Joint Development Agreements are now one of the most common collaboration models in Indian real estate. They allow landowners and developers to combine resources for developing projects without the need for large upfront land acquisitions by developers or immediate sales by landowners. This model ensures that both parties share risks and rewards in proportion to their contribution. However, the taxation of these arrangements, particularly under the Goods and Services Tax, has been one of the most contested issues in recent years. Before delving into the implications of GST, it is crucial to understand the structure of JDAs and how the concept of supply applies to their unique framework.
The Structure of a Joint Development Agreement
A Joint Development Agreement is essentially a contract where the landowner allows a developer to use land for construction in exchange for either a share of the developed property or a share of the revenue from sales.
Area-sharing model
In the area-sharing model, the landowner provides development rights to the developer, who in turn constructs apartments or commercial units on the land. Once construction is complete, the developer hands over a specified share of the built-up property to the landowner. The developer retains the remaining portion, which can be sold independently in the open market.
Revenue-sharing model
In the revenue-sharing model, the landowner again transfers development rights to the developer. The developer then sells the units to buyers in the market and agrees to share an agreed percentage of the sales revenue with the landowner. The landowner’s compensation is thus not in the form of physical property but a portion of the monetary proceeds.
Each model results in distinct streams of supplies and consideration flows, and hence their treatment under GST varies.
Pre-GST Scenario and Challenges
Before July 2017, indirect taxation of JDAs was a patchwork of service tax, state VAT, and stamp duty.
- Service tax applied to construction services provided by developers, but exempted completed properties.
- VAT applied differently across states depending on whether construction contracts were classified as works contracts.
- Stamp duty was levied on transfers of land and immovable property, remaining outside the scope of service tax and VAT.
This fragmented system led to frequent disputes on valuation, timing of liability, and whether a particular transaction constituted a taxable service. Developers often faced challenges in claiming credits across different tax regimes, increasing compliance complexity. GST was introduced with the aim of simplifying this framework by subsuming multiple indirect taxes into a single regime.
GST and the Concept of Supply
Under the Central Goods and Services Tax Act, supply includes all forms of transfer, exchange, or disposal of goods or services for consideration in the course of business. Land and completed buildings were specifically excluded from the definition of supply, which meant outright sale of land or sale of completed property did not attract GST.
However, JDAs involve two critical elements that the law recognized as taxable services:
- Transfer of development rights by the landowner to the developer.
- Construction of the landowner’s share of property by the developer.
These elements created obligations for both landowners and developers under GST.
Transfer of Development Rights
Classification of development rights
Development rights are intangible rights that allow the developer to undertake construction on the landowner’s property. Courts have debated whether such rights are akin to immovable property. The Telangana High Court ruled that transfer of development rights does not constitute a sale of immovable property but qualifies as a service under GST. The matter is currently pending before the Supreme Court, but the government continues to treat development rights as a taxable service.
Reverse charge mechanism on developers
To simplify compliance, the government mandated that developers must discharge GST under the reverse charge mechanism when they receive development rights from landowners. This means the landowner does not have to register under GST solely for transferring development rights, while the developer bears the tax liability.
Exemption for residential projects
From April 2019, development rights supplied for construction of residential apartments were exempt from GST provided the units were booked before completion. The exemption prevents double taxation because GST would already apply on under-construction residential units sold to buyers.
If the units remain un-booked at the time of completion, the exemption does not apply. In such cases, the developer is required to pay GST on a deemed value of the development rights under the reverse charge mechanism. For affordable residential apartments, the liability is capped at 1 percent of the value, while for other residential apartments it is capped at 5 percent.
Commercial projects
No such exemption exists for commercial units. Development rights transferred for commercial projects are fully taxable under GST, with the developer required to pay the tax under reverse charge.
Valuation of Development Rights
One of the key challenges has been determining the value of development rights since no direct monetary consideration is involved. The rules provide that the value of development rights is equal to the price charged for similar units sold to independent buyers near the date of transfer. From this amount, a deemed deduction of one-third for land value is allowed.
This deemed deduction has been contested before courts, as land values vary significantly across projects and locations. The Gujarat High Court, for example, held that where the actual value of land is ascertainable, it should be considered instead of applying the one-third deduction formula.
In practice, valuation remains a sensitive area, especially in fluctuating markets where sale prices vary across different time periods. Developers must maintain proper documentation to justify valuation adopted for GST purposes.
Timing of Tax Liability on Development Rights
The time of supply rules are critical in JDAs. In the case of development rights for residential projects, liability arises on the relevant date, which is defined as the date of issuance of completion certificate or the date of first occupation, whichever is earlier. This ensures that developers are not burdened with upfront GST liability before they generate sales revenue.
For commercial projects, the time of supply follows the general provisions of Section 13 of the CGST Act. This means that liability could arise earlier, based on invoice issuance or receipt of consideration, increasing the compliance burden for developers engaged in commercial developments.
Construction Services Provided to Landowners
When developers construct apartments or commercial units for landowners in exchange for development rights, the activity is classified as a supply of construction services.
Applicability of GST
- For affordable residential apartments in both Real Estate Residential Projects (RREP) and other residential projects, GST is payable at 1.5 percent (effective rate of 1 percent after deduction).
- For other residential apartments, GST is payable at 7.5 percent (effective rate of 5 percent).
- For commercial apartments in residential real estate projects, GST is payable at 7.5 percent (effective rate of 5 percent).
- For commercial construction projects that do not qualify as residential real estate projects, GST is payable at 18 percent with the benefit of input tax credit.
These rates are mandatory and developers cannot opt for higher rates to avail input credit benefits.
Valuation of construction services
GST is levied on the total consideration received for the apartment, including the value of construction and land. For valuation purposes, one-third of the consideration is deemed to represent the land component and is deducted. However, where the actual land value can be identified, it should be considered instead of applying the notional deduction.
Input tax credit restrictions
One of the most significant changes from April 2019 was the withdrawal of input tax credit for projects taxed at concessional rates. Developers must pay GST entirely in cash without using credit or taxes paid on inputs and services. Ongoing projects were required to reverse previously availed credits proportionate to the unsold inventory.
Procurement requirements
Developers are also mandated to procure at least 80 percent of inputs and services from registered suppliers. Any shortfall attracts GST under reverse charge at 18 percent. Purchases of cement from unregistered suppliers are always taxable under reverse charge, regardless of the 80 percent threshold. This provision ensures that the supply chain remains tax compliant and minimizes leakage.
Time of supply of construction services
In area-sharing models, the liability for GST on construction services provided to landowners arises on the relevant date, similar to development rights. In revenue-sharing models, the liability follows general provisions of Section 13, leading to earlier tax payment obligations.
Compliance Burdens for Landowners and Developers
The unique nature of JDAs means that both parties have to navigate overlapping obligations.
- Landowners who sell their share of apartments before completion must register under GST and discharge tax liability on such sales. They can claim input tax credit of GST charged by the developer on construction services.
- Developers face multiple obligations including paying GST on development rights under reverse charge, charging GST on construction services provided to landowners, collecting GST on under-construction sales to buyers, and discharging reverse charge liability on procurements from unregistered suppliers.
The need to pay GST in cash without input credits strains working capital. Careful financial planning and contractual arrangements are necessary to manage these obligations effectively.
Practical Application of GST in Area-Sharing and Revenue-Sharing Models
We examined the structural framework of Joint Development Agreements and the treatment of development rights and construction services under GST. With the theoretical foundation in place, the next step is to analyze how these provisions play out in practice. Developers and landowners often face significant challenges in implementing compliance when JDAs are executed, particularly in area-sharing and revenue-sharing models.
The complexity arises not only from the dual nature of supplies but also from valuation, timing, and restrictions on credit. We explored practical examples to illustrate how GST is applied to different models, highlights key obligations for stakeholders, and discusses compliance strategies that can reduce disputes.
Area-Sharing Model and GST
Structure of the arrangement
In the area-sharing model, the landowner gives the developer the right to construct on the land. In exchange, the developer hands over a fixed portion of the completed apartments or commercial units to the landowner. The remaining portion is retained by the developer to sell in the open market.
Development rights under area-sharing
The transfer of development rights by the landowner to the developer is treated as a supply of services. The developer is required to pay GST on this transaction under the reverse charge mechanism.
For residential projects, exemption applies to the extent the apartments are booked before completion. For un-booked units, GST liability arises on the relevant date, i.e., the date of completion certificate or first occupation. For commercial projects, the exemption does not apply and GST is payable by the developer under reverse charge in accordance with general time of supply rules.
Construction services provided to the landowner
When the developer constructs apartments for the landowner, this constitutes a supply of construction services. GST is payable by the developer on the value of these services. Since no monetary consideration is involved, valuation is based on the sale price of similar apartments sold to other buyers, reduced by the deemed land value deduction.
For example, if the developer agrees to give 40 apartments to the landowner and sells similar apartments at 80 lakh each, the value of construction services to the landowner is 80 lakh per unit, less the deemed one-third land deduction. GST is payable at the applicable rate depending on whether the apartments are residential affordable, residential other than affordable, or commercial.
ITC restrictions and compliance impact
Under post-2019 rules, developers cannot claim input tax credit for projects where concessional rates apply. This increases the cash outflow for developers as they must discharge liability in cash. If the landowner later sells their share of units before completion, they must register under GST, pay tax on those sales, and they are eligible to claim credit of the GST charged by the developer on construction services.
This mechanism ensures tax neutrality but creates significant compliance obligations for both parties. Developers must raise proper tax invoices to the landowner for their share of units, while landowners must maintain records of subsequent sales to claim credit.
Example of area-sharing with numbers
Consider a JDA where a landowner provides land worth 20 crore to a developer. The developer constructs 200 apartments, of which 80 are allocated to the landowner and 120 are retained by the developer. Similar apartments are sold at 90 lakh each.
- Development rights: Exempt to the extent apartments are booked before completion. For un-booked apartments, GST payable by developer under reverse charge at 5 percent of value.
- Construction services: Value = 90 lakh per apartment x 80 apartments = 72 crore. Deemed land deduction one-third = 24 crore. Net value = 48 crore. GST payable on this amount at 5 percent = 2.4 crore.
- Sale of developer’s share: If 120 apartments are sold under construction, GST at 5 percent is payable on the transaction value.
- Sale of landowner’s share: If sold before completion, the landowner pays GST but can claim ITC of the 2.4 crore charged by the developer.
This example illustrates the cascading effect of multiple supplies and highlights the importance of clear contracts to allocate liability and credit.
Revenue-Sharing Model and GST
Structure of the arrangement
In the revenue-sharing model, the landowner transfers development rights to the developer, who undertakes construction and sells units in the market. The revenue from sales is shared between the landowner and the developer according to agreed ratios. The landowner receives cash rather than physical apartments.
Development rights under revenue-sharing
The treatment of development rights is similar to the area-sharing model. The developer is liable to pay GST under reverse charge on the development rights. For residential projects, exemption applies up to the proportion of units booked before completion. For un-booked units, GST liability arises on the relevant date. For commercial projects, GST is payable as per general time of supply rules.
Revenue share as consideration
When the developer sells units, GST is payable on under-construction sales. The landowner’s revenue share is not taxed separately as supply of services, since the consideration for transfer of development rights has already been subjected to GST under reverse charge. However, the classification of such revenue sharing must be carefully documented in agreements to avoid disputes.
Valuation complexities
Valuation of construction services under revenue sharing requires reference to the proportion of revenue allocated to the landowner. For example, if the agreement provides that 40 percent of the sale proceeds belong to the landowner, this share represents the value of development rights transferred by the landowner. GST liability on these rights is discharged by the developer under reverse charge.
The balance revenue retained by the developer is treated as consideration for their construction services. The taxable value must again exclude the one-third deemed land deduction, unless actual land value is ascertainable.
Example of revenue-sharing with numbers
Consider a JDA where a landowner provides land worth 30 crore. The developer undertakes a project of 250 apartments. Sales proceeds from apartments amount to 225 crore. The revenue sharing ratio is 40:60, with 40 percent to the landowner and 60 percent to the developer.
- Development rights: Landowner transfers rights, and developer discharges GST under reverse charge. Value linked to 40 percent of sales, i.e., 90 crore. If apartments are booked before completion, exemption applies. For un-booked units, GST payable on deemed value at 5 percent.
- Construction services: Developers pays GST on their share of 60 percent of sales, i.e., 135 crore, reduced by one-third for deemed land. Net value = 90 crore. GST at 5 percent = 4.5 crore.
- Landowner’s share: Since the landowner receives monetary consideration, no further GST applies on receipt of share, provided the developer has already discharged GST on development rights.
This example demonstrates that valuation and timing must be carefully aligned with contractual terms to avoid double taxation.
Timing of Liability in JDAs
Residential projects
For both area-sharing and revenue-sharing models, liability on development rights for residential projects is deferred until the relevant date. This provides relief to developers, as they are not required to pay GST upfront before generating sales revenue.
Commercial projects
For commercial projects, general time of supply provisions apply. Liability could arise earlier, depending on invoice issuance or receipt of consideration. This creates a working capital burden for developers engaged in commercial projects.
Construction services
For area-sharing models, GST liability on construction services to landowners also arises on the relevant date. For revenue-sharing models, liability on construction services follows general provisions, meaning tax may need to be paid earlier.
Compliance and Documentation in JDAs
Developer obligations
- Pay GST on development rights under reverse charge.
- Pay GST on construction services to landowners.
- Collect and pay GST on under-construction sales to buyers.
- Ensure 80 percent procurement from registered suppliers.
- Pay GST under reverse charge on cement and shortfall in procurement.
Landowner obligations
- Register under GST if selling their share of units before completion.
- Pay GST on such sales.
- Claim ITC of GST charged by developer on construction services.
- Maintain documentation of sale contracts, agreements, and credit claims.
Documentation essentials
Proper agreements are critical in JDAs. Contracts should clearly specify:
- The model of arrangement (area-sharing or revenue-sharing).
- The proportion of units or revenue allocated to each party.
- Responsibility for GST payment under reverse charge.
- Mechanism for valuation of services and development rights.
- Timelines for invoicing and payment of tax.
Without clear documentation, disputes may arise over valuation, liability, and credit entitlement.
Challenges and Grey Areas
Despite clarifications, JDAs continue to present unresolved challenges. The one-third deemed deduction for land value remains controversial, as actual land values may be significantly higher or lower. The withdrawal of input tax credit for residential projects increases project costs and creates pressure on pricing. The treatment of unsold inventory at completion continues to be a compliance hurdle, as developers must pay GST under reverse charge on deemed value of development rights.
The divergence between residential and commercial projects adds another layer of complexity. While residential projects benefit from deferred liability and partial exemption, commercial projects are taxed more stringently, affecting their financial viability.
Judicial Interpretations of JDAs under GST
Treatment of Transfer of Development Rights
The classification of transfer of development rights as a taxable supply has been a contentious issue. Traditionally, under pre-GST law, development rights were considered immovable property and not liable to service tax. However, with the advent of GST, transfer of development rights is expressly treated as a supply of services.
The Telangana High Court, in a notable ruling, held that development rights cannot be equated with immovable property but instead amount to a benefit arising out of land, making it liable to GST. This decision underscored the legislature’s intent to bring such rights within the ambit of supply. The matter remains pending before the Supreme Court, but the prevailing practice is to treat transfer of development rights as taxable, subject to exemptions for residential projects.
Exemption for Residential Projects
Judicial interpretations have reinforced the exemption granted for transfer of development rights in residential projects. Courts have upheld the position that the exemption applies only where units are booked prior to completion or first occupation. Unsold inventory at the time of completion triggers GST liability under reverse charge on the developer, even though no consideration is received from buyers. This interpretation imposes a notional burden that developers must account for in project planning.
Deduction for Land Value
The deemed deduction of one-third of the total consideration for land value has been subject to litigation. Developers have argued that a fixed deduction does not reflect the true market value of land, particularly in high-value urban areas. The Gujarat High Court ruled that if actual land value can be determined from the agreement, GST must be computed on the balance amount without applying the one-third formula. This ruling provides relief for projects where the land component is significant and documented.
Timing of Liability
The time of supply for development rights and construction services has also been clarified in judicial forums. Courts have emphasized that liability on development rights for residential projects arises on the relevant date of completion or occupation, consistent with the notifications issued. For commercial projects, the general provisions under Section 13 of the CGST Act apply, which could lead to earlier liability.
Advance Rulings
Several advance ruling authorities have dealt with specific disputes under JDAs:
- In one ruling, it was held that construction provided to landowners constitutes supply, and valuation must be based on comparable sales.
- Another ruling clarified that if landowners sell their share of units before completion, they must register under GST and discharge tax liability, with eligibility to claim credit of tax charged by the developer.
- Authorities have also ruled that sale of land or completed property after obtaining a completion certificate does not attract GST, reaffirming the exemption for immovable property.
These rulings provide important guidance but are binding only on the applicant and jurisdictional officer. Nevertheless, they establish trends in interpretation that developers and landowners can use in planning.
Case Studies in GST on JDAs
Case Study 1: Area-Sharing Model with Residential Project
A landowner enters into a JDA with a developer for construction of 100 residential apartments. The landowner is to receive 40 apartments, and the developer retains 60 for sale. Apartments are priced at 70 lakh each.
- Development rights: Exempt to the extent apartments are booked before completion. For unsold units at completion, the developer pays GST under reverse charge at 5 percent of the deemed value.
- Construction services: Value determined as 70 lakh x 40 apartments = 28 crore, reduced by one-third for land deduction = 18.67 crore. GST at 5 percent = 93.3 lakh. The developer pays this tax in cash.
- Sale by developer: 60 apartments sold under construction attract GST at 5 percent on transaction value.
- Sale by landowner: If landowner sells any apartments under construction, they must pay GST and can claim ITC of 93.3 lakh charged by the developer.
This case highlights the importance of timing in booking and sale of apartments, as it directly impacts the tax burden.
Case Study 2: Revenue-Sharing Model with Mixed Development
A landowner provides land worth 25 crore to a developer, who constructs both residential and commercial apartments. Sales proceeds amount to 200 crore, of which 150 crore is from residential units and 50 crore from commercial units. The revenue-sharing ratio is 30 percent to the landowner and 70 percent to the developer.
- Development rights: For residential units booked before completion, exempt. For un-booked residential units, the developer pays GST on deemed value under reverse charge. For commercial units, GST payable by developer on landowner’s share of 30 percent of sales = 15 crore, reduced by land deduction.
- Construction services: Developers pay GST on their share of sales, i.e., 70 percent, subject to land deduction. Residential units taxed at 5 percent, commercial units at 18 percent.
- Revenue to landowner: The landowner’s share of 60 crore (30 percent of 200 crore) is not separately taxed, since tax liability on development rights has already been discharged.
This case demonstrates the complexity when projects involve both residential and commercial components, requiring careful segregation of values and rates.
Case Study 3: Impact of Land Deduction Dispute
A developer sells apartments for 1 crore each in a metropolitan city where land cost is exceptionally high, constituting nearly 70 percent of the total value. Applying the deemed one-third deduction, GST is levied on 66.67 lakh instead of the actual construction cost of 30 lakh.
Developers challenge this valuation, citing Gujarat High Court’s ruling that actual land value must be considered. This case reflects the practical implications of valuation disputes and the potential financial strain on developers when statutory deductions do not match market realities.
Compliance Strategies for Developers and Landowners
Structuring Agreements Carefully
JDAs must be drafted with clear allocation of responsibilities for GST compliance. Agreements should specify:
- Whether the arrangement is area-sharing or revenue-sharing.
- The treatment of development rights and construction services.
- Responsibility for paying GST under reverse charge.
- Mechanism for invoicing between developer and landowner.
- Timelines for discharging tax liability.
Ambiguities in agreements often lead to disputes with tax authorities, and clear drafting can reduce litigation.
Managing Time of Supply
Developers should carefully monitor the time of supply for both development rights and construction services. Deferring liability until completion for residential projects can ease cash flow pressures. For commercial projects, advance planning is needed to ensure liquidity for earlier tax payments.
Maintaining Proper Documentation
Accurate records of agreements, invoices, booking status, and completion certificates are essential. Developers must maintain evidence to substantiate exemption claims for booked residential units. Landowners must keep records of construction invoices to claim ITC when selling units before completion.
Addressing the 80 Percent Procurement Rule
Developers must ensure compliance with the requirement to procure 80 percent of inputs and services from registered suppliers. Non-compliance triggers reverse charge liability at 18 percent on the shortfall. Cement procured from unregistered suppliers attracts immediate liability under reverse charge. Maintaining supplier records and monitoring procurement ratios are critical for compliance.
Managing Input Tax Credit
Although ITC is restricted for residential projects under concessional rates, developers must carefully manage available credits for commercial components or ongoing projects prior to the 2019 changes. Landowners selling under-construction units should register under GST to claim ITC of construction services charged by developers.
Planning for Unsold Inventory
Unsold residential units at completion trigger GST liability under reverse charge on development rights. Developers should forecast sales and plan booking strategies to minimize unsold stock. This requires alignment between sales, construction timelines, and GST obligations.
Anticipating Valuation Disputes
Developers should consider including clauses in agreements to reflect actual land values, particularly in high-value markets. Maintaining supporting documentation of land transactions can strengthen the case in the event of disputes over the one-third deemed deduction.
Leveraging Advance Rulings
Although binding only on applicants, advance rulings provide useful guidance. Developers and landowners can apply for advance rulings to obtain certainty on specific issues, such as valuation methods, applicability of exemptions, or treatment of mixed-use projects.
Risk Management in JDAs
Financial Exposure
Failure to comply with GST obligations in JDAs can result in significant financial exposure, including tax demands, interest, and penalties. Developers must account for these risks in project costing and maintain reserves for potential liabilities.
Litigation Risks
Given the evolving jurisprudence, litigation risks in JDAs remain high. Developers and landowners should adopt conservative compliance strategies, avoiding aggressive interpretations that may trigger disputes.
Contractual Allocation of Liability
Contracts should allocate responsibility for GST compliance between parties. For example, developers may agree to discharge all GST liabilities and recover from landowners, or landowners may take responsibility for their share of tax. Clearly defining these obligations reduces disputes between parties and with tax authorities.
Monitoring Legal Developments
With pending cases before the Supreme Court and evolving advance rulings, stakeholders must stay updated on legal developments. A shift in judicial interpretation, particularly on valuation or treatment of development rights, can significantly alter tax obligations.
Conclusion
Joint Development Agreements represent a significant model in the Indian real estate sector, combining the resources of landowners and the expertise of developers. While they provide mutual economic benefits, the introduction of GST has added layers of complexity to their structuring and execution.
The analysis across this series highlights that GST applies primarily to the transfer of development rights and supply of construction services, while the sale of land and completed property remains outside its scope. The tax treatment varies considerably depending on whether the JDA is structured as an area-sharing or revenue-sharing model, as well as whether the project involves residential or commercial components.
Exemptions granted for residential projects, especially post-April 2019, have provided relief but also created compliance obligations, particularly regarding unsold inventory and reverse charge liabilities. The valuation of land, the mandatory one-third deduction, and its challenge in courts illustrate how GST rules sometimes conflict with commercial realities. Developers must also navigate restrictions on input tax credit and ensure compliance with the 80 percent procurement rule, which has its own implications for cost and supply chain management.
Judicial interpretations and advance rulings have clarified key issues such as the taxability of development rights, timing of supply, and valuation mechanisms. However, litigation risks remain high, with divergent views across jurisdictions and pending appeals before higher courts. This legal uncertainty requires stakeholders to adopt cautious and well-documented compliance strategies.
For landowners, the key lies in understanding their liability when selling under-construction units and their eligibility to claim credit on construction services. For developers, the primary challenge is balancing cash flow management with GST obligations, particularly in projects where significant unsold inventory at completion could trigger reverse charge liabilities.
Ultimately, successful navigation of GST in JDAs requires meticulous drafting of agreements, robust documentation, proactive compliance with procurement and valuation rules, and careful monitoring of judicial and legislative developments. By integrating these strategies into project planning, both landowners and developers can reduce risks, avoid unnecessary disputes, and ensure smoother execution of development projects under the GST regime.