GST: Relief For Land Owners As Council Fixes Credit Problem

The recent GST Council meeting has heralded good news for landowners. By making it easier for landowners to avail goods and services tax credit, the council has addressed their cash flow concerns, which in turn could potentially lower home prices for buyers.

The council has suggested to allow credit to landowners in joint development agreements even before the completion certificate is received. In joint development agreements, the landowner gives the development rights of his land to the developer for construction of project. In exchange, the landowner gets a certain number of flats in the project.

While the transaction is taxable on the date of exchange itself, the time to pay GST on it is the date of completion or first occupation of the project. It’s a case where GST liability gets triggered earlier but payment is required by law to be made at a later date.

As an illustration, let’s say:

In 2019- Landowner transfers his development rights to a developer for construction of project. In exchange, the developer earmarks 30 flats in the building for the owner simultaneously. The GST liability is sparked at this stage. But no payment is made to the government since no completion certificate is received.

In 2020- The landowner sells his share of flats to homebuyers. On this sale transaction of an under-construction flat, GST is applicable. But he has no input tax credit to offset against this output tax liability, as till this time the developer has not deposited the GST with the government.

In 2022-The project is completed. The developer makes the payment of GST, enabling the landowner to claim credit of the same. The same credit which should’ve been ideally available to the landowner in 2020.

The difficulty is the law requires the developer to deposit GST at the time the completion certificate in respect of the project is received, Ranjeet Mahtani, partner at Dhruva Advisors said. Till the time developer pays GST, the landowner cannot take credit to offset his tax outgo arising from sale of flats to homebuyers, Mahtani said.

This led to two issues:

One, it resulted in tax blockages and working capital issues.

Two, it lead to increase in home prices, Jigar Doshi, founding partner at TTMS LLP, pointed out. In absence of credit, the GST amount is factored into the cost of homes, driving up the costs of projects by as much as 12-18%, Doshi said.

To rectify this inconsistency, the council has recommended that the developer can now pay GST on the apartments sold to landowner either before or at the time of issuance of completion certificate. This will enable the landowner to take credit of the GST at the time of selling the flats further to buyers.

Doshi said the amendment will have positive implications for joint development agreements which have emerged as a preferred mode of construction particularly in Covid times due to limited capital being available.

This amendment was much needed to ensure that the benefit of input tax credit is actually received by the homebuyers and that costs of housing projects are not driven up for tax reasons, he adds.

Mahtani pointed that it will be interesting to see how the law enables and compels the developers to pay GST at an earlier stage, so that landowners can use the input tax credit. This could lead to commercial negotiations between the parties and possible restructuring of their agreed upon arrangements, he said.