Liability w.r.t. JDA entered prior to GST

[Shilpi Jain]

Joint development agreement (JDA) is an agreement entered between the landowner and the developer wherein the landowner would provide the right to the developer to develop the land, in return for construction services to be provided by the developer.The developer would be entitled for a share in the developed property(generally allotted through supplementary agreement (SA))in return for such construction services. Without getting into whether GST is liable or not on these activities, let us examine what is the levy that needs to be examined i.e. GST or Service Tax, for such agreements in the below scenario.

Let us take a scenario, wherein the JDA is enteredprior to 01.07.2017 and the SA is entered in the GST regime. Since, the two agreements are entered in periods where two different taxeswere liable, a question would arise regarding, the liability of which tax has to be examined, either GST or Service Tax?

Discussion of transition provisions under GST levy:

In the given scenario, the JDA is entered prior to the GST regime and the SA is entered in the GST regime. As the activities have occurred in two different tax regimes, transitional provisions need to be examined.

Section 142(11) (b) of CGST Act, 2017, is found relevant in such cases, which states that no tax shall be payable on services under GST to the extent the tax was leviable on such services under service tax.

Further, section 142(11)(c) of the CGST Act would not be applicable in the instant case as the said transaction is not liable to both service tax and VAT but is only liable to service tax. Thereby, the transition provision contained in section 142(11)(b) ibid is only applicable to identify whether ST or GST is applicable. Now let’s examine, whether levy exists under the Finance Act, 1994.

Discussion on Service Tax levy:

Section 66B of the Finance Act (Act), 1994 is the charging section which provides that the service tax shall be levied on all taxable services provided or agreed to be provided in the taxable territory, other than those covered under the Negative List u/s 66D of the of the Act. Here the activity to be examined is the construction services provided by the developer to the landowner, whether this would be a service or not. If yes, whether on the date of entering into the JDA, the levy would be attracted or not?

The term “Service” is defined u/s 65B (44) of the Service Tax Act, to mean any activity carried out by a person for another person for consideration and includes declared services. On perusal of the declared services, clause (b) and clause (h) of section 66E of the Service Tax Act are relevant which are as under:

• Clause (b) provides “Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the consideration received is received after issuance of completion certificate by the competent authority”
• Clause (h) provides “service portion in the execution of works contract”.

Thus, the activity of construction on the landowner’s share of land is covered under the declared services as mentioned above, in respect of which the consideration would be in non-monetary terms, being a share in the developed property. Further, by entering into the JDA, the developer has agreed to provide the services to the landowner. Hence levy has occurred in terms of section 66B of the Act prior to GST itself. Thereby, going by section 142(11)(b) of the CGST Act, no GST shall be payable for such services.

When the liability to discharge service tax arises (PoT)?

As per rule 3 of Point of Taxation Rules (PoT), 2011, the liability to pay service tax arises at the earliest of:

1. Date of invoice if the invoice is issued within the time period as specified in rule 4A of Service Tax Rules
2. Date of completion of service if the invoice is not issued within the time specified in clause (a).
3. Date of payment.

Further, even though the services provided by the developer are for a longer period of time, since there are no periodic payment obligations other than the requirement of handing over the units, it cannot be said to be a continuous supply of service. However, with respect to construction services between the landowner and the developer, there would not be any system of issue of invoices. Therefore, the PoT would be the date of completion of the service or receipt of payment (i.e. receipt of right or possession of land/development rights).

In the case of JDA, the consideration received by the developer is the development rights and the agreed share of land or undivided share of land. The said consideration crystallizes when the SA is entered into, where the specific units belonging to the developer are identified and after such date, the developer would have right over his units to enter into sale agreements with its customers. Accordingly, service tax is required to be paid by 5^th/6^th of the month following the month in which such SA is entered into.

A similar view comes out in the circular No. 151/2/2012-ST dt.10.02.2012. However, in the instant case, on the date of entering into SA (date of discharging service tax liability) the service tax law has been repealed whereby it can be said that there is no legal validity requiring payment of tax on such levy.

Further, in terms of section 174(2)(c) of the CGST Act, it has been provided that the repeal of the earlier laws (in the instant case the service tax law) will not affect any right, obligation, accrued or incurred under the repealed Acts. However, in the instant case, there has been no right that was accrued w.r.t. the JDA under the service tax law before 01.07.2017 as the right to collection of tax under such law would have arisen only at the time of entering into the SA. Thereby, even as per the repeal and saving provisions under GST, no service tax would be payable.

Thereby, it seems that in case of JDAs entered prior to GST, where the SA is entered into after 30.06.2017, no tax liability could exist.

The article has been written by CA. Shilpi Jain and Hema Muralidharan. For any queries mail @ shilpijain@hiregange.com.