The Patna High Court on May 5, 2025 ruled that Goods and Service Tax (GST) is payable on transfer of development rights received by a builder from a landlord prior to issuance of completion certificate (CC) and as per a joint development agreement (JDA) with the landowner. In simple terms this means a builder has to pay GST on the house apartment units on reverse charge mechanism (RCM) basis given by it to the landowner under the terms of JDA.
To give you a clear idea, in a JDA the landowner usually does a barter trade with the builder by telling him to build house apartments on the land in exchange for some money and house units in return. The builders in such JDAs usually keep a substantial portion of the house units which he himself sells to homebuyers. The landowner has a choice to either sell off his share of the house units or use it for his family. This judgement impacts the landlord’s share of the jointly developed house property.
For instance, a builder may agree to build a 4-story building on a vacant land bearing the entire cost and offer two floors of newly constructed building to the landowner.
In the case referred to Patna High Court the builder and landowner signed a JDA where the builder got 57% of the house units and the landowner 43%. But the tax dispute started with the 43% part which the landowner received from the builder. The builder said that he should not pay GST on the 43% part on reverse charge mechanism (RCM) basis since no money was exchanged. The builder said that this JDA between them was a simple non-monetary consideration towards allotment of houses.
The government contended that this transaction would attract GST and that too under RCM basis and the builder has to pay this. With this dispute the builder and government reached the doors of Patna High Court.
The government’s primary point of contention was they deemed that in this property joint development transaction there is an element of supply of service and receipt of consideration under development agreement which is liable to tax under the GST Act. Ultimately, the high court gave a verdict in the government’s favour.
In hyper simple language this judgement means homebuyers should note that GST liability in a JDA real estate project depends on the timing of the sale (pre/post-completion) and the seller’s identity. Since builders would be required to pay GST on such construction services, it may form an additional cost to the landowners, depending on the terms of the joint development agreement.
Also, homebuyers should verify the home’s completion status and the seller’s GST compliance before going ahead with the transaction, so as to know whether they need to pay GST on top of the home’s selling price.
For example: if you are buying from a builder during the property’s construction stage, GST is to be paid. If you are buying from a landlord, check if the JDA between the landlord and builder was executed before the property got a completion certificate (CC). Because if it is executed before the CC, then the builder will have to charge GST on RCM basis from the landlord, who in turn may adjust the selling price proportionately or choose to absorb this cost, it depends on the landlord.
Read below to know the legal reasoning behind this judgement and what should be done by homebuyers.
How did this case start?
According to the judgement of Patna High Court dated May 5, 2025 here are the details:
November 27, 2014: Landowner and builder executed a joint development agreement (JDA) where the builder agreed to give possession of 43% of the constructed house and parking spaces.
December 20, 2018: The builder finished the construction and handed over the landlord’s share to him.
November 30, 2023: GST department sends a tax demand notice to the building asking why he did not pay GST on RCM basis, on the landlord’s 43% share. The GST department-imposed tax demand of Rs 4.61 crore (4,61,72,628), Rs 2 crore interest (2,00,17,554) and penalty of Rs 23 lakh (23,95,368).
What did the GST department say about GST on joint development properties?
According to the order of the Patna High Court dated May 5, 2025 here’s what the GST department said:
It is submitted that the builder cannot claim exemption from tax on the ground that he had handed over the constructed property to the land owner after receiving the completion certificate.
No exemption is available in case of transfer of built-up property by a developer against consideration received from the land owner in the form of development rights.
The tax is imposed on the construction service supplied by the builder to the landowner and not on the immovable property as such. The supply of service by way of construction of real estate which is intended to be conveyed to the land owner in lieu of transfer of development rights by the land owner attracts GST
What did Patna High Court say?
The Patna High Court in its order dated May 5, 2025 said:
We are of the considered opinion that in fact the builder does not get any right on the said property until the completion of the project. After the project is completed and completion certificate is issued, the builder gets a right to sell the area of the property which is called “Developers Area”.
We do not find any substantial material to establish that with the execution of the development agreement, the petitioner got ownership in the land. It is held that the transfer of development rights as it stands is amenable to GST and cannot be brought within the purview of sale of land subject to clause (b) of Paragraph 5 of Schedule II, sale of building (as per Entry 5 of Schedule-III of the GST Act).
In this case, it has been specifically pleaded by the government that the consideration had been received by the builder in the form of transfer of development rights, which happened long before the issuance of completion certificate or first occupancy. This Court agrees that in this case, the builder cannot claim that it had received the consideration after the issuance of completion certificate or first occupancy.
It is evident from a bare reading of the aforesaid notifications that the State-respondents are correct in contending that the construction of a complex, civil structure etc. intended for sale to a buyer was made exigible to GST except where the entire consideration has been received after issuance of completion certificate or after its first occupancy, whichever is earlier. There would be no ambiguity in the above-mentioned notifications.
Patna High Court final judgement
The Patna High Court placed emphasis on the Supreme Court judgement of M/S Govind Saran Ganga Saran and said, “In our opinion, all the essential components of tax which have been noticed by Supreme Court are present in this case.”
Final judgement: “In the light of the discussions made hereinabove, we are of the opinion that there is no ambiguity with regard to liability of the petitioner on account of ‘GST’ on ‘RCM’ basis on the constructions services rendered by him in lieu of the developments rights under the Development Agreement dated 27.11.2014. We find no reason to entertain the present writ application. This writ application is dismissed.”
Source #ET
