HomeDaily NewsTOI: ‘GST makes jt development of realty projects unviable’

TOI: ‘GST makes jt development of realty projects unviable’

NEW DELHI: Joint development of a real estate project, including housing, has become unviable due to inclusion of such a practice under the Goods and Services Tax (GST) regime, say developers. Joint Development Agreements (JDAs) now attract GST at the rate of 18%.

According to the new regime, the land owner renders a ‘service’ to the developer via the transfer of development (construction) rights and therefore GST is applicable at the JDA execution stage itself, said a CEO of a real estate firm from Mumbai, whose efforts to enter into agreement with a farmer in Gurgaon fell through. “This increases the cost of a project, making it unviable in the present market scenario,” said the CEO, who declined to be named.

There are two common types of JDAs. One is area-sharing JDA. Under which, the developer pays the land owner a deposit and hands over a certain percentage of the developed area in the project to secure development rights.

Another model is the revenue-sharing JDA, where the developer pays the land owner a deposit and a share of the revenues from the project to secure the development rights.

In the pre-GST era, revenue-sharing JDAs were outside the ambit of service tax and area-sharing JDAs would attract service tax at the time of approvals for the project, once the apartments/units under the land owner’s area share were identified.

But in the new regime, the GST at the rate of 18% on the market value of the deal has to be paid at the time of execution of the deal itself, which in turn results in cash flow concerns for both parties, said Pankaj Goyal, director of Express Builders.

Suppose a developer is constructing 200 apartments under JDA with an agreement that 100 apartments would be given back to the land owner after finishing the construction to compensate for the value of land.

If the cost of each apartment is Rs one crore, the deal size would be treated as of Rs 100 crore and a GST of Rs 18 crore would be levied.

As land costs have increased, JDAs have become a popular and preferred format for real estate development in the country and helped address the need for housing stock in a sustainable manner, said CREDAI chairman Getamber Anand, who is also the CMD of ATS infrastructure.

“The JDA model enables the developer to share market risk with land owner and reduces capital outlay,” he said.