The Hon’ble Telangana High Court in the case of M/s. Prahitha Constructions Private Limited v. Union of India and Ors. [Writ Petition No. 5493 of 2020 dated February 09, 2024] dismissed the writ petition and held that transfer of development rights would be considered as service and is, therefore, subject to levy of GST.
What Was the Case About?
M/s. Prahitha Constructions Private Limited (“the Petitioner”) is engaged in the business of conceptualizing, planning, constructing, and developing commercial real-estate projects. The Petitioner entered into a Joint Development Agreement (“JDA”) with the landowners for the development of land by constructing towers in the first phase with common facilities.
The Petitioner has filed a writ petition for declaring that the transfer of development rights of landowner to the Petitioner by way of JDA should be treated as sale of land by the landowners and hence the execution of JDA should not be subject to levy of GST. The Petitioner also prayed for declaring Notification No. 4 of 2018-Central Tax (Rate) dated January 25, 2018 (“the Impugned Notification”) as amended by Notification No. 23 of 2019 dated September 30, 2019, imposing GST on transfer of development rights of land by the landowners under JDA is ultra vires to the Constitution of India.
The Petitioner contended that, the execution of JDA is almost like sale of the land which is developed by the Petitioner. The Petitioner further contended that, the Revenue Department (“the Respondent”) cannot compel the Petitioner to pay GST by treating JDA as a transaction of sale of the land.
What Did the Court Say?
The Telangana High Court looked at the details and decided against Prahitha Constructions. Here’s a simplified explanation of their reasoning:
JDAs Are More Than Just Buying Land: The court explained that when Prahitha Constructions gets development rights from landowners, it’s not just buying land. It’s more complex. The company is providing a service by developing the land. Therefore, this activity falls under the category of services that should be taxed under GST.
Ownership Doesn’t Change Right Away: The court also noted that just because Prahitha Constructions has the rights to develop the land, it doesn’t mean they own the land outright. They only get certain rights to the property, and these rights come with the responsibility to develop it before they can sell any part of it.
Services Are Taxable: Since Prahitha Constructions is offering a service (developing the land) before selling it, this service is taxable under GST. The court said that the government’s notifications about taxing development rights were valid and within the law.
What Does This Mean?
This decision is a big deal for the real estate industry. It clarifies that when a developer gets rights to develop land, it’s not just a simple purchase of property. It’s a service that the developer is providing, and therefore, it’s subject to GST. This has several implications:
Real Estate Deals Will Be Scrutinized for GST: Developers need to consider GST when they enter JDAs. They can’t assume that these deals are tax-free like selling land.
Clearer Rules: The judgment helps everyone understand the tax rules better. Developers, landowners, and even buyers will now have a clearer idea of how GST applies to development rights and JDAs.
Planning and Costs: Companies involved in real estate development will have to plan their finances more carefully, considering the tax implications of their development agreements.
Conclusion
In simple terms, the Telangana High Court’s decision makes it clear that in the world of real estate, developing property under an agreement with landowners is a service that attracts GST. This ruling helps clear up confusion and ensures that similar future deals are done with a clear understanding of the tax implications, making things fairer and more predictable for everyone involved.
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