GST is applicable on joint development of properties in this condition, rules Patna High Court; buyers must check this

Time of India

15-05-2025

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How did this case start?
November 27, 2014: Landowner and builder executed a joint development agreement (JDA) where the builder agreed to give possession of 43% of the constructed house and parking spaces.
Landowner and builder executed a joint development agreement (JDA) where the builder agreed to give possession of 43% of the constructed house and parking spaces. December 20, 2018: The builder finished the construction and handed over the landlord's share to him.
The builder finished the construction and handed over the landlord's share to him. November 30, 2023: GST department sends a tax demand notice to the building asking why he did not pay GST on RCM basis, on the landlord's 43% share. The GST department-imposed tax demand of Rs 4.61 crore (4,61,72,628), Rs 2 crore interest (2,00,17,554) and penalty of Rs 23 lakh (23,95,368).
What did the GST department say about GST on joint development properties?
It is submitted that the builder cannot claim exemption from tax on the ground that he had handed over the constructed property to the land owner after receiving the completion certificate.
No exemption is available in case of transfer of built-up property by a developer against consideration received from the land owner in the form of development rights.
The tax is imposed on the construction service supplied by the builder to the landowner and not on the immovable property as such. The supply of service by way of construction of real estate which is intended to be conveyed to the land owner in lieu of transfer of development rights by the land owner attracts GST
What did Patna High Court say?
We are of the considered opinion that in fact the builder does not get any right on the said property until the completion of the project. After the project is completed and completion certificate is issued, the builder gets a right to sell the area of the property which is called 'Developers Area'.
We do not find any substantial material to establish that with the execution of the development agreement, the petitioner got ownership in the land. It is held that the transfer of development rights as it stands is amenable to GST and cannot be brought within the purview of sale of land subject to clause (b) of Paragraph 5 of Schedule II, sale of building (as per Entry 5 of Schedule-III of the GST Act).
In this case, it has been specifically pleaded by the government that the consideration had been received by the builder in the form of transfer of development rights, which happened long before the issuance of completion certificate or first occupancy. This Court agrees that in this case, the builder cannot claim that it had received the consideration after the issuance of completion certificate or first occupancy.
It is evident from a bare reading of the aforesaid notifications that the State-respondents are correct in contending that the construction of a complex, civil structure etc. intended for sale to a buyer was made exigible to GST except where the entire consideration has been received after issuance of completion certificate or after its first occupancy, whichever is earlier. There would be no ambiguity in the above-mentioned notifications.
Patna High Court final judgement
Will homebuyers get impacted due to this judgement? If yes then how?
Joint development of property agreements created between July 2017 and March 2019 to have far reaching impact
Landowners may have to bear additional cost, depending on the terms of the agreement
GST liability in JDA real estate projects depends on the timing of the sale (pre/post-completion) and the seller's identity
Acquiring a flat pre-completion certificate or first occupation attracts GST at 5% or 1% based on housing type (standard/affordable). The judgment confirms that selling flats pre-completion, even with non-monetary compensation under JDA, is a taxable supply. Post-completion certificate purchases are considered immovable property sales exempt from GST under Schedule III of the CGST Act.
In JDAs, landowners typically receive flats from builders. Buying a flat from a landowner pre-completion certificate is treated as an under-construction property sale, subject to GST based on thresholds and the landowner's GST registration. Post-completion sales by landowners are regarded as completed property sales exempt from GST.
Why did the builder lose this case?
The judgment primarily addresses the taxability developers, not that of landowners. The issue before the court was taxability of construction services ( share of land owner provided). In this light, the court held that, the supply of construction services falls under SAC Code 9954 and the petitioner has been rightly taxed under this code. The petitioner has not been taxed for supply by way of transfer of development rights. It was reiterated that the supply of services of transfer of development rights remained taxable since the introduction of the GST but by virtue of Notification No.04/2018-CT(Rate) dated 25.01.2018, the liability to pay Central tax shall arise only on the consideration received in the form of construction services.
Although the issue before the court was not the tax liability of the landowner, the observations made by court in one of the paragraphs of the judgment have significant implications. The Court observed that the developer does not acquire any rights in the land upon execution of the development agreement; instead, such rights crystallise only upon completion of the project and issuance of the completion certificate, at which point the developer obtains the right to sell the "Developer's Area." On this basis, the Court concluded that the transfer of development rights is amenable to GST and cannot be classified as a mere sale of land or building under Schedule III of the CGST Act.
While the question of whether taxability of development rights in the hands of the landowner was not directly before the Court, the judgment appears to draw an observation on the same. This may have unintended consequences which could potentially affect pending matters and contribute to further litigation. In our view, if transfer of development rights has been completed prior to the GST regime, the same would not be taxable. Therefore, a nuanced reading and possible clarification from tax authorities or higher judicial forums may become necessary.
The Patna High Court on May 5, 2025 ruled that Goods and Service Tax (GST) is payable on transfer of development rights received by a builder from a landlord prior to issuance of completion certificate (CC) and as per a joint development agreement (JDA) with the landowner. In simple terms this means a builder has to pay GST on the house apartment units on reverse charge mechanism (RCM) basis given by it to the landowner under the terms of JDA.To give you a clear idea, in a JDA the landowner usually does a barter trade with the builder by telling him to build house apartments on the land in exchange for some money and house units in return. The builders in such JDAs usually keep a substantial portion of the house units which he himself sells to homebuyers. The landowner has a choice to either sell off his share of the house units or use it for his family. This judgement impacts the landlord's share of the jointly developed house property For instance, a builder may agree to build a 4-story building on a vacant land bearing the entire cost and offer two floors of newly constructed building to the landowner.In the case referred to Patna High Court the builder and landowner signed a JDA where the builder got 57% of the house units and the landowner 43%. But the tax dispute started with the 43% part which the landowner received from the builder. The builder said that he should not pay GST on the 43% part on reverse charge mechanism (RCM) basis since no money was exchanged. The builder said that this JDA between them was a simple non-monetary consideration towards allotment of houses.The government contended that this transaction would attract GST and that too under RCM basis and the builder has to pay this. With this dispute the builder and government reached the doors of Patna High Court.The government's primary point of contention was they deemed that in this property joint development transaction there is an element of supply of service and receipt of consideration under development agreement which is liable to tax under the GST Act. Ultimately, the high court gave a verdict in the government's favour.In hyper simple language this judgement means homebuyers should note that GST liability in a JDA real estate project depends on the timing of the sale (pre/post-completion) and the seller's identity. Since builders would be required to pay GST on such construction services, it may form an additional cost to the landowners, depending on the terms of the joint development agreement.Also, homebuyers should verify the home 's completion status and the seller's GST compliance before going ahead with the transaction, so as to know whether they need to pay GST on top of the home's selling price.For example: if you are buying from a builder during the property's construction stage, GST is to be paid. If you are buying from a landlord, check if the JDA between the landlord and builder was executed before the property got a completion certificate (CC). Because if it is executed before the CC, then the builder will have to charge GST on RCM basis from the landlord, who in turn may adjust the selling price proportionately or choose to absorb this cost, it depends on the landlord.Read below to know the legal reasoning behind this judgement and what should be done by homebuyers.According to the judgement of Patna High Court dated May 5, 2025 here are the details:According to the order of the Patna High Court dated May 5, 2025 here's what the GST department said:The Patna High Court in its order dated May 5, 2025 said:The Patna High Court placed emphasis on the Supreme Court judgement of M/S Govind Saran Ganga Saran and said, 'In our opinion, all the essential components of tax which have been noticed by Supreme Court are present in this case.''In the light of the discussions made hereinabove, we are of the opinion that there is no ambiguity with regard to liability of the petitioner on account of 'GST' on 'RCM' basis on the constructions services rendered by him in lieu of the developments rights under the Development Agreement dated 27.11.2014. We find no reason to entertain the present writ application. This writ application is dismissed.'We have asked various experts about the possible impact of this judgement for homebuyers. Here's what they said:Parag Mehta, Partner, N.A. Shah LLP, says: "One of the foremost factors to be considered in the judgement is that the same is applicable for F.Y 2018-19 i.e before the new notifications for builders and developers were made applicable from 01.04.2019. Further the judgement confirms the departmental position on two issues i.e GST on constructed area handed over to the landlord and GST on development rights as per JDA. It will have far reaching impact for all agreements entered in erstwhile service tax regime or between July 2017 to March 2019."Mehta adds: "The factual position of barter transaction for development rights in lieu of constructed area and hence the liability if any arose in the erstwhile service tax regime has not been considered. Also the fact for taxability of free units to landlords is still pending before Supreme Court in case of Vasantha Greens is also not considered. Similar matters are still pending before various forums throughout India and this Patna High Court judgement will adversely impact many builders and developers."Saloni Roy, Partner, Deloitte India says: 'The Patna High Court has recently held that GST is payable by the land developer on constructed flats given to landowner under a Joint Development Agreement. This ruling provides guidance on taxability of construction services provided by developers to landowners for consideration received in the form of development rights of land.'Roy added: Since developers would be required to pay GST on such services, it may form an additional cost to the landowners, depending on the terms of the agreement. This judgment does not have an impact on home buyers purchasing flats from developers since a limited issue of taxability of services between developers and landowners was dealt with by the Court.Shashi Mathews, Partner, IndusLaw agrees with Roy and adds: 'Insofar as homebuyers are concerned, this judgment will not have any impact on them. The position of the law has been clear that if one is purchasing a house prior to completion certificate then payments made to the builder are liable to GST. However, purchase of a house after completion certificate would not be liable to GST. This judgment would cover those situations where a landowner has entered into a JDA with the builder for construction of flats and in such cases, GST is payable by the builder under RCM for the transfer of the development rights. In almost all cases, TDRs are transferred at the time of entering into the JDA.Rajat Bose, Partner, Shardul Amarchand Mangaldas & Co. adds: 'The judgement casts GST liability on grant of development rights. The court was of the opinion that grant of development rights is not the same as transfer of immovable property, but more in the nature of undertaking construction services. Therefore grant of development rights shall be subject to GST.'Ranjeet Mahtani, partner, Dhruva Advisors LLP, says: 'The builder is responsible for paying GST on the consideration received for the entire constructed area, except (for those units) where the entire consideration has been received after issuance of the Completion Certificate. In this ruling, whilst the builder is responsible for paying tax on the 57% share, he could collect it from the third-party buyers; on the other hand, tax on the 43% share would have to be remitted to the Government exchequer by the builder but collected from the landowner.'Dr. Sachin Sharma, Managing Partner, KSV Tax Consultants, says:'In essence, this ruling underscores that GST liability in JDA real estate projects depends on the timing of the sale (pre/post-completion) and the seller's identity. Homebuyers should note that purchasing pre-completion, from either the builder or landowner, may attract GST. Hence, verifying the completion status and the seller's GST compliance before transactions is crucial,' says Sharma.Shashank Agarwal, Advocate, Delhi High Court, says: 'This judgment clarifies the position as to when GST would be levied. The construction activity is considered as a service. Therefore, in cases where a homebuyer buys a flat from a builder and where the payment is made after the builder has received the completion certificate, then there will be no GST leviable. However, in case, the homebuyer, being a landowner, GST will be leviable where the payment or any form of consideration is paid to the builder for the construction services rendered before receiving completion certificate.'Chartered Accountant Ashish Niraj, partner, ASN & company says: 'In JDA cases the builder is liable to pay GST on RCM basis for his share of the house units for purchase of rights if the JDA does not involve any monetary consideration. If it involves monetary consideration then the landowner is liable to pay GST on the forward charge mechanism on construction services charges paid to builder . However, in cases of RCM the builder is entitled to claim input tax credit (ITC), so this cost won't necessarily be added to the cost of the house since he can offset his output GST liability with input tax credit."According to Shivam Mehta, Executive Parter, Lakshmikumaran & Sridharan Attorneys,Mahtani says: "As per the extant law, the developer/builder is liable to pay GST on the constructed area delivered to the landowner/person transferring the development rights. The judgment affirms this position whilst ruling that the builder is liable to pay GST on the construction services that it renders to the landowner. The ruling reiterates that construction services are liable for GST, to be paid by the builder, whereas the burden of such GST would fall on the parties in the manner they contractually agree. The decision of the Patna High Court discusses the applicability of GST on supply of construction services (by a builder) to the landowner, in a project for which the Completion Certificate was issued in the year 2018 (post-GST implementation); this supply by the builder was in lieu of development rights transferred by the landowner under a Joint Development Agreement (JDA) entered in the year 2014 (pre-GST regime)."