Developer of land is not a seller, liable to pay GST, rules AAR

Selling land does not attract the Goods and Services Tax, but if some one develops and sells a parcel, then it comes under the GST ambit, according to the Authority of Advance Ruling (AAR) in Karnataka.

Bengaluru-based Maarq Spaces Private Ltd had entered into a Joint Development Agreement (JDA) with landowners for the development of a parcel of land into a residential layout along with specifications and amenities. The

consideration was on revenue-sharing basis in the ratio of 75 per cent for the landowner and 25 per cent for the developer company. The cost of the development was to be borne by Maarq Spaces.

The company approached the AAR with two questions: Does development and sale of land attract tax under GST? If yes, then for the purpose of taxable value, will provision of rule 31 be applicable in ascertaining the value of land and supply of service?

Rule 31 of CGST rules prescribes residual method for determination of value of supply of goods or services or both.

AAR said the applicant may have a role in activity of ‘sale’, but he cannot claim himself to be ‘seller.’ It said anyone who does not possess any title of the land cannot be considered as the seller. Such a person may have a role in the activity of sale but he cannot claim himself to be the seller.

It said the company has no right over the plots and only has a right to the extent of 25 per cent of the amounts received on account of sale of the plots towards the cost of development incurred by them. It observed that applicant company undertakes development of plots and also constructs road, lays sanitary pipes and drains, etc. and bifurcates the land into sites and amenities, hence, core competence and activity carried out is of land development and not sale of land.

Referring the relevant clauses of the agreement, the AAR felt that applicants do not acquire any right over the property which would qualify them to be considered as sellers of the property in the capacity of an owner, and that landowners have engaged the applicant to develop the land in accordance with the approvals.

Accordingly AAR held that the activities envisaged under the Joint Development Agreement between the applicant and the landowners amount to supply of service, liable to be taxed under GST while rejecting applicant’s plea that it is primarily engaged in sale of land, which is not liable to be taxed.

Though AAR’s ruling is applicable for applicant and the jurisdictional officer only, but can be used for persuasion in similar cases. The AAR helps the taxpayer by giving an advance decision in relation to the supply of goods and/or services proposed to be undertaken or being undertaken by the assessee.

Terming the ruling as interesting, Harpreet Singh, Partner in KPMG, said that it distinguished between development of land and sale of land. 

Generally development and sale of land are carried out together by the same person, in which case, concept of composite supply may come in play and where sale of land is the principal supply, the entire consideration may be exempt.

“With this and some other recent rulings, it is becoming more and more important to have the scope of work clearly worded in the agreements, as relevant scope clauses in the agreement are often relied by the tax authorities to determine taxability in each case,” he said.