If a developer buys land upfront, they pay just stamp duty on it but if they opt for a JDA model, they pay both stamp duty and 18% GST on the JDA agreement.
Instead of outright purchase of land, developers are now looking to enter into a joint development agreement where both landowner and developer share the built up area of the property.
And the GST levied on the project increases cost and ends up reducing returns in case the developer plans for a REIT.
Numerous representations have been made to the government by various industry bodies but to no avail.
“Economically value accretive mechanisms have not taken off for developers aiming to develop build-to-lease commercial real estate, due to excessive taxation. If the office complex is eventually leased out, there is no input tax credit (ITC) available. This is making most Grade A build-to-lease commercial projects unviable,” said Rishi Raj, Chief Business Development Officer, Max Ventures & Industries Limited.
Developers say that the move affects a large number of developers who propose to construct malls, multiplexes, hotels, shopping complexes, commercial towers (including office spaces), industrial parks and warehouses across the country.
“This could also impact the supply of Grade A commercial assets negatively as development models such as joint development etc would be precluded due to additional GST cost resulting from such models,” said Gaurav Karnik, partner and national leader-real estate at EY India.
Experts say it’s unfair to not get the input credit as such loss of credit becomes cost, reduces the overall return and more importantly breaks the chain which is not the intent of the GST legislation.
Transactions involving transfer of land development rights were out of the gamut of indirect tax in the erstwhile tax regime but the issue came to the fore following a recent government notification.
As per the notification GST was payable by both the land owner and the developer.
The GST notification sought to levy tax on land owners, which was later challenged in the court.
“There are several constitutional challenges with respect to transfer of development rights which are akin to sale of land in a complex barter transaction. As land and building are outside the purview of GST, the tax applicability depends on contractual terms and facts unless challenged in writ Court coupled with the problem of valuation and applicability of the reverse charge mechanism,” said Abhishek A Rastogi, partner, Khaitan & Co.
According to Anuj Puri, Chairman, ANAROCK Property Consultants, in commercial projects, the developer currently pays GST on the value of his undivided share (UDS) when entering into a Joint Development.
ITC on inputs and input services also can’t be claimed.
“Since most commercial projects are not sold but rather capitalised for rental income, this, more often than not, is an added cost for a developer which eventually impacts his profit margins,” Puri said.
According to developers, GST cost forms approximately 34% of the development cost and is incurred over and above the total development cost.
“GST has impacted the overall cost of the developer and with no facility of input credit, the move puts built to lease assets at a disadvantage. In the earlier tax regime, we used to get advantage but this extra tax has increased the cost of commercial assets,” said Tina Rawla, MD – CFO & COO of Hines India, a privately owned global real estate investment firm.