MAY 13, 2019

By S Sivakumar, LL.B., FCA, FCS, ACSI, Advocate

THE recent notifications issued on 29-3-2019 have shifted the liability to pay GST on transfer of development rights by any person (including, of course, the Land owner) on the Developer-Promoter under the Reverse Charge Mechanism, in respect of both RREPs ('residential real estate projects') and REPs ('real estate projects'), with effect from 1-4-2019. Of course, the CBIC has also come out with a list of FAQs dated 7-5-2019, wherein, it has been clarified that, there is no liability on the Developer-Promoter under RCM, in respect of Joint Development Agreements '(JDAs') signed on or before 1-4-2019.

Earlier to 1-4-2019, in terms of Notification No. 4/2018-CTR dated 25-1-2018, the registered Land Owner was made liable to pay GST on the transfer of development rights, while the Developer was made liable to pay GST on the value of completed apartments that was transferred to the Land owner, in pursuance of the joint development agreement entered into between both the parties. In the absence of Section 9(4) being implemented, the Developer was not required to pay GST under RCM, in respect of Development Rights. Effective from 1-4-2019, the Developer will have to carry the albatross of being required to pay GST on transfer of Development Rights to himself, by registered as well as unregistered Land-Owners/Transferors, both in respect of residential projects and commercial projects.

Be that as it may…

The fundamental question that would arise is whether, development rights can be subjected to the levy of GST at all, in terms of the Notifications and Rules issued by the Government, which form part of the delegated legislation? Can a delegated piece of legislation enacted by the Government eclipse the charge/levy or expand the scope of the levy of GST?

It is clear that, in terms of Section 2 of the CGST Act, which deals with the scope of goods and services and supply of goods/services, transactions as between the land owner and the developer, which are mutually benefiting both the parties to the said agreement, cannot be subjected the levy of GST.

In terms of Sl. No. 5 of SCHEDULE III of the CGST Act, 2017, the following supply is treated as an activity or transaction which is neither a supply of goods nor a supply of services, viz.

"Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building".

If sale of land is neither a supply of goods nor a supply of services and, therefore, cannot be subjected to the levy of GST, can tax be levied on transfer of development rights? By the way, what are these development rights?

As we know, the expression 'land' has not been defined under the GST law. Hence, we would need to look at definition of land, as are available under other laws. Under Section 3(a) of the Land Acquisition Act, 1894, the expression 'land' includes benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth. As per Explanation to Section 35(2) of the Income tax Act, 1961, land includes any interest in land. As per Section 2(c) of the Andhra Pradesh Land Grabbing (Prohibition) Act, 1982, 'land' includes rights in or over land and buildings. As per Section 2(2) of the Karnataka Town and Planning Act, 1961, 'land' includes benefits arising out of land.  Under Section 3(26) of the General Clauses Act, 1897, the term 'immovable property' shall include land, benefits to arise out of land and things attached to the earth, or permanently fastened to anything attached to the earth.

In S N Chandrashekar v State of Karnataka (2006) 3 SCC 208, 214 p.13, the Supreme Court held that the term 'land' has to be defined to include benefits to arise out of land. The Supreme Court, in Hansraj Sharma v Collector, Land Acquisition, reported in (2006) 3 SCC 399, 407, P. 16 has held that, the expression "land" includes benefits to arise out of land, things attached to the earth or permanently fastened to anything attached to the earth and rights created by law over any street.  As per the General Clauses Act, 1897, "immovable property" includes benefits arising out of land. The said Act defines immovable property to include land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.

The Courts have consistently held that rights to develop land/property and avail benefits arising from such development/developed land are benefits arising out of the land. Attention of TIOL netizens is invited to the decision rendered in Chheda Housing Development Corpn., a Partnership firm Vs. Bibijan Shaikh Farid & Ors. (2007) (3) MHLJ 402 (Bom.), wherein the Bombay High Court while dealing with specific performance of Agreement for use of TDR, held that FSI/TDR are benefits arising from the land and consequently must be held as immovable property.

The Supreme Court in the case of Ananda Behera and Another Vs. State of Orissa AIR (1956) SC 17, has held that Profit a prendre is considered as a right of taking soil, gravel, minerals and the like from the land of another. It is a benefit arising out of land and it is immoveable property within the meaning of Transfer of Property Act, 1882.

The Supreme Court in the case of Canbank Financial Services Ltd. Vs. Custodian (2004) 8 SCC 355 in para 86 has held that title in a property connotes a bundle of rights. Subject to prohibitory or regulatory statutes, such rights are capable of being transferred.

The Constitutional Bench of the Supreme Court in the case of State of WB Vs. Kesoram Industries (2010) 10 SCC 201, has in Para 129 has held that "fields of taxation covered by Entries 49 and 50 in List II continue to remain with State Legislatures in spite of the Union having enacted laws by reference to Entries 52, 53 and 54 in List I. 'Land' the term occurring in Entry 49 has a wide connotation. To be a tax on land, the levy must have some direct and definite relationship with the land. So long as the tax is a tax on land by bearing such relationship with the land, it is open for the legislature for the purpose of levying tax to adopt any one of the well-known modes of determining the value of land such as annual or capital value of the land or its productivity. The methodology adopted, having an indirect relationship with the land, would not alter the nature of the tax as being one on land."

We also need in keep in mind the fact that 'Land' falls within Entry 49, State List, Constitution of India and this entry has not been amended by the 101st Constitution Amendment Act which introduced GST. The levy of GST is only on goods or services or both and, therefore, there cannot be any levy of GST on land, which, as we have seen above, includes TDRs.

We also find that, the Stamp Acts of the various States define 'immoveable property' to include land, building, rights to ways, air rights, development rights whether transferrable or not, benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth.

We can go on and on…. There is a very strong basis for the legal view that, Development Rights are nothing but rights that arise or accrue from land and consequently, levying GST on Development Rights would tantamount to levying GST on land itself, which is impermissible under the GST law.

If GST cannot be levied on the Landowners or the transferor of Development Rights under the forward charge, can the hapless Developer be made liable to pay GST, under Reverse Charge mechanism, under the Notifications issued on 29-3-2019, which have been issued under Section 9(4) of the CGST Act? Let's take a look at this Section 9(4), as amended by the Central Goods and Services (Amendment) Act, 2018 with effect from 1-4-2019, reads as under

"(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both:"

A reading of Section 9(4) makes it amply clear that liability under reverse charge mechanism can be fastened on the recipient of the transaction, only if such a transaction is a 'supply' within the meaning of the CGST Act. Development Rights being nothing but land, are neither supply of goods nor supply of services, in terms of Schedules II and III, how does the issuance of a notification bring about a tax liability in the hands of the Developer, at all?

Before parting…

Under the service tax law no attempt was made to levy service tax on transfer of Development Rights in terms of Circular No. 151/2/2012- ST dated 10-2-2012. The first attempt to levy GST on transfer of development rights was made, perhaps for the first time, by Notification No.4/2018-CTR dated 25-1-2018 and here too, only registered Land-Owners / Transferors of Development Rights were made liable to pay GST. Now, to shift the GST liability to the Developers, irrespective of whether the Land-Owner/ Transferor is registered or not, is a highly unwelcome step from the Government and this development could severely affect the commercial realty sector, considering the fact that the GST rate for transfer of Development Rights is 18% as contrasted to the residential realty sector, wherein, the GST levy on Development Rights is restricted to a rate of 5% of the unsold flats in a RREP.

(The views expressed are strictly personal.)