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February 23, 2023

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GST on Sale of TDR/FSI- Received for Surrendering Joint Rights in Land

GST on Sale of TDR and FSI for Surrendering Land Rights

Transferable Development Rights (TDR) and Floor Space Index (FSI) are considered critical ideas in the field of real estate and urban development. The local authority may give TDR or FSI to the landowners as a consideration or compensation for the land or development rights given up for public causes. A major GST question arises when the TDR or FSI is being sold or transferred, i.e., is the sale subject to GST and, if yes, what is the rate of GST?

What is TDR

Transferable Development Rights (TDR) refer to rights of a property that can easily be transacted and exercised over another property, given the type of development controls applicable in the area where the property is situated. The transfer of TDR takes place when the owner of a property gives up his land for some social or public reason, such as:

Upgrading of roads
Building of roads
Creating social infrastructure
Reservation of land
Other uses that are provided for in accordance with existing legislation

The landowner may be compensated by the issuance of development rights in the form of a Development Rights Certificate (DRC). According to the relevant legislation, a TDR/Development Rights Certificate is a certificate delivered by the authority empowered to grant DRC to the land owner in response to surrendering land that is required for public use.

What is FSI

Floor Space Index (FSI) means the allowed construction area of land according to the parameters stated by the legislation governing production operations. As an example, the owner of a property or an organization engaged in construction works can register additional FSI according to the regulations on land development. In this way, both FSI and TDR represent an integral aspect of the development possibilities for a piece of land, while the exact legality of this process can differ from one State to another.

Is Sale of TDR and FSI Subject to GST

Certainly, the transfer of development rights and FSI can be recognized as a provision of services under GST, based on the type and conditions surrounding the transaction. Under GST, the transfer of rights can be treated as a provision of services since the GST regime provides for the taxation of services connected with real estate and development rights. The Maharashtra AAR in Vilas Chandanmal Gandhi dealt with a scenario where TDR/FSI was received as payment for surrendering joint ownership over land subsequently sold.

Particular	GST Treatment
Transaction	Sale/transfer of TDR/FSI
Nature	Supply of service
Classification	Heading 9972
CGST	9%
SGST	9%
Total GST	18%

Why is TDR/FSI Treated Differently from Sale of Land

It is important to differentiate between the sale of land and the conveyance of development rights. As per the provisions stated in Schedule III of the CGST Act, the sale of land cannot be classified as the supply of either goods or services. The CBIC has underlined that the sale of land, whether undeveloped or developed land, does not attract GST. TDR as well as FSI represent development rights that are associated with land.

This distinction is very important to determine the treatment of GST. In the Maharashtra AAR ruling, it was held that the applicant’s assertion that TDR/FSI should be treated as an interest in land not being taxable under GST was not accepted by the AAR as it concluded that the transaction falls under Heading 9972.

GST Rate on TDR and FSI

The appropriate GST treatment relies on the transaction's nature and the provisions of exemption. Taking the transaction discussed in the Vilas Chandanmal Gandhi AAR as an example, its certain 18% GST, which is shared between CGST (9%) and SGST (9%). The classification falls under Heading 9972 – Real estate services.

However, one should not consider that any TDR or FSI transaction draws 18% GST automatically. Some exemptions apply to transfers of TDR/FSI used for residential apartment construction by promoters.

GST Exemption for TDR and FSI in Residential Construction

There are some GST notifications that impose exemptions for certain transactions connected to TDR or FSI transfer to construct apartment buildings by the promoter in the project meant for selling. The CBIC rate notification clarifies that in some cases the TDR/FSI use for the residential apartment construction is exempt.

Nevertheless, the exemption is not unconditional. It depends on some terms and conditions and amount of residential and commercial areas of the project.

How Does the TDR/FSI Exemption Work

In order to grant exemption for qualifying residential projects, it has been derived from a prescribed formula, which looks at the carpet area of the residential apartments vis-a-vis that of residential as well as commercial apartments. In simple words:

GST absolute exemption = GST payable on TDR/FSI × Carpet area of residential apartments ÷ Total carpet area comprising residential and commercial apartments

The relevant notification has also provided for the cases of unbooked residential apartments at the time of issue of the completion certificate or when the first occupation takes place. Thus, the builders must look into the specific facts applicable to the project instead of being under the impression that the transfer of TDR/FSI will always be exempt.

Reverse Charge Mechanism on TDR and FSI

Another significant aspect revolves around Reverse Charge Mechanism (RCM). Under the GST dispensation, there are provisions that state that the recipient/promoter has to pay GST on a certain TDR/FSI transaction. In specific reference to the real estate industry, CBIC has brought out regulations wherein the transaction involving the transfer of TDR/FSI can be taken care of.

Important Maharashtra AAR Ruling

Vilas Chandanmal Gandhi– GST AAR Maharashtra

The ruling is highly pertinent in connection with the matter in examination. The applicant owned land located within Pune Municipal Corporation limits and received TDR/FSI for the surrender of development rights in respect to the above-stated land under the applicable Development Control Regulations. The issues arising before AAR were:

Is GST payable on the sale of TDR/FSI provided as a consideration against the relinquishment of rights over land?
If GST is payable, under which classification and rate would the above transaction fall under?

The AAR replied positively to both the questions mentioned above. The AAR laid down that GST was payable on the sale of the above-said goods and classified the transaction under Heading 9972 at 18% GST, being 9% CGST and 9% SGST.

Importance of the ruling

The importance of this ruling lies in drawing a clear-cut line of demarcation between the two: Sale of land and Transfer of development rights like TDR/FSI. While the former falls outside the purview of supply as provided under Schedule III, the latter could be liable to taxation as per the provisions applicable.

Difference Between Sale of Land and Sale of TDR/FSI

Basis	Sale of Land	Sale/Transfer of TDR or FSI
GST treatment	Generally outside GST	Can be taxable as a service
CGST Schedule III	Sale of land covered	TDR/FSI is not simply sale of land
Nature	Transfer of land	Transfer of development rights
GST rate	No GST on sale of land	Depends on applicable provisions
Residential project exemption	Not applicable in the same manner	Specific TDR/FSI exemption may apply
RCM	Not applicable to sale of land	May apply to specified transactions

Key Compliance Points for Landowners and Developers

Companies engaged in TDR and FSI transactions should pay attention to the following:

1.TDR/FSI documents

TDR documents include the development rights certificate, allotments documents, agreements, and records of relevant authorities.

2. Land surrender documents

Keep documents regarding the surrender of land or of development rights, and documents concerning payment of compensation.

3. Development regulations

Understand the rules of development in a given municipality or State as the nature of TDR/FSI is mainly determined by the existing town planning regulations.

4. GST invoices and records

Keep records and the appropriate GST documentation, if this transaction is subject to taxation.

5. RCM analysis

If this transaction falls within a category notified for RCM, then the recipient should find out how to pay GST.

6. Exemption eligibility

In case of residential construction, the developers need to ensure that the conditions for TDR/FSI exemption are met.

Conclusion

The GST imposed on the sale of TDR and FSI for relinquishing land rights varies according to the type of transaction and the appropriate GST rules. This is because transfer of development rights due to sale of TDR and FSI are viewed as providing service, which therefore has different GST implications. Hence, landowners, developers, and real estate companies must check the nature of the rights being transferred, the intent of the transaction, exemptions, RCM provisions, and latest notifications before calculating their GST liability.

FAQs

1. Who is responsible for paying GST when it comes to the TDR in the case of RCM?

On the transfer of FSI or TDR if the service is rendered to the promoter accordingly, the GST has to be paid by the recipient of such service, per the RCM.

2. Is GST applicable to FSI?

The FSI is treated as a development right and the transfer of such FSI is also subjected to GST. The rate or exemption is contingent on the type of transaction and applicable rules.

3. What is GST Heading 9972?

GST Heading 9972 generally pertains to real estate services. In the Vilas Chandanmal Gandhi ruling, the Maharashtra AAR categorized the sale of TDR/FSI under the GST heading mentioned.

4. Is there a distinction between sale of land and sale of TDR from the GST perspective?

No. The sale of land is not falling under the category for the supply, as stated in Schedule III. However, the transfer of TDR or FSI is a supply of service.

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