Realty joint development projects hit by GST in FY18: Report

Even as the share of real estate projects launched under the joint development (JD) model has increased significantly over the years, the challenges posed by

the applicability of the GST has hit the joint development launches in FY18, a recent survey said.

According to ratings agency Icra, the imposition of the Goods and Services Tax (GST) on the joint development projects has resulted in decline in the proportion on year-on-year basis from 93 per cent in FY17 to 71 per cent in FY18.

A study of 196 projects launched revealed that on an average, around 55 per cent of the projects launched per year during the period FY13-FY15 were under the JD model.

"The developments were initially more concentrated in Bengaluru, with city-based developers using the JD model extensively initially. However, in the build-up to the RERA, which largely got implemented from July 1, 2017, the proportion of the JD launches started increasing, and the trend began spreading into other cities on a pan-India basis," Icra said.

Under the JD model, the owner of a land parcel and a developer jointly undertake the development of a real estate project, with the landowner providing the land, and the developer undertaking the construction/marketing of the project.

Joint development launches across India stood at 72 per cent in FY16, and reached a high of 93 per cent in FY17, but declined to 71 per cent in FY18, the report said.

"The Y-o-Y decline witnessed in the proportion of launches in FY18 was possibly due to challenges posed by the applicability of the GST on the JD models," it said.

Under the GST for a joint development project, the land owner has to transfer the development rights on the land to the developer, who is deemed to be providing construction services to the former.

Since these are treated as a continuous supply of services, tax is levied accordingly at 18 per cent, with input credit being available if the units are sold to end-customers during the construction phase.

Icra, however, expects the proportion of this development model is likely to increase to nearly 76 per cent in the current fiscal.

"Given that land parcels, particularly those located in premium areas, can cost more than the entire construction cost of the project, joint development models offer a good cash flow management strategy that are now being employed with increasing frequency," Icra vice president Shubham Jain said.

The agency also noted that there is a lack of clarity on the tax rate to be paid by a developer for provision of construction services, against which the TDR is received as a consideration.

"Clarity on these GST-related issues would be key for continued momentum in the joint development space, though we expect it to continue as a preferred mode of development," Jain added.