GST on Real Estate – TDR, FSI and Long Term Lease of Land

Table of Contents

1. Tax on real estate transactions except sale of land or completed building/apartment

2. Transfer of development rights

3. Transferable Development Rights i.e. transfer of FSI

4. GST on Upfront amount payable for long term lease of land

5. GST on Development Rights/FSI/Upfront Amount in real estate transactions by promoter under reverse charge

6. Transfer of development rights/FSI after 1-4-2019 for construction of residential apartments exempt, if sold before completion

7. GST on Development Rights/FSI transferred or long term lease amount paid before 31-3-2019

Check out Taxmann's GST on Works Contract & Real Estate Transactions which provides complete & updated coverage of Works Contracts & Real Estate Transactions, incorporating issues pertaining to Projects, TDR, Development Rights, FSI, Leasing & Renting, and Numerical Illustrations.

1. Tax on real estate transactions except sale of land or completed building/apartment

Definition of ‘service’ is so wide that it can cover all transactions relating to land and buildings. However, GST is not payable on sale of land or completed apartment/building/civil structure. Thus, GST is payable on following services –

• • Transfer of Development Rights (by land owner or society or tenant to promoter)
  • Transfer of Development Rights by Government (in case of slum rehabilitation project)
  • Transferable Development Rights (transfer of FSI)
  • Upfront amount for granting long term lease of land for thirty years or more or

GST applies on transfer of development rights – GST applies on transfer of development rights by land owner to developer – Vilas Chandanmal Gandhi, In re [2020] 114 taxmann.com 239 (AAR) – affirmed in Vilas Chandanmal Gandhi, In re [2020] 120 taxmann.com 83 (AAAR – Maharashtra)* Maarq Spaces P Ltd., In re (2020) 78 GST 25 = 111 taxmann.com 368 (AAR – Karnataka). – confirmed in appeal in Maarq Spaces P Ltd. In re (2020) 81 GST 192 = 116 taxmann.com 702 (AAAR-Karnataka).

Service code – The service should fall under group 99721. The tax rate is 18% [9% CGST plus 9% SGST/UTGST].

Exemption in respect of residential apartments – In respect of aforesaid transactions, exemption has been granted only to be extent of services of transfer of development rights or FSI or payment of long term lease amounts, relating to residential apartments, where sale is made before completion or occupation (as in that case, GST is payable @ 1%/5% without ITC).

Tax payable by promoter under reverse charge – In most of the cases, GST on these transactions is payable by promoter under reverse charge.

Tax payable by promoter under reverse charge in transactions after 1-4-2019 -GST on these transactions is payable by promoter under reverse charge in case of transactions entered into after 1-4-2019. This is confirmed in FAQ (Part I) No. 12 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 7-5-2019.

Thus, GST @ 18% (9% CGST plus 9% SGST/UTGST) is payable on – (a) commercial apartments and (b) unbooked residential apartments as on date of issue of completion certificate/occupancy certificate or first occupation of the project – FAQ (Part II) No. 7 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 14-5-2019.

If development rights were transferred prior to 1-4-2019, reverse charge does not apply even if consideration for the same, in cash or kind, is received after 1-4-2019 – FAQ (Part I) No. 38 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 7-5-2019.

GST on TDR applies even if land owner is individual and not in business of land relating to activities – Definition of ‘business’ is very wide. Hence, GST on TDR applies even if land owner is individual and not in business of land relating to activities – FAQ (Part I) No. 39 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 7-5-2019.

2. Transfer of development rights

In some cases, land owner transfers development rights to promoter. The landowner gets some fully constructed apartments from promoter as consideration.

In case of old buildings owned by society, the development rights are given by owners of apartments or tenants (where tenants have tenancy rights under law) to promoter. The promoter demolishes old building and constructs new apartments. He gives agreed constructed area (often equal to the area of earlier building which was demolished) to earlier owner/tenant free i.e. without any monetary consideration. Then, the promoter sales balance area.

Land owner/owner of apartment in society/tenant gives land development rights to promoter, for which he is given some apartments. This is a barter transaction.

In such cases, GST is payable on such transfer of development rights (These are different from ‘transferable development rights’ discussed later).

There is no doubt that the promoter is providing construction service to the land owner, transferor of TDR or earlier tenant/owner of apartments. The consideration is paid to them in form other than cash.

GST should be payable in respect of free apartments given to the land owner. See also CBI&C circular dated 10-2-2012 and Para 6.2.1 of CBI&C’s ‘Taxation of Services : An Education Guide’ published on 20-6-2012, where the same view has been expressed.

In LCS City Makers P Ltd. v. CST (2012) 36 STT 228 = 23 taxmann.com 169 = 68 VST 318 (CESTAT), it has been held that service tax is payable even when consideration is received in form of land – same view in Direktorna Direktsia Obzhalvane I Upravlenie na izpalnenieto v. Orfey Bulgaria EOOD (2013) 38 STT 289 (ECJ) * Southern Properties v. CCE (2015) 52 GST 413 = 61 taxmann.com 423 (Mad HC DB) * Gowra Ventures (P.) Ltd., In re [2018] 98 taxmann.com 320 (AAR- Telangana).

2.1 Transfer of development rights in case of re-development of slum rehabilitation

In re-development of old buildings or societies, apartments are given free to original inhabitants as they transfer TDR/FSI to promoter.

In case of slum development projects, TDR/FSI is received from Government from promoter. The promoter gives apartments free to slum dwellers.

In both the cases, GST is payable as consideration is received in form of TDR/FSI [it is not free]. It is taxable supply -FAQ (Part II) No. 8 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 14-5-2019.

If the promoter opts to pay tax @ 8%/12% with ITC, he can avail ITC even in respect of apartments supplied free to existing occupiers even if no monetary consideration is received (as consideration is in form of grant of TDR/FSI).

3. Transferable Development Rights i.e. transfer of FSI

‘Transferable Development Rights’ (TDR) means certificates issued in respect of category of land acquired for public purposes either by the Central or State Government in consideration of surrender of land by the owner without monetary compensation, which are transferable in part or whole – para 2.1.46 of Consolidated FDI Policy Circular dated 28-8-2017.

TDR is also defined in section 6(2) of FEMA.

TDR is granted by a local authority in pursuance of Development Control Regulations. Owner of land relinquishes or surrenders some area to local authority. In lieu of that area, Government allows construction of additional built-up area. The land owner can use extra built-up area either himself or transfer it to another for agreed some of consideration. Thus, TDR is right given by authority to construct/develop land upto certain permissible Floor Space Index (FSI) within permissible limits of Development Control Regulations.

Transferable Development Rights (TDR) allow the owner of TDR additional construction area [FSI].

The owner of Transferable Development Rights is permitted to transfer these development rights to third person for consideration. The third person purchasing these transferable development rights (TDR) is allowed additional FSI to construct apartments using this TDR.

In the notifications issued under GST, the term used is ‘transfer of Floor Space Index (FSI) (including additional FSI)’. This is similar to transfer of Transferable Development Rights.

Supply of TDR is not sale of land. It is also not actionable claim. Such supply of TDR is subject to GST.

TDR is different from Transfer of Development Rights – In TDR, Government (local authority) gives an instrument to land owner (for surrender of his right) to either use it or sale it.

In Transfer of Development Rights, the owner of land allows promoter to develop the land and construct apartments in his land. This is different from Transferable Development Rights.

TDR (Transferable Development Right) is subject to GST – In Vilas Chandanmal Gandhi, In re [2020] 114 taxmann.com 239 (AAR – Maharashtra), it has been held that GST is leviable on amount received on sale of Transferable Development Rights (‘TDR’)/Floor Space Index (‘FSI’) for surrendering joint rights in terms of Development Control Regulations granted.

TDR (Transferable Development Right) was subject to sales tax – In Sumer Corporation v. State of Maharashtra (2017) 102 VST 251 (Bom HC DB), the developer had constructed some apartments free of cost (without any charge) and supplied them to Slum Rehabilitation Authority (SRA). The developer received Transferable Development Rights (TDR) from SRA. The developer could sale the TDR in market and in fact, the developer did sale those TDR in market. It was held that construction done by developer is works contract. It was further held that TDR received by developer from SRA is ‘other valuable consideration’ received from SRA and is subject to sales tax (works contract tax) on the construction of flats.

4. GST on Upfront amount payable for long term lease of land

Long term lease of land is not sale of land. Hence, GST is payable on services relating to long term lease of land which may be even 99 years or 999 years.

The upfront amount may be called as premium, salami, cost, price, development charges or by any other name.

Leasing of land for 99 years is subject to GST – Hazari Bagh Builders (P.) Ltd., In re [2020] 117 taxmann.com 797 (AAR – Rajasthan).

In Builders Association of Navi Mumbai v. Union of India [2018] 67 GST 334 = 92 taxmann.com 134 (Bombay HC), it has been held that premium/one-time premium is a measure on which tax is levied, assessed and recovered. Hence, demand for payment of GST on one-time lease premium consideration paid by assessee for entering into lease with City Industrial and Development Corporation of Maharashtra Limited (CIDCO) is justified.

This principle will apply to long term lease of land also.

In Goa Tourism Development Corporation Ltd., In re [2018] 71 GST 611 = 100 taxmann.com 128 (AAR – GOA), the applicant collected amount of Rs. 25.20 crores from a hotel Myrayash in the name of onetime upfront Concession Fees for a term of 60 years for use of their property through Private Investment mode on Design, Build, Finance, Operate and Transfer (DBFOT) Basis. It was held that this service is not exempt.

Long lease of land is practically sale of land – In Lavasa Corporation Ltd. v. Jitendra Jagdish Tulsiani [2018] 96 taxmann.com 212 (Bombay HC), agreement of lease was executed to take apartments on long term lease of 999 years. Almost 80% of the cost was paid and substantial amount of stamp duty and registration charges were paid. Lease rent was nominal of Rs. one per year. It was held that though nomenclature of the document is ‘agreement to lease’ in its real purpose, it is an ‘Agreement to sale’. Law is well settled that the nomenclature of the document cannot be a true test of its real intent. The document has to be read as a whole to ascertain the intention of parties. In reality, the transaction is ‘agreement of sale’.

This judgment is in respect of RERA, and may not apply to GST. Further, specific provisions have been made in respect of GST on long lease in case of real estate projects of residential and commercial apartments.

4.1 Upfront amount for long term lease of industrial plots exempt

Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease (of thirty years, or more) of industrial plots or plots for development of infrastructure for financial business, provided by the State Government Industrial Development Corporations or Undertakings or by any other entity having 20%* or more ownership of Central Government, State Government, Union territory to the industrial units or the developers in any industrial or financial business area – Sr No. 41 of Notification No. 12/2017-CT (Rates) and Sr No. 43 of  9/2017-IT (Rates) both dated 28-6-2017 amended on 13-10-2017 and 1-1-2020. [* – The % was 50% upto 1-1-2020]

Explanation.- For the purpose of this exemption, the Central Government, State Government or Union territory shall have 20%* or more ownership in the entity directly or through an entity which is wholly owned by the Central Government, State Government or Union territory [* – The prescribed % was 50% upto 1-1-2020].

This explanation has been inserted under section 11(3) of CGST Act and hence has retrospective effect from 1-7-2017.

Exemption available even if upfront amount on long term lease of industrial plots or for financial business is paid in instalments – Exemption from GST is available even if upfront amount on long term lease of industrial plots is paid in instalments – CBI&C circular No. 101/20/2019-GST dated 30-4-2019.

Conditions for the exemption as introduced w.e.f. 1-1-2020 – The leased plots shall be used for the purpose for which they are allotted, that is, for industrial or financial activity in an industrial or financial business area. The State Government concerned shall monitor and enforce the above condition as per the order issued by the State Government in this regard.

In case of any violation or subsequent change of land use, due to any reason whatsoever, the original lessor, original lessee as well as any subsequent lessee or buyer or owner shall be jointly and severally liable to pay such amount of central tax, as would have been payable on the upfront amount charged for the long term lease of the plots but for the exemption contained herein, along with the applicable interest and penalty.

The lease agreement entered into by the original lessor with the original lessee or subsequent lessee, or sub-lessee, as well as any subsequent lease or sale agreements, for lease or sale of such plots to subsequent lessees or buyers or owners shall incorporate in the terms and conditions, the fact that the central tax was exempted on the long term lease of the plots by the original lessor to the original lessee subject to above condition and that the parties to the said agreements undertake to comply with the same – the condition as introduced w.e.f. 1-1-2020. Earlier, there was no such condition.

Preferential location charges is part of value of land – Location charges or preferential location charges (PLC) paid upfront in addition to the lease premium for long term lease of land constitute part of upfront amount charged for long term lease of land and are eligible for the same tax treatment, and thus eligible for exemption under Sl. No. 41 of Notification No. 12/2017- Central Tax (Rate) dated 28-06-2017 – para 10 of CBIC Circular No. 177/09/2022-TRU dated 3-8-2022.

Sub-leasing of industrial plots is taxable – Sub-leasing of industrial plots is taxable – Gujarat Hira Bourse In re (2021) 133 taxmann.com 77 (AAR- Gujarat).

Ancillary services relating to service of providing lease of industrial plots is taxable – Only upfront amount is exempt from GST. Ancillary services like transfer fees, extension permission fees, conversion fees for changing from leasehold to freehold plot, which are relating to service of providing lease of industrial plots is taxable – Punjab Small Industries and Export Corpn. Ltd., In re (2018) 99 taxmann.com 293 = 71 GST 80 (AAR- Chandigarh).

Till 13-10-2017, the exemption was as follows – One time upfront amount (called as premium, salami, cost, price, development charges or by any other name) leviable in respect of the service, by way of granting long term (thirty years, or more) lease of industrial plots, provided by the State Government Industrial Development Corporations or Undertakings to industrial unit is exempt – Notification Nos. 12/2017-CT (Rates) and 9/2017-IT (Rates) both dated 28-6-2017, effective from 1-7-2017, upto 13-10-2017.

However, in view of explanation inserted w.e.f. 1-7-2017, the amendment made on 13-10-2017 will apply even for upfront fees paid during 1-7-2017 to 12-10-2017.

4.2 Upfront amount for long term lease paid after 1-4-2019 for construction of residential apartments exempt, if apartment sold before completion

Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting long term lease of thirty years or more, on or after 1-4-2019, for construction of residential apartments by a promoter in project, is exempt.

This exemption is available only when the promoter makes sale to buyer before obtaining completion certificate of the building or its first occupation, whichever is earlier. If the promoter received entire consideration from buyer after issuance of completion certificate by competent authority or its first occupation, the exemption is not available.

In case of unsold residential apartments as on date of completion certificate, the promoter is liable to pay GST on proportionate upfront amounts, as provided in Sl. No. 41B of Notification No. 12/2017-CT (Rate) dated 28-6-2017, inserted w.e.f. 1-4-2019.

5. GST on Development Rights/FSI/Upfront Amount in real estate transactions by promoter under reverse charge

GST is payable on transfer of development rights, FSI and upfront amount for long term lease.

5.1 Person liable to pay GST on transfer of Development Rights/FSI/Upfront amount for long term lease

Till 31-3-2019, tax was payable on transfer of development rights/FSI/upfront amount for long term lease by transferor of development of rights or FSI or lessor who gave land on long term lease.

This provision has changed w.e.f. 1-4-2019, vide Notification Nos. 6/2019-CT (Rate) and 06/2019-IT (Rate) both dated 29-3-2019 and Sr Nos. 5B and 5C of Notification No. 13/2017-CT (Rate) dated 28-6-2017 inserted w.e.f. 1-4-2019.

W.e.f. 1-4-2019, the promoter is liable to pay tax under reverse charge in respect of following-

• • Development rights or FSI (including additional FSI) received on or after 1-4-2019 for construction of project (it may be residential or commercial).
  • Long term lease of land (30 years or more) granted after 1-4-2019 for construction of project (it may be residential or commercial).

6. Transfer of development rights/FSI after 1-4-2019 for construction of residential apartments exempt, if sold before completion

Exemption is available in respect of transfer of development rights, FSI made after 1-4-2019 or upfront amount for long term lease of land (30 years or more) paid after 1-4-2019, to the extent of construction of residential apartments by promoter, when sale is made by promoter during construction.

This exemption is not available –

(a) where entire construction of residential apartment is received after completion certificate or first occupation i.e. when ready apartments are sold without GST
(b) transfer of Development Rights/FSI or payment of long term lease amount for commercial apartments.

In such cases, promoter is liable to pay GST under reverse charge.

The exemption is not applicable in respect of transfer of Development Rights/FSI or long term lease of land (30 years or more) made on or before 31-3-2019.

Provisions in respect of exemption and tax on TDR/FSI/Upfront amount in real estate transactions have been made in Sr Nos. 41A and 41B of Notification Nos. 12/2017-CT (Rate) and 9/2017-IT (Rate) both dated 28-6-2017 inserted w.e.f. 1-4-2019.

The provisions are in respect of following –

(a) Service by way of transfer of development rights (TDR) or Floor Space Index (FSI) (including additional FSI) on or after 1st April, 2019

(b) Upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable in respect of service by way of granting of long term lease of thirty years, or more on or after 1-4-2019.

The service is for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.

GST on TDR – GST on TDR @ 18% (9% CGST plus 9% SGST/UTGST) is payable on –

(a) commercial apartments and

(b) unbooked residential apartments as on date of issue of completion certificate or first occupation of the project – FAQ (Part II) No. 7 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 14-5-2019.

Exemption to the extent of residential apartments sold before completion – The amount of GST exemption available for construction of residential apartments in the project under this notification shall be calculated as provided in Sr Nos. 41A and 41B of Notification No. 12/2017-CT (Rate) dated 28-6-2017.

The provision has been very clumsily drafted. Hence, we have to understand the provision considering the principle behind the provisions.

What is written below is not what is actually written against Sr Nos. 41A and 41B but what is actually meant (based on principles). Hope the notification will be amended suitably to clarify the position.

As per the principle, the first step is to calculate GST payable on development rights transferred, which pertain to residential apartments.

(A) GST on transfer of development rights/FST attributable residential apartments = [GST payable on TDR or FSI (including additional FSI) or both or on upfront amount payable in respect of service by way of granting of long term lease of thirty years, or more for construction of the project] × (carpet area of the residential apartments in the project) ÷ (Total carpet area of the residential and commercial apartments in the project) .

[The notification wrongly terms it as ‘Amount of exemption available for construction of residential apartments].

The second step is to calculate GST payable by promoter on un-booked residential apartments.

The promoter shall be liable to pay tax at the applicable rate, on reverse charge basis, on such proportion of value of development rights or FSI (Including additional FSI) or both, or upfront amount (called as premium, salami, cost, price, development charges or by any other name) paid for long term lease of land, as is attributable to the residential apartments, which remain un-booked on the date of issuance of completion certificate, or first occupation of the project, as the case may be.

The calculation will be made in the following manner –

(B) GST payable on residential apartments remain un-booked on date of completion = [GST payable on TDR or FSI (including additional FSI) or both or upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for long term lease of land for construction of the residential apartments in the project but for the exemption contained herein] × (carpet area of the residential apartments in the project which remain un-booked on the date of issuance of completion certificate or first occupation ÷ Total carpet area of the residential apartments in the project) – first proviso to Sr Nos. 41A and 41B of Notification No. 12/2019-CT (Rate) dated 28-6-2017 inserted w.e.f. 1-4-2019.

The exemption available on transfer of development rights/FSI attributable to residential apartments which were booked prior to date of completion = (A) – (B).

Upper limit for tax on residential apartments – The tax payable in terms of above shall not exceed 0.5% of CGST (plus 0.5% of SGST/UTGST) of the value in case of affordable residential apartments and 2.5% of CGST (plus 2.5% of SGST/UTGST) of the value in case of residential apartments other than affordable residential apartments remaining un-booked on the date of issuance of completion certificate or first occupation – first part of second proviso to Sr Nos. 41A and 41B of Notification No. 12/2019-CT (Rate) dated 28-6-2017 inserted w.e.f. 1-4-2019.

Time when liability of promoter arises – The liability to pay central tax on the said portion of the development rights or FSI, or both, or upfront amount paid for long term lease of land, calculated as above, shall arise on the date of completion or first occupation of the project, as the case may be, whichever is earlier – second part of second proviso to Sr Nos. 41A and 41B of Notification No. 12/2019-CT (Rate) dated 28-6-2017 inserted w.e.f. 1-4-2019.

Value of supply of service of development rights or FSI to promoter – Value of supply of service by way of transfer of development rights or FSI by a person to the promoter against consideration in the form of residential or commercial apartments shall be deemed to be equal to the value of similar apartments charged by the promoter from the independent buyers nearest to the date on which such development rights or FSI is transferred to the promoter – para 1A of Notification Nos. 12/2017-CT (Rate) and 9/2017-IT (Rate) both dated 28-6-2017 inserted w.e.f. 1-4-2019.

As per paragraph 2 of Notification No. 11/2017-CT (Rate) dated 28-6-2017, the value will be equal to total amount charged less one third of total amount as value of land.

In fact, if value is calculated on aforesaid basis, the ‘value’ will be much higher than that provided in section 15 of CGST Act, which is legally impermissible.

Value if cash is received by land owner – If cash is received by land owner, the total amount received will be taxable value of supply. Rule 31 applies – Maarq Spaces P Ltd. In re (2020) 78 GST 25 = 111 taxmann.com 368 (AAR-Karnataka).

Value of portion of un-booked residential or commercial apartments – Value of portion of residential or commercial apartments remaining un-booked on the date of issuance of completion certificate or first occupation, as the case may be, shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the date of issuance of completion certificate or first occupation, as the case may be – para 1B of Notification Nos. 12/2017-CT (Rate) and 9/2017-IT (Rate) both dated 28-6-2017 inserted w.e.f. 1-4-2019.

6.1 Issue of partial completion certificate/occupancy certificate

All the accounts are to be maintained project-wise. In one project, there may be more than one building. Often, partial completion certificate/occupancy certificate is obtained for each building.

As per FAQ (Part I) No. 29 issued by CBI&C vide circular F No. 354/32/2019-TRU dated 7-5-2019, if partial completion/occupancy certificate has been obtained before 31-3-2019, the first occupation shall not be considered to have taken place. It will be considered as ongoing project as on 1-4-2019. Promoter can opt to pay tax @ 1%/5% on such project.

7. GST on Development Rights/FSI transferred or long term lease amount paid before 31-3-2019

The provisions discussed aforesaid apply where Development Rights/FSI was transferred or Upfront Amount for long term lease was paid on or after 1-4-2019. In respect of rights transferred before 31-3-2019, the provisions are discussed in para 16.4 above.

The provisions are contained in Notification No. 4/2018-CT (Rate) dated 25-1-2018.

When the promoter gets development rights from the land owner, this can be said to be ‘advance received’ and GST may become payable immediately.

However, CBI&C, vide its Circular No. 151/2/2012-ST dated 10-2-2012 had clarified that service tax will be payable by the builder/developer on the ‘construction service’ involved in the flats to be given to the land owner, at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar instrument (e.g. allotment letter) – this view was confirmed in CBI&C Instruction F No. 354/311/2015-TRU dated 20-1-2016.

This principle has also been confirmed in case of transfer of development rights by land owner to builder/developer (now promoter) in Notification No. 4/2018-CT (Rate) and 4/2018-IT (Rate) both dated 25-1-2018.

If development rights or FSI are transferred for consideration in form of apartments, two services are involved –

(a) person transferring FSI or development rights to developer or builder (now termed as ‘promoter’ w.e.f. 1-4-2019)- this is supply of FSI/development rights

(b) Builder or developer (termed as promoter w.e.f. 1-4-2019) transfers possession of apartments to transferor of FSI/development rights – this is supply of construction service.

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