The levy of Goods and Service Tax on land development, re-development of housing society buildings and slum rehabilitation is a contentious issue though these activities were already subject to the levy of service tax and VAT in the pre-GST regime.
In this article implications of GST on the builders / developers, a co-operative housing society (society), its members, landlords, tenants and unauthorised occupants (viz. slum dwellers on encroached land) are discussed. The most important issue is that whether there is any change under GST regime from the earlier service tax regime. In the opinion of the writers, there is a qualitative and substantive change. Under service tax, , immovable property was outside the scope by way of definition of ‘activity’. The term ‘activity’ was of wider and unrestricted implication. However, in case of GST, a ‘supply’ is liable to tax only if made in the course or in furtherance of business. This has resulted in interesting debate and complexities.
GST on re-development of society buildingLet us say, a Co-operative Housing Society registered under the Maharashtra Co-operative Societies Act, 1960 and its members (for the sake of brevity, the society and members are collectively referred to as ‘SM’) decide to redevelop the existing building which is in dilapidated condition and is required to be re-developed as per prevailing Development Control Regulations [DCR]. In case of re-development of the dilapidated building, the municipal regulations in Maharashtra presently allow approx. 3:1 FSI instead of 1:1 which is allowed under normal circumstance.
The key contents that are incorporated in the Development Agreement with the developer (DA) are discussed below:
SM shall allow the developer to reconstruct building by demolishing the existing one with some additional area, may be by way of constructing additional floors. The developer shall do so by employing his funds and at his attendant cost and risk. To avail the benefit of extra construction is permitted under DCR, the developer is required to purchase necessary Transferable Development Right (TDR) from permissible sources. As per the terms of DA, the developer may be required to construct some extra area for the existing members which is to be given to them free of cost to incentivise the project.
Out of the total constructed area after utilising full potentiality of FSI and TDR, the remaining area after allotment to the existing members as warranted by DA belongs to developers which is known as “Developer’s free sale portion” and he can sell it at his discretion and price. SM undertakes to enrol and register the purchasers of such free sale portion as the members of the society upon fulfilment of necessary formalities. The newly enrolled members are entitled to the same rights as of existing members and also have undivided share in the title of the land in the similar manner.
In addition to re-development, the developer shall pay to SM cash consideration in form of corpus fund, hardship allowance, rent for alternate accommodation till permanent alternate accommodation is granted in the new building, brokerage, shifting allowance etc.
In the above background, we will examine the incidence of GST from the point of view of:a.The society and its members
b.The developer
Taxability of development right in the hands of SM
The issue here is that the SM is supplying development right to the developer to re-develop the building, putting up extra area / floor by using permissible FSI, TDR etc. in return for newly constructed flats with some additional area free of cost and some cash consideration mentioned above in terms of DA. Under GST law, SM may not be liable to tax for the following reasons:
Supply not in the course or furtherance of business:
For the purpose of determining the liability under GST, it is necessary to look into Charging Section 91 according to which central goods and services tax is leviable on all intra-State supplies of goods or services or both. Thus, ‘supply of goods or services or both’ is the vital element for charge of tax. Section 7 (a) defining ‘supply’ require that the supply for a consideration by a person should be in the course or in furtherance of business.
“S.7 – For the purposes of this Act, the expression “supply” includes––
all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business”.
Definition of ‘goods’ as per S. 2(52) is as follows:
“goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”.
Thus, goods do not include immovable property. Development right is an immovable property.
Definition of ‘service’ u/s. 2(102)
“services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
As per the above definition, everything other than goods, money and securities is service. However, the moot issue is whether an immovable property can be said to be a ‘service’. This is a contentious issue as right in land, viz. development right is a benefit arising from land is “immovable property”. This will be discussed little later, since the discussion centres right now on the treatment of immovable property under GST.
“Supply of goods or service or both” for the purpose of levy of GST u/s. 7, has to be in the course or furtherance of business. The society and / or members cannot be said to be in the business of grant of development right, whether the re-development of a society building is undertaken by virtue of compulsion on account of dilapidated condition or not. A society or its members cannot be said to be involved in supply of development right to the developer in the course or in furtherance of business by entering into development agreement. By agreeing to get a new flat in lieu of the old flat, the members of society have not made any supply.
Land and right / benefit in land outside the scope of GST – Sch. III of CGST Act, Transfer of undivided right in land from the existing members to the new purchasers:
Various judgements of the Supreme Court and High Courts on the principle of mutuality and examination of the provisions of Maharashtra Co-operative Societies Act, 1960 and bye-laws of a Co-operative Societies made thereunder that the rights of a member in a co-operative housing society are a bundle of rights including the right of possession, right to transfer and right to let-out the flats allotted to him etc., etc.
In Ramesh Himmatlal Shah vs. Harsukh Jadhavji Joshi, (1975) 2 SCC 105, the Hon’ble Supreme Court referred to clause 47(1)(b) of Maharashtra Cooperative Societies Act, 1960 and observed that a flat in a multi-storeyed building would naturally have a corresponding right over the undivided proportionate share of the land on which the building stands and that a member of the society has interest in the property belonging to the society. In the words of the Hon’ble Apex Court:
“We may now turn to the relevant Rules. By Rule 9 “when a society has been registered the Bye-laws of the society as approved and registered by the Registrar shall be the Bye-laws of the society”. Rule 10 contains classification and sub-classification of societies and we are concerned with the fifth class mentioned therein, namely, the “Housing Society” which again is sub-divided into three categories and we are concerned in this appeal with the second category, namely, “Tenant Co-partnership Housing Society”, which is described therein as an example of “Housing Societies which hold both lands and buildings either on leasehold or freehold basis and allot them to their members”.
In Gayatri De vs. Mousumi Coop. Housing Society Ltd., (2004) 5 SCC 90, the Hon’ble Supreme Court held that in the event of death of a member of a housing society, the heirs of the deceased person would inherit the flat with proportionate interest in the land. For this, the Supreme Court examined the provisions of West Bengal Cooperative Society Act, 1983, and observed as under:
“Section 87 of the Act deals with a member’s right of ownership and sub-section (3) of the said section makes it abundantly clear that a plot of land or a house or an apartment in a multi storied building shall constitute a heritable and transferable immovable property within the meaning of any law for the time being in force provided that notwithstanding anything contained in any other law for the time being in force, such heritable and transferable immovable property shall not be partitioned or subdivided for any purpose whatsoever”.
When a person purchases a flat and incidentally becomes a member of the society, the right, title, interest over the flat is not merely a right to occupy it. It is specie of property, which can be sold. Once a member completes the procedure, the society has no option but to recognising the incoming member as the owner of the flat. The Supreme Court in the case of Hill Properties Ltd. vs. Union Bank of India, (2014) 1 SCC 635, observed as under:
“So far as a builder is concerned, the flat-owner should pay the price of the flat. So far as the society or company in which the flat-owner is a member, he is bound by the laws or articles of association of the company, but the species of his right over the flat is exclusively that of his. That right is always transferable and heritable”.
In this context, it is required to examine Sch. III of CGST Act which denotes the activities or the transactions that shall be treated neither as a supply of goods or nor supply of services –
“Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building”.
In case of re-development of society building, the developer is given right to construct additional area and to sell the same to the purchasers by purchasing TDR from open market. The undivided ownership right in the land of the existing members is thus curtailed and the same is being transferred to the developer for further commercial exploitation including recouping the cost of re-construction of the existing building. Transfer of ownership right in land is out of the scope of “supply” as per Sch. III to the CGST Act.
Development right – a right in land being an immovable property whether outside the scope of GST?
The expression “land” and “building” in Schedule III includes even right in land / building. It is relevant to note Entry 18 of List II of Seventh Schedule to the Constitution of India. It reads as “Land, that is to say, rights in or over land, land tenures including the relation of landlord and tenant, and the collection of rents; transfer and alienation of agricultural land; land improvement and agricultural loans; colonization”. Therefore, reference to land includes even rights in land.
Relying on the Hon’ble Supreme Court decision in Santosh Jayaswal vs. State of M.P., (1995) 6 SCC 520, in Godrej & Boyce Mfg. Co. Ltd. vs. State of Maharashtra, (2009) 5 SCC 24 : (2009) 2 SCC (Civ) explaining the meaning of the expression, “benefits to arise out of land”, perusal of Bombay High Court’s decision in case of Chheda Housing Development Corporation vs. Bibijan Shaikh Farid, (2007) 3 Mah LJ 402 and other relevant decisions of the Apex courts and High Courts and various provisions of Maharashtra Regional Town Planning Act 1966 read with section 3 of Transfer of Property Act defining immovable property indicates the artificial manner in which the development rights are carved out from the land. Further, sections 17(1) and 2(16) of The Registration Act r.w. S.2(16) of Indian Stamp Act also establish that development rights are right in immovable property.
The expression, “immovable property” has not been defined under the GST law. Therefore, it would be relevant to note the definition of “immovable property” under the following laws:
Section 3(26) of the General Clauses Act, 1897:
Definitions:
In this Act, and in all Central Acts and regulations made after the commencement of this Act, unless there is anything repugnant in the subject or context-
(26) “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;
Section 2(ja) of the Maharashtra Stamp Act:
In this Act, unless there is anything repugnant in the subject or context,-
(ja) “immovable property” includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth;
Section 2(6) of the Registration Act, 1908:
In this Act, unless there is anything repugnant in the subject or context-
(6)”immovable property” includes land, buildings, hereditary allowances, rights to ways, lights, ferries, fisheries or any other benefit to arise out of land, and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, growing crops nor grass;”
A perusal of the above definitions indicates that they are more or less similar. Thus, immovable property includes interalia benefit arising out of land and things attached to the earth or permanently attached to the earth.
It is relevant to note the following extract wherein the expression “benefits to arise out of land” is explained:
Extract from commentary on The Transfer of Property Act, 1882 (TP Act) by Sir. Dinshaw Fardunji Mulla [11th Edition – 2013]”
“The definition of ‘immovable property’ in S.3(26) of the General Clauses Act is not exhaustive”.
“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”.
“The TP Act defines the phrase ‘attached to the earth, but gives no definition of immovable property beyond excluding standing timber, growing crops and grass. These are no doubt excluded because they are only useful as timber, corn and fodder after they are severed from the land. Before they are so severed, they pass on transfer of the land under S. 8 as things attached to the earth”.
“A ‘benefit to arise out of land’ is an interest in land and, therefore, immovable property. The Registration Act, however, expressly includes as immovable property benefits arising out of land, hereditary allowances, rights of way, lights, ferries and fisheries”.
“From a combined reading of the definition of ‘immovable property’ in S. 3 of the TP Act and S. 3(5) of the General Clauses Act, it is evident that in an immovable property, there is neither mobility, nor marketability as understood in excise law”.
……
The definition of immovable property in the General Clauses Act, TP Act and other laws and judgements cited above have dealt with benefit and right in land. In the absence of a specific definition under GST law, general definition must prevail.
Consequently, Development Right being the benefit arising from the land, must be held to be immovable property and outside the scope of GST.
Therefore, in view of the specific provision of treating sale of land and sale of building as neither supply of service nor as supply of sale would not make the sale of land / building liable for GST as there is no charge in the first place. Similarly, the absence of reference to right in land / building in serial no. 5 of Schedule III cannot deem the presence of a charge of GST. The satisfaction of levy should be arrived at dehors the entries in Schedule III.
Whether the amounts paid by developer to SM in terms of DA like hardship allowance, rent, shifting allowance, contribution to the corpus of the society, brokerage and such other amounts as agreed upon can be treated as ‘consideration’ in the hands of SM so as to attract the levy of GST?
The consideration flowing from a developer to the SM, in whatever form, is not against any taxable supply. All payments from the developer to the SM is flowing out from DA. Appointing developer to re-develop the existing building is not a taxable supply as we have discussed earlier. The developer makes payment to the members of society in satisfaction of the obligation to the society and its members. Viewed in this manner, the allotment of a new flat, the payment of compensation being rent for alternate accommodation and hardship allowance is also governed by the principle of mutuality. Payment of corpus fund to the society by the developer is also in satisfaction of the obligation flowing out from DA as a part of design of the re-development arrangement. Therefore, the SM are not liable for GST as they have not effected any supply under the DA.
It may be argued that the developer makes payment to the members and /or the society as compensation for the act of agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act treated as supply of service as per section 7(1)(d) read with paragraph no. 5(e) of Schedule II. However, there is no stipulation in the DA which requires the members of society to agree to the obligation to refrain from an act or to tolerate an act or a situation, or to do an act; for which a consideration is stipulated. The essential ingredient of the contract is redevelopment. Therefore, the members or the society are not liable to GST even under this entry. There is no supply made by SM to developer though they have been compensated.
Whether the DA involves any taxable supply by developer to SM under GST?
Developer is constructing the building, a part of which will be given to the members of SM. The other part of the building will be sold by it for a consideration. For the construction of the building for the members of SM, developer is not receiving any monetary consideration from them, but a right from SM is received to load TDR on its plot so that the developer would be able to construct extra area in the building for selling in the market. There are common facilities and common spaces which are owned and used jointly by the owners of these units. These units do not have any independent existence. Therefore, construction of entire building is necessary before handing over the units to the members. In other words, developer cannot construct the building for selling to new customers unless he would construct that part of the building which would be allotted to SM. Hence, the developer is constructing the entire building in order to sell a part of the building.
Effectively, the developer is providing service to both SM and the buyers of additional flats under DA as a part of a single supply. The entire revenue in this arrangement flows from the buyers of additional flats, a part of which is paid by developer to the members of SM by way of construction and monetary consideration. The proportionate ownership of the land obtained by the developer from SM would be passed on to the flat buyers. For all these efforts, the developer would be remunerated by way of sale consideration from the additional flats constructed for sale.
Support may be found from the definition of consideration contained under CGST Act.
2(31) “consideration” in relation to the supply of goods or services or both
includes–
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government:
…………………”
Thus, it can be said that the SM by virtue of entering into DA, induces developer to supply works contract service and to sell additional area to outsiders to recoup the cost of construction and other monetary consideration. In turn they undertake to make the purchasers as members by allotting undivided share in land. The sale consideration will also be the consideration for re-construction of the existing building.
Whether the transaction between SM and the developer is barter and liable to tax as such?
The definition of ‘supply’ contained in S.7 (supra) includes a barter arrangement. The question arises that whether the grant of development right by SM and the construction of the building by a developer is barter. The answer is that it may be so in technical term but not liable for GST as grant of development right is not liable for GST as already discussed above.
Availment of input tax credit (ITC) and reversal thereof attributable to the units allotted free of cost to SM.
Units allotted free of cost to SM are not without consideration. The consideration flows from other persons. The service provided by developer is taxable. Hence, ITC under the law is available fully and can be used for the GST payable on the sale of under constructed flats from free sale area.
Without receiving such inputs and input services, it would be impossible to construct that part of the building on which GST is payable. Therefore, it cannot be said that the entire inputs and input services used for construction of the building are not used for providing taxable supply. Therefore, ITC is eligible. It has been discussed earlier that there is a single supply to SM and the purchasers of free sale area.
(To be continued – concluding part will cover taxability of slum rehabilitation projects, land development agreements.) _
