Redevelopment of old Co-operative Societies is of great interest for its members when houses/units of the society have become uneconomical, show sign of aging or are in dilapidated condition. Redevelopment of houses is the best economical option for the society members and builders/developer as the members get new bigger houses with several amenities and builders can make cost effective construction by utilising unused potential of the land of the society located in good area.
In case of redevelopment process the builder/developer demolishes existing society construction which may be old and construct new structure on the same land. Thus, the builder gives new construction to the existing members with many amenities and also sells new additional units built by it to new buyers in the market.
A. Model of Redevelopment
The society registered under the Co-operative Societies Act is owner of the land and generally it enters into agreement with the developer for reconstruction of new building/units, whereby members of the society grant their consent to the society.
Under redevelopment model,
The members of society get newly constructed houses with extra space and with certain amenities. Generally each member gets additional money from the builder and also gets fixed rental amounts for temporary accommodation. In certain cases, the society gets corpus fund also from the builder.
While the builder gets consideration in two forms, inter alia, (i) from the existing members/tenants of the society by way of development rights over the land to construct new building including the permission to construct additional flats/units, and (ii) money consideration from buyers against sale of new flats.
Thus, the above referred transactions are generally involved in model of redevelopment of society and taxability of such transactions depend upon terms and conditions of each agreement. is discussed in following paragraph. Considering general terms and conditions of agreement, I have expressed my view with respect to taxability of transactions involved in Redevelopment model.
B. Taxability of Transactions involved in Redevelopment Model under GST law
Transfer of Development Rights (TDR) to the Developer
In above referred chain of events, the first transaction would be Transfer of Development Rights (TDR) by the society to the developer.
1.1 As per Section 9 of the CGST Act, the supply of goods or services or both is the taxable event. The term ‘supply’ as defined under Section 7(1)(a) of the CGST Act includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business. Further, as per Section 7(2)(a), activities or transactions specified in Schedule III shall not be treated as a supply of goods nor a supply of services notwithstanding anything contained in Section 7(1) of the said Act.
1.2 Thus, following are essentials to treat a transaction as supply under Section 7(1):
A transaction with respect to goods or service or both is by way of sale or exchange or transfer or barter or lease or licence or rental or in any other such form;
There must be consideration; and
Such transaction must be in course or furtherance of business.
1.3 As per Section 2(31) of the CGST Act, ‘Consideration’ in relation to the supply of goods or services or both includes any payment made or to be made whether in money or otherwise in respect of the supply of goods or services or both whether by the recipient or by any other person. Further, as per Section 2(17) of the CGST Act, ‘Business’ includes provision of the facility or benefits by the society to its members.
1.4 Thus, ‘transfer of development rights’ by the society to the builder is a transaction of supply because when the society transfers development rights to the builder/developer including permission to construct and sale additional flats, the existing society members get consideration from such builder in form of new structure with more space, rental amount for temporary accommodation, and fund to the corpus of society. Further, this transaction may also be looked at from other angle, the developer supplies construction services to existing members of the society against the development rights including permission construct and sale new flats to new buyers.
1.5 Before we examine under which entry of Schedule II the supply of TDR would fall, it is pertinent to examine whether transaction of TDR can be treated as ‘sale of land’ or not. If, TDR is considered to be ‘sale of land’ it is out of the purview of GST law in view of Section 7(2)(a) read with entry no. 5 of Schedule III of the CGST Act.
1.6 Section 2(52) of the CGST Act defines the term ‘goods’ as “every kind of movable property other than …” and the term ‘service’ as “anything other than goods …”. The land is immovable property and therefore, it is not ‘good’ under the GST law. But it is very important to understand what immovable property includes within its scope with respect to land.
The term ‘immovable property’ is not defined under GST law. As per The General Clauses Act, 1987, definition of ‘immovable property’ includes land, benefits arising out of land, and things attached to the earth, or permanently fastened to anything attached to the earth. As per Registration Act, 1908, ‘immovable property’ includes land, building, 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 attached to the earth, but not standing timber, growing crops nor grass. Therefore, it is clear that benefit arising from the land is immovable property. A land has various rights attached to it and one of such rights is ‘transfer of development right’ (TDR). In case of Chheda Housing Development Corporation v. Bibijan Shaikh Farid, 2007 (2) BomCR 587; MANU/MH/0070/2007, the Hon. Bombay High Court has held that TDR being a benefit arising from the land, it is immovable property. When there is ‘sale of land’ there will be transfer of all interests and rights in the property/land. As per Section 54 of the Transfer of Property Act, 1882 to constitute a sale, one of the preliminary conditions is that there must be transfer of ownership from one person to another, i.e., all rights and interest in the properties which are possessed by that person are transferred by him with his free consent to another person.
In case of redevelopment process, the society does not transfer the ownership of land to the developer. Only Development Rights coupled with interest to reconstruct the building with additional units and to sell such additional units is being transferred by the Society to its developer, and therefore, in view of Section 54 of the Transfer of Property Act, 1954 it is not the sale of land.
Therefore, in my view, though TDR is immovable property, it cannot be considered as ‘sale of land’.
1.7 Now, it is to be determined under which entry of Schedule II of the CGST Act the activity of transfer of development would fall in case of redevelopment. In my view such transaction of transfer of development rights coupled with interest to sell additional units is nothing but a licence given by the society to the developer. In law such licence is recognised as licence coupled with interest. Such interest is restricted to construct the building and the additional flats for sale. Therefore in my view, the activity of transfer of development rights by the society to the developer is nothing but a supply of services covered under Entry No. 2(a) of
Schedule II, which says ‘any lease, tenancy, easement, licence to occupy land is a supply of service.’
A licence is defined in Section 52 of the Indian Easements Act and a lease is defined in Section 105 of Transfer of Property Act. For the purpose of deciding whether a particular transaction is a lease or a licence, the question of intention of the parties is to be determined, and the intention has to be inferred from the circumstances of each case. Whether it is the creation of an interest in immovable property or a right to possess it that distinguishes a lease from a licence. The conduct of the parties before and after the creation of relationship is of relevance for finding out their intention. The description given by the parties may be evidence of the intention, but is not decisive.
A lease under the provisions of Transfer of Property Act envisages transfer of exclusive possession to a lessee with interest in the property transferred. A lessor is entitled to rent and to reclaim possession at the end of the lease period and/or on breach of the terms of the lease. In a TDR, what is transferred is the non-exclusive possession of the land. However, no interest in the land is transferred and neither any rent is payable by the Developer for such possession. Further, both lease and license are modes of transfer of property in presenti
and by their very nature cannot be of a future property.
Therefore, it is apparent that a TDR transaction is only a licence coupled with a limited interest on the constructed property (fruits of the possession) without any interest in the land.
1.8 In view of foregoing discussion, activity of transfer of development rights to the developer is a supply of service and GST is payable on such transaction.
Availing Services by the Developer from Local Authorities
In one of the stages of redevelopment process, the builder has to get registration for development, plan passing, permissions from Local Authority (Municipality). Thus, services of plan passing, registration for development, etc., are rendered by the Municipality to the Developer and such services are as per power entrusted to it under Twelfth Schedule prescribed under Article 243W to the Constitution of India. As per Notification 12/2017-CGST (Rate), dated 28-6-2017, services rendered by Municipality are exempted. Therefore, the developer shall not bear any tax burden on availing such services from the Municipality.
However, services availed by the developer from its architects, designers, contractors, etc. shall be subject to GST.
Supply of New Units to existing members & Supply of Additional Units to new buyers, by Developer
3.1 Construction activity carried out by the developer for the existing members of the society is a supply of service. For providing such construction services, the developer gets consideration from the society in form of development rights over the land including the permission to construct the additional flats. Therefore, such transaction of supply of construction of new flats by the developer to the existing buyers is supply of services and is subject to GST.
3.2 While the service of construction provided by the builder to new flat buyers is concerned, consideration received by the developer from new buyers is in form of money. Therefore, such activity of construction for new buyers is also supply of services and GST is payable, subject to condition that such consideration received by the developer from the new buyers before receipt of completion certificate or first occupation, whichever is earlier as per Entry no. 5(b) of Schedule II of the CGST Act. However, if, the consideration received from the new buyers after receipt of completion certificate or first occupation, whichever is earlier, supply shall not be taxable in view of Entry no. 5(b) of Schedule II read with Entry no. 5 of Schedule III of the CGST Act.
C. Time of Supply
It is very crucial to determine time of supply because the liability to pay GST arises at the time of supply. In case of supply of services, the time of supply is to be determined in accordance with Section 13 of the CGST Act.
However, by virtue of provisions of Section 148 of the CGST Act, the Government has issued Notification No. 4/2018-Central Tax (Rate), dated 25-1-2018, whereby the liability to pay GST in case of supply of development rights and supply of construction service has been deferred till the allotment of units vide conveyance deed or allotment letter or similar instrument.
Accordingly, in case of redevelopment of society, (a) the registered person being society, who transfers development right to the developer against consideration in the form of construction service; and (b) the registered person being a developer, who supplies construction service to the supplier of development rights against consideration in form of transfer of development rights, are liable to pay GST on supply of said services at the time when the said developer transfers possession or the right in the constructed building to the person supplying development rights by entering into a conveyance deed or similar instrument like allotment letter. Thus, both the parties, the society and the developer are liable to pay GST when a conveyance deed is executed or allotment letter is issued, as the case may be.
So far as supply of additional flats is made by the developer to new buyers, the time of supply is to be determined in accordance with Section 13 of the CGST Act and invoices are to be issued by the developer in accordance with provision of Section 31(5) of the said Act.
D. Valuation of Supply and Rate of Tax
As per Section 15(1) of the CGST Act, value of supply of services shall be the transaction value, which is the price actually paid or payable for the said supply of services where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.
As per Section 15(4), where the transaction value of supply of services cannot be determined, the same is to be determined in accordance with Rules of Determination of Value of Supply.
In case of redevelopment model as discussed above, transaction value of supply of service cannot be determined as the price is not the sole consideration, and therefore, it is to be determined in accordance with prescribed Valuation Rules. As per Rule 27 of the CGST Rules, where the supply of service is for a consideration not wholly in money, like in the present case, the taxable value of supply of development right and supply of construction service shall be the open market value. In case, open market value is not ascertainable then the supplier has to arrive at the value equivalent to consideration in money. If the same is also not possible then the value of supply of service of like kind is to be taken into consideration. If the value is not determinable under any of these options, the value of supply is to be determined by the application of Rule 30 and Rule 31 of the CGST Rules. As per Rule 30, the value of service shall be one hundred and ten per cent of the cost of provision of such service. Where the value of supply of service cannot be determined in accordance with Rule 27 or 30, the same shall be determined using reasonable means consistent with the principle and the general provisions of Section 15 and the provisions of chapter of Valuation Rules.
As per Notification No. 11/2017-CGST (Rate), dated 28-6-2017 read with similar Notification of respective States, the rate of GST on Construction Service is 18%. In case of sale of flats to new buyers, the value charged by the developer includes undivided share of the land, and therefore, the value of such supply shall be 1/3rd of the total amount charged by the builder from the new buyer. Therefore, effective rate of GST is 12% on total value of such supply. However, so far as supply of services to the existing members is concerned, the rate of GST is 18% without deduction of land or undivided share of land because the land is owned by the society. In my view only development rights were transferred to the developer and at no point of time the land was not conveyed to the developer, and therefore, deemed deduction of land value is not be allowable with respect to services supplied to the existing members.
In above article I have discussed the taxability of redevelopment of society considering the general terms of the agreement of redevelopment. Though, Notification 4/2018 (supra) determines time of supply, the intention of legislature to levy tax on activity of transfer of development rights transpires therefrom. In my view, not only taxability but valuation of such transaction will always be a matter of litigation.
[Source : Paper printed in Paper Book of National Tax Conference, Thane, held on 6th & 7th October, 2018]
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