Transfer the right of land and its development under GST

There are various rights that are carried by a piece of land. For instance, the possessor of a land has all the rights related to land. Here all the rights can be explained as the right to possess, right to easement, right to sale, right to rent, right to develop, right to sublet, right to occupy and many more. If the owner of a land authorises a person to develop a structure of land, this right to develop will be called "Development Right".

A simple document grants permission to a person to develop a structure on land in the case of the development rights. With the help of these documents "Development Right" can be sold, transferred or exchanged.

Now, let's discuss a case which will give clarity to our thoughts upon development Rights. Mr Ajay possess a piece of land, where Mr. Bharat is a developer. Mr. Bharat comes to Mr. Ajay with a joint development project details and Mr. Ajay has provided his consent to develop on a joint development project. After completing all the formalities of project Mr. Bharat sells some flats and shops to outsiders and Mr. Ajay becomes a consenting party in this case. Here, Mr. Ajay will name the undivided share in land to the outsider's co-operative housing society. With this, in the form " Transfer of Development rights" Mr. Ajay's permission will be granted.

It is being stated in Regulation 34 of Development Control Regulations of greater Bombay, 1994 that under certain circumstances the development potential of a plot/ land may be separated from the land itself and can be made available to the owner of the land in the form of "Transferable Development Rights".

Let's take another example, a plot of land  is possessed by Mr. Aryan and some slum dwellers have encroached his land. Now through the scheme " slum development" government approached Mr. Pawan for development of his plot for slum dwellers. In exchange Mr. Pawan gets "Transferable Development Rights" from government.Here, this "Transferable Development Rights" can be used on any land subject to fulfilment of some terms and conditions by Mr. Pawan 

LET'S DISCUSS WHETHER TRANSFER OR DEVELOPMENT RIGHTS ARE TAXABLE UNDER GST OR NOT;

"Section 7 of Central Goods and Service Tax Act, 2017 levy tax of "supply" of Goods or Services or both.

"sec-7, notwithstanding anything contained in subsection (1), 

(a) activities or transactions specified in schedule III; -----shall be treated neither as supply of goods nor a supply of service."

Schedule III, cover sale of land, now whether Transfer of Development Rights in land is taxable, let us see some court decision;

Sale of Land is not defined under CGST Act, 2017.

CIT vs Motors and General Stores (P.) Ltd (1967) 66 ITR692 and in case of 20th Century Finance Corporation Ltd. Vs State of Maharashtra (2006)6 SC 12; held that the word "sale" denotes transfer of title, which is irrevocable and permanent. Hence "Sale of Land", denotes "Transfer of title of title in land".

Let's see definition of land in other laws;

Section 3(a) of Land Acquisition Act, 1894 defines "Land" as it includes benefits to arise out of land and things attached to earth or permanently fastened to anything attached to the Earth.

Section 3(a) of the Bombay Land Revenue Code:-"land" includes benefits to arise out of land and things attached to the Earth or permanently fastened to anything attached to the Earth and also shares in or charges on the revenue or rent of villages or other defined portions of territory.

Safiya Bee vs Mohd Vajahath Hussain (2011)2SCC94, Apex Court: and in various other cases it was held that "land" includes benefits that arise out of land.

Now it is clear that "Land"includes benefits to arise out of land. Nagen Hazarika vs Manorama Sharma AIR 2007 Gau 62; Guwahati High Court held that the expression "title" is a board expression in law, which cannot always be understood as akin to ownership. It conveys different forms of a right to a property, which can include the right to possess such property.

It means that the "land" not only includes full title in the land but also rights, which gives benefits associated with it.

Girnar Traders vs State of Maharashtra(2011)3SCC: held that land development Right is a Right to carry out development or to develop the land or business or both. Thus, it is a benefit arising out of land and hence included in the definition of land.

NOW LET'S DISCUSS "SALE OF LAND", ON SUPPLY OF GOODS OR SERVICES ASPECTS UNDER GST;

AS GOODS;

The land owners have given the land development rights in joint development agreement. With this, they also have given the right to sell the units constructed on their land. Through power of attorney, the possession of land has been parted out by the land owner to the developer, executed in favor of the developer.

A land is a benefit arising out of land in this case. Hence, this is covered within definition of land. Since the same right is given irrevocable and permanently , it is covered within the definition of

"sale of land". This is also covered in Entry 5  of schedule III to central Goods and Service Tax Act, 2017 and that's why it is neither considered as sale of goods nor supply of service.

Thus, the sale of development rights is not taxable under GST.

Same as above Transfer of Development Rights, shall not be considered as "Goods", because it involves transfer of interest in immovable properties.

AS SERVICES;

Section 2(102) of CGST Act, 2017, Services covers anything other than goods. An activity is not considered as service if that does not possess any element of service. That's why, Transfer of Development Rights cannot be considered as service.

From the above explanations of the apex of the courts, we can say that " sale of land", connotes' transfer (irrevocable and permanently) of title in land including rights in the form of benefits arising from it. The same is covered under entry number 5 of schedule III to CGST

Act, 2017. Hence this shall neither be regarded as supply of goods or supply of services or both. So GST cannot be levied on Transfer of Development Rights.

On 25/01/2017 through a notification(No. 4/2018-CGST), it is being stated by the government that Development Rights are indirectly held to be taxable and opened a window for litigation.

LET'S DISCUSS IF ONE WILL BE ABLE TO CLAIM INPUT TAX CREDIT BY DECIDING TO PAY TAX ON DEVELOPMENT RIGHTS.

One who is paying GST on Development Rights can claim credit under CGST Act, 2017.

But Section 17(5) of CGST Act, 2017 states that goods or services or both received by a taxable person for construction of an immovable property( other than plant or machinery ) on his own account including when such goods or services or both are used in the course of furtherance of business.

Government can prohibit input tax credit on Development Rights, through this entry. Besides, it blocks goods or services or both received by a person in construction of immovable property. However, Development Rights are procured in relation to construction. That's why one can claim the credit of taxes paid on transfer of development rights.

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