In what could soon get Goods and Services Tax (GST) clarity for the real estate sector, especially for the developers, the Supreme Court on Monday (May 13) in a Special Leave Petition (SLP) against Telangana High Court’s order issued notices to the Union of India, Union Finance Ministry and Central Board of Indirect Taxes & Customs (CBIC).

The Supreme Court has asked for responses to the plea as to whether GST is applicable to the joint development agreement signed by the developer and the owner of the land parcel on which the real estate development is scheduled or planned.

According to the SLP, a joint development agreement involves the sale of land and thus, GST should not be applicable. The plea that development rights are incidental to the sale of land and should not attract GST.

GST on the transfer of development rights has been a bone of contention before the Telangana High Court, predominantly on the ground that the central government does not have the power to levy tax on the sale of land, where Telangana High Court ruled that GST should be applicable.

Telangana High Court had ordered that transfer of development rights in all its variations, directly or indirectly amounts to the sale of land and any arrangement between a landowner and a developer in a joint development agreement and thus GST of 18% should be applicable, which was challenged by the petitioner Prahitha Constructions.

The real estate company said that any such right is only incidental to the ultimate conveyance of land in favour of the developer against construction services.

Telangana High Court earlier in February this year had held that a joint development agreement is distinct from an agreement for the sale of land and therefore, transfer of development rights under a joint development agreement should be taxed under GST.

Supreme Court after hearing the petitioner on Monday in detail contesting the observation of Telangana High Court in this matter, issued notices to the Union of India, Revenue Department and CBIC, asking them to file a reply soon.

However, the Supreme Court made it clear that in the interim, GST will continue to be applicable on the transfer of development rights or on such joint development agreements. The matter was heard by the division bench of Justice Sanjeev Khanna and Justice Dipankar Dutta.

The matter is now listed for hearing, post responses from the union government on September 9. Since no interim stay has been given by the Supreme Court, it appears that the land owners and the developers will have to pay the taxes based on valuations of the development services till the matter is finally decided

Source: CNBC TV 18