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GST UPDATE ON TAXABILITY OF TDR/FSI PART-7

GST UPDATE ON TAXABILITY OF TDR/FSI PART-7
GST UPDATE ON TAXABILITY OF TDR/FSI PART-7:-
 
In earlier update, we have discussed about the GST rates and various issues pertaining to affordable housing schemes post implementation of new scheme for real estate sector w.e.f. 01.04.2019. In the present update, we seek to discuss the taxability of Transfer Development Rights (TDR)/ Floor Space Index (FSI).
 
There has been a lot of debate over the taxability of TDR in a Joint Development Agreement. In this context, the provisions of Notification No. 04/2018-Central Tax (Rate) dated 25.01.2018issued in the context of payment of tax by registered person supplying service by way of construction against transfer of development right are worth noting. The above notification only says that GST is leviable on supply of development rights by land owner to builder/developer and by developer supplying construction service to the land owner and specifies the ‘time of supply’ for the said transactions. This notification does not speak about valuation but only states that liability to pay GST would arise on the date of issue of allotment letter. However, the provisions with respect to taxability of TDR have been substantially changed w.e.f. 01.04.2019 vide Notification No. 04/2019-Central Tax (Rate) dated 29.03.2019. The provisions of the notification are summarised as follows:-
  1. There shall be exemption from levy of GST on TDR in case of construction of residential apartments by a promoter in a project on or after 01.04.2019 except where the entire consideration has been received after issuance of completion certificate by the competent authority or after its first occupation, whichever is earlier.
  2. In nutshell, there will be exemption from levy of GST on TDR only on residential apartments sold before issuance of completion certificate or first occupancy whichever is earlier, on which the promoter has paid GST.
  3. With respect to TDR on residential apartments sold after issuance of completion certificate or first occupancy, whichever is earlier, the liability to pay tax on TDR will be on the promoter under reverse charge mechanism. The liability to pay tax will arise on the date of completion or first occupation of the project, whichever is earlier.
  4. The value of supply of service by way of transfer of development rights or FSI by a person to the promoter against consideration in the form of residential or commercial apartments shall be deemed to be equal to the value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter.
  5. However, there is no such GST exemption on TDR with respect to commercial projects. The TDR on commercial projects will continue to be liable to GST at the rate of 18%.
  6. The exemption will be computed as follows:-
GST payable on TDR for construction of project* carpet area of residential apartments in the project/Total carpet area of residential and commercial apartments in the project.
  1. The amount of tax payable by the promoter under reverse charge mechanism will be computed as lowest of the following:-
  2. GST payable on TDR for construction of residential apartments in a project but for exemption contained herein* carpet area of residential apartments in a project which remain un-booked on the date of issuance of completion certificate or first occupation/Total carpet area of residential apartments in the project.
  3. GST at the rate of 1% of the value in case of affordable residential apartments and 5% of the value in case of residential apartments other than affordable residential apartments remaining un-booked on the date of issuance of completion certificate or first occupation.  
  4. The liability to pay tax on TDR for projects commenced prior to 01.04.2019 would continue to be governed by the provisions of notification no. 04/2018-Central Tax (Rate) dated 25.01.2018 and tax on the same will be payable by the landowner under forward charge.
The computation of GST exemption on TDR and GST payable by the promoter under reverse charge mechanism may be explained with the help of an example as follows:-
ABC Ltd, land-owner and XYZ Ltd, developer have entered into a Joint Development Agreement (JDA) on 05.04.2019 for construction of 100 apartments wherein 50 apartments are allocated to Landowner and 50 apartments are allocated to Developer. The other information is as follows:-
 
  • The carpet area of each apartment would be 1000 sq ft.
 
  • Out of the 50 apartments allocated to the developer, developer sells 30 apartments prior to the completion certificate to independent buyers.
 
  • The remaining 50 apartments are allocated to the landowner before issuance of completion certificate.
 
  • The value of apartments sold to independent buyers nearest to the date of JDA is Rs. 75 Lakhs.
 
  • The value of apartments sold to independent buyers nearest to the completion certificate date is Rs. 85 Lakhs .
Solution:- The developer XYZ Ltd. is liable to pay GST under reverse charge mechanism on TDR with respect to 20 apartments sold after obtaining completion certificate. GST on TDR is exempt for 30 apartments sold before completion certificate. Furthermore, since all 50 apartments pertaining to ABC Ltd., Landowner have been sold by the developer prior to completion certificate, no GST is payable on TDR with respect to those 50 apartments by the developer under reverse charge mechanism. For the purpose of determining tax liability on TDR, only sale of apartments by the developer are to be considered and it is irrelevant whether the landowner further sells the apartments before completion certificate or not. The calculation of GST payable by the developer under reverse charge mechanism will be lowest of following:-
  1. (7500000*100*5%) * (1000 *20) /(1000*100) = Rs. 75,00,000/-
  2. (85,00,000*20*5%) = Rs. 85,00,000/-
The developer will be liable to pay GST amounting to Rs. 75,00,000/- under reverse charge mechanism.
 
This is solely for the educational purpose.
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