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Posted on December 24, 2021
ITC Allowability to Landowner before Issuing Completion Certificate
As per the recommendations made by the GST Council in the 43rd Meeting which was held on 28th of May 2021 with respect to the allowability of credit of taxes paid by a developer to the landowner in case of Joint Development Agreement, there was a major change that helped in eliminating one of the issues faced by the construction industry in the country in case of such areas or arrangement of construction.
Joint Development Agreement
In an area sharing Joint Development Agreement (JDA):
– A Landowner will transfer the development rights of their piece of land to the Developer, and
– The Developer develops and constructs a structure i.e., superstructure for the Landowner on their piece of land.
– For this a Transferable Development Rights (TDR) or Floor Space Index (FSI), shall be obtained.
GST shall be charged on the services provided by the Developer to the Landowner in the form of construction.
Time of Supply Before 43rd Council Meeting
Until now GST Law provided that the Developer shall pay GST on the construction services provided by them to the Landowner on the basis of the Development Rights
– at the time of providing the certificate stating the completion, which is also known as the Completion Certificate (CC), or
– first occupation,
whichever is earlier.
And, in case the Landowner further sells these allotted areas or the flats build in such areas, to other buyers available in the market, before the issuance of CC, the Landowner is required to raise the invoice and also charge GST on the basis of the date on which payment is due from the buyer, and this resulted in accumulation of ITC.
Accumulation of ITC
As the Landowner has to pay tax on the basis of the same being due from his buyers, the tax shall be paid in cash, which might become due prior to the issuance of CC.
And the Developer will raise the invoice and charge GST at the time of issuance of CC or first occupation whichever is earlier, this will now lead to accumulation of ITC in the hands of the Landowner.
Let’s take an example for the same,
Mr. A is the Developer here and Mr. B is the Landowner, and there is a JDA (Joint development Agreement) formed between these two parties. The date of issuance of the completion certificate for the same is 31.03.2022. But Mr. B transfers his portion of flats before 31.03.21, to Mr. C.
As the date of issuance of completion certificate is 31.03.2022, Developer, Mr. A will be paying GST on supply of Construction Services to Mr. B only during the tax period 2021-22 i.e., 31.03.2022. But Mr. B will have to pay the entire tax liability on the supply of flat to Mr. C before this date of issuance of CC, as the payment is due from Mr. C before 31.03.21. And the ITC for GST paid in this regard by Mr. A shall only be available for the tax period of 31.03.2022. Hence, this ITC shall now be accumulated in the credit ledger of Mr. B.
Time of Supply After 43rd Council Meeting
Now as per the amendment which was brought in by the 43rd Council Meeting of GST, vide Notification No. 3/2021 – Central Tax (Rate), it has been given that:
Time of sale or providing of construction services supplied against Transferable Development Rights (TDR) or Floor Space Index (FSI) shall arise “in a tax period not later than the tax period in which,
– the date of providing of the certification stating the completion, or
– the date of its first occupation,
whichever is earlier.
So, we can understand that the Developer shall be allowed to pay GST on such supply of construction services to Landowner before issuance of CC or the first occupation whichever is earlier. The Landowner can ask the Developer to pay such GST, such that the landowner on receipt of payment on sale of such flats or space, utilize the same and ensure that there is no extra cash flow or accumulation of ITC taking place.
The same can be understood easily with the help of the example which was taken before with respect to Mr. A being the Developer and Mr. B being the Landowner.
Mr. A is the Developer here and Mr. B is the Landowner, and there is a JDA between these two parties. The date of issuance of the completion certificate for the same is 31.03.2022. But Mr. B transfers his portion of flats before 31.03.21, to Mr. C.
Contrary to what was stated before, Mr. A pay GST before tax period during which such CC was issued such that the Landowner which is Mr. B in this case can avail the ITC while making payment of GST, on his sale of flat to Mr. C and collection of payment with GST from Mr. C for the same, by virtue of the amendment which was made by the GST Council in the 43rd Meeting held by the Council.
The Landowners now by virtue of this Notification and Amendment eliminate the confusion and accumulation of funds which was actually increasing the cost for them as they had to pay GST to the developer as part of their invoice payment while not being able to avail the same due to the time disparity in remittance of the same to the GST Authority by both the parties, in case the Landowner sell their flats to a buyer in the market before such CC is issued and the payment from such buyer becomes due.