What is a Land Development Agreement
Land Development Agreement also known as Joint Development Agreement is one of the arrangements commonly resorted to by the builders/developers nowadays to develop and sell properties. There are two parties to this agreement, a Land owner and a Builder. It is sometimes also a tripartite agreement between the land owner, builder/developer and a contractor. We are discussing the first category of arrangement in this article. In this arrangement the land owner agrees to transfer the land rights to the developer to build/develop and sell flats/ property. In consideration to the said sale of land rights the land owner agrees to a sum in cash and some flats in the developed property. One of the major advantages of this kind of arrangement is that it does not involve excessive investments from both the parties and is as such a win-win situation for both the developer and the land owner.
Issue involved
Important issues in dealing with this kind of arrangement is (i) whether the sale of land and consideration received thereon is liable to service tax, (ii) whether the consideration received by the land owner in terms of flats is liable to service tax, (iii) if the answer to (ii) is yes then at what value will the service tax be leviable, (iv) who is liable to pay the service tax, is it the builder or the land owner (v) when is the service tax payable, is it at the time of entering into the agreement or at the time of possession of the flats.
Circular in respect of real estate is Circular 151/ 2/2012-ST issued on 10th February 2012 which provided clarifications with respect to the various business model adopted by the construction industry and the treatment of service tax thereon. Negative list regime the Para 6.2.1 of Education Guide – taxation of services issued by the CBEC .
Clarification provides that the sale of land by the land owner to the builder/developer is exempt from service tax as it is a sale of immovable property which is out of the scope of service tax net. Hence answer to query (i) is a vehement NO.
Moving on the answer (ii), it is yes, which is what is warranting the need of writing this article. Construction services provided by the builder/developer is taxable in case any part of the payment /development rights of the land was received by the builder/developer before the issuance of completion certificate and the service tax would be required to be paid by the builder /developers even for the flats given to the land owner.
Coming to the valuation of the flats given to the land owner. Value of the taxable service in such as case would be determined in terms of section 67(1)(iii) read with Rule 3(a) of the Service Tax (Determination of Value) Rules 2006. Accordingly value of these flats would be equal to the value of similar flats charged by the builder/developer from other buyers to whom he is selling flats. In case the price of flat undergoes a change over the period of sale then the value of similar flat as sold nearer to the date on which the land is made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid 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 of the flats are transferred to the land owner by entering into a conveyance deed or similar instrument(like allotment letter).
For the sake of convenience and better understanding I would like to explain the above in the form of an example. Mr. A (Builder/Developer) enters into an agreement Mr. B (Land Owner) to build a residential complex in his land. Mr. A agrees to construct 40 flats and 10 villas in the said land. The agreement states that the land development rights are sold to Mr. A in lieu of consideration in cash of Rs. 40 Lakhs (to be paid as per agreed terms of payment), 4 (3BHK) flats and a Villa. The agreement was entered into on the 10th July 2013. Mr. A starts the construction and sells his first flat (2BHK) for Rs. 4000 Rs. Per square feet on 10th September 2013 sells a 3BHK flat at Rs. 4200 on 7th November 2013. He sells his first villa on 5th January 2014 for Rs. 1.5 Crores. The construction is completed on 1st August 2015. Possession of flats are transferred to the land owner on 1st January 2015 and of the Villa on 15th July 2015. Now the valuation would be For Flats – 4*2000*4200=Rs. 3.2 Crores(Value to be taken of similar flat) and for the Villa would be Rs. 1.5 Crores. The service tax would be paid by the builder on separate date for flats and Villa as the possession was transferred on 2 separate dates.
On some of the instances the land owner may also decide to sell the flats given to him by the builder/developer in lieu of the land development rights transferred. In such cases also the service tax will be required to be paid by the transferee if any consideration is received by him from any person before the receipt of completion certificate.
Important issues in dealing with this kind of arrangement is (i) whether the sale of land and consideration received thereon is liable to service tax, (ii) whether the consideration received by the land owner in terms of flats is liable to service tax, (iii) if the answer to (ii) is yes then at what value will the service tax be leviable, (iv) who is liable to pay the service tax, is it the builder or the land owner (v) when is the service tax payable, is it at the time of entering into the agreement or at the time of possession of the flats.
Circular in respect of real estate is Circular 151/ 2/2012-ST issued on 10th February 2012 which provided clarifications with respect to the various business model adopted by the construction industry and the treatment of service tax thereon. Negative list regime the Para 6.2.1 of Education Guide – taxation of services issued by the CBEC .
Clarification provides that the sale of land by the land owner to the builder/developer is exempt from service tax as it is a sale of immovable property which is out of the scope of service tax net. Hence answer to query (i) is a vehement NO.
Moving on the answer (ii), it is yes, which is what is warranting the need of writing this article. Construction services provided by the builder/developer is taxable in case any part of the payment /development rights of the land was received by the builder/developer before the issuance of completion certificate and the service tax would be required to be paid by the builder /developers even for the flats given to the land owner.
Coming to the valuation of the flats given to the land owner. Value of the taxable service in such as case would be determined in terms of section 67(1)(iii) read with Rule 3(a) of the Service Tax (Determination of Value) Rules 2006. Accordingly value of these flats would be equal to the value of similar flats charged by the builder/developer from other buyers to whom he is selling flats. In case the price of flat undergoes a change over the period of sale then the value of similar flat as sold nearer to the date on which the land is made available for construction should be used for arriving at the value for the purpose of tax. Service tax is liable to be paid 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 of the flats are transferred to the land owner by entering into a conveyance deed or similar instrument(like allotment letter).
For the sake of convenience and better understanding I would like to explain the above in the form of an example. Mr. A (Builder/Developer) enters into an agreement Mr. B (Land Owner) to build a residential complex in his land. Mr. A agrees to construct 40 flats and 10 villas in the said land. The agreement states that the land development rights are sold to Mr. A in lieu of consideration in cash of Rs. 40 Lakhs (to be paid as per agreed terms of payment), 4 (3BHK) flats and a Villa. The agreement was entered into on the 10th July 2013. Mr. A starts the construction and sells his first flat (2BHK) for Rs. 4000 Rs. Per square feet on 10th September 2013 sells a 3BHK flat at Rs. 4200 on 7th November 2013. He sells his first villa on 5th January 2014 for Rs. 1.5 Crores. The construction is completed on 1st August 2015. Possession of flats are transferred to the land owner on 1st January 2015 and of the Villa on 15th July 2015. Now the valuation would be For Flats – 4*2000*4200=Rs. 3.2 Crores(Value to be taken of similar flat) and for the Villa would be Rs. 1.5 Crores. The service tax would be paid by the builder on separate date for flats and Villa as the possession was transferred on 2 separate dates.
On some of the instances the land owner may also decide to sell the flats given to him by the builder/developer in lieu of the land development rights transferred. In such cases also the service tax will be required to be paid by the transferee if any consideration is received by him from any person before the receipt of completion certificate.
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