Gulati, Deepak Arya

Discussions to this article

[Rakesh Garg]

Dear Deepak ji,

I would like to discuss Para 2 of Phase III (On or after 01.04.2019) of your Article:

Provisos IV to Conditions specified against Sl. No. (i) to (id) of entry no. 3 vide Notification No. 3/2019-CTR dated 29.03.2019 reads as, “Provided also that where a registered person (land-owner- promoter) who transfers development right or FSI (including additional FSI) to a promoter (developer-promoter) against consideration, wholly or partly, in the form of construction of apartments, (i) the developer-promoter shall pay tax on supply of construction of apartments to the landowner-promoter, and…..”

Further, as per Para 2A of Notification No. 11/2017-CTR, inserted vide N. No. 3/2019-CTR dated 29.03.2019, where a person transfers development right or FSI (including additional FSI) to a promoter against consideration, wholly or partly, in the form of construction of apartments, then, the value of construction service in respect of such apartments shall be Equal to the Total Amount charged for similar apartments in the project from the independent buyers, other than the landowner, nearest to the date on which such development right or FSI (including additional FSI) is transferred to the promoter, less the value of transfer of land as prescribed in paragraph 2 above (i.e. one third of total vale).

Further against the Sl. No. (i) to (id) of entry no. 3, rate has been specified as 1.5% / 7.5%. Thus, in respect of RREP projects and other residential apartments, effective tax rate shall be 1% or 5%, as the case may be of the total value (after reducing one-third value of land).

Thus, in my view, the rate of tax of 12%/18% on the cost of construction is applicable to works contractor and not to the promoter.

Pl consider and discuss.

[deepak gulati]

Sir

The promoter is providing construction services ( Work contract ) to Landowner, hence 12%/18% will be applicable.

[Rakesh Garg]

Deepak Ji

Does it mean that -

(1) valuation of the construction service shall be determined as per Para 2A, which shall be equal to similar apartment less value of land as per Para 2 (one third). We can't ignore Para 2A of the Notification.

(2) After arriving at the value of construction service as per (1) above, tax shall be calculated @12% / 18%.

[Abhijeet Mane]

Dear Deepak sir,

For "Phase – II : Provisions between 25.01.2018 to 31.03.2019", request you to please clarify as to what will be the HSN classification to levy 18% of GST on transfer of rights from landowner to developer.

Thanks in advance for your valuable inputs.

Regards,

Nouman

[deepak gulati]

Abhijeet Ji,

To the best of our knowledge Development Right services will fall under "REAL ESTATE SERVICES" which is classsified under heading No. 9972.