Taxability of Development Rights under GST

Transfer of development rights by landowner to developer for development of project is a very common
practice prevalent in real estate industry which may entail GST implications. Let us understand the
nature of such development rights which is transferred by landowner to developer.

It may be noted that the rights conferred by land owner to developer under a Collaboration Agreement
or Joint Development Agreement whereby land owner gives a limited right over the land such as right to
construct, own and sell the superstructure to developer are commonly known as development rights.

Such rights are granted by the landowner to developer in return of a consideration which may be a
portion of constructed area or revenue or profit derived from the sale of units constructed over the
land.

Taxability of transfer of such development rights had been a subject matter of dispute under the
erstwhile regime of service tax wherein department used to contend that transfer of development right
shall qualify as service leviable to service tax, unless such rights are transferred through registered
document.

Under GST Regime, the taxable event "supply" as defined under Section 7 of the Central Goods and
Services Tax Act, 2017 ("CGST Act") inter-alia includes all forms of supply of goods or services or both
which is made or agreed to be made by a person in the course or furtherance of business for a
consideration.

The activities or transactions specified in Schedule III of the CGST Act shall be treated neither as supply
of goods nor as supply of services. Schedule III of the CGST Act amongst others includes sale of land.
Therefore, sale of land shall not be subject to levy of GST.

In this background, this article discusses whether transfer of development right shall be subject to levy
of GST.
The rights over the land such as right to construct, own and sell the superstructure constructed over the
land is transferred to developer. Such rights can be considered as immoveable property being benefit
arising out of land.

In this regard, we may refer to the judgement of Bombay High Court in the case of Sadoday Builders
Private Limited v. Joint Charity Commissioner (2011 SCC Online Bombay 760), and Chheda Housing
Development Corporation v. Bibijan Shaikh Farid (2007 SCC Online Bombay 130), wherein the Hon'ble
High Court observed that Transferable Development Rights (TDR) being a benefit arising from the land
must be held to be an immovable property.

In view of the above judicial precedents, it appears that development rights are benefit arising out of
land, and cannot be equated with land itself. Therefore, transfer of such development right would not
be outside the ambit of levy of GST pursuant to Schedule III of the CGST Act for the reason the same
cannot be said to be sale of land. Accordingly, transfer of such development rights by landowner to
developer for a consideration shall qualify as supply leviable to GST.

At this juncture, it may be noted that the Government vide Notification No. 4/2018-Central Tax (Rate)
dated 25th January 2018 has specified that under area sharing model, the liability to pay tax shall arise
at the time when the developer transfers possession or the right in the constructed complex, building or
civil structure, to the landowner by entering into a conveyance deed or similar instrument.

By above Notification, Government intends to treat transfer of development rights as taxable supply
leviable to GST. However, the above Notification has not considered other models such as revenue
sharing/profit sharing model etc. which is usually adopted by developers and landowners for
development of the project. Further, the above Notification has not provided any mechanism for the
valuation of such development rights which is the need of the hour. Accordingly, the valuation of such
development rights would continue to be an open issue.

In my view, the transaction of transfer of development rights by landowner to developer for a

consideration shall qualify as "supply" leviable to GST. The manner of providing consideration for
transfer of such rights in the form of developed area or revenue share would not alter the nature of
transaction. Hence, such transaction shall be subject to levy of GST.
As the valuation of such supply has not been provided under the GST Laws, let us examine the value
which can be taken for payment of GST.

Generally, landowner charges consideration from the developer towards the development right as well
as for transfer of undivided interest in land to the buyers of units.

Hence, a question which may arise is whether it can be said that the consideration received by
landowner from the developer is not only towards transfer of development right in favor of developer
but a portion thereof can be said for transfer of undivided interest in the land in favor of buyers of units.

The said contention that a part of the amount received by land owner is on account of transfer of
undivided proportionate rights in the project land in favor of the buyer of units and therefore would not
be taxable needs to be tested before the Court of Law.