Joint Development Agreement - Karnataka VAT
Friends, Let us try to analyse what are the legal provisions under K-VAT act with respect to Joint Development agreements popularly known as JDA.
What do you mean by Joint Development Agreement ?
In a Joint development agreement, an owner of a site and a developer come together to enter into an arrangement to develop a property jointly.
Suppose A is th owner of a plot of say 500000 Sq ft . B is a builder. B wants to contruct 300 flats. Now, A & B enter into an agreement whereby A will sell the Land to B , in exchange for 120 flats being given to Mr A by B.
In this Agreement, Mr A is not recieving any money for selling his land, he will only get 120 flats ie 40% of share in 300 flats.
This kind of an agreement is called JDA . The ratio being 60: 40. 60 being developer share, 40 being landlord share.
The Developer would be the Person liable to VAT under K-VAT Act (although this is legaly still a big question mark) . He is liable to Pay VAT on the 60% share i.e 180 flats sold by him. Contract to exchange 120 flats is a Principal-to-Principal contract and hence cannot be treated as a Works contract , therefore exempt from VAT.
Computation of VAT under Regular Scheme
Sales consideration on sale of 180 flats ( 60% share)
Less : Land Cost ( only for 180 flats - arrived using Superbuiltup area or Undivided Share)
Less : Sub-Contractor deduction ( Only for 180 flats apportioned)
Less : labour & like charges ( Either Adhoc dedcution of 30% of contract value or actuals)
Total : -Turnover Liable to VAT
Calculate VAT @ 14.5%
Less : Input tax deduction ( apportioned for 180 flats)
Net tax Payable
Computation of VAT under Composition Scheme
Same as above, except that Composition dealer will get deduction of Interstate Purchases since Local VAT Rate is applicable for Composition dealer and not Composition rate. Moreover, Input tax deduction is not available to Composition dealers.
Note : Sub-contractor should be a registered dealer who has to file monthy VAT returns and declare the amounts recived from contractors.
Anybody has any questions can ask me, will try my best in answering your queries
What about the flats given to land owner? How tax will be charged to land owner?
Flats sold by developer to landlord is IMMOVABLE PROPERTY, no way to charge VAT on the same. Land owner cannot be made liable to VAT. He may be liable to Capital gains when he sells his share to some other buyers.
I dont have complete understanding on VAT implication on real estate transactions. Can you please explain, how the construction and sale of flats is taxed?
Basically, you need to understand some basics of Works Contract
What is Works contract ?
How is Works contract liable to VAT ? How is it liable to Service tax ?
Then , you will understand VAT implications onreal estate.
What is Works Contract ? How is VAT & ST charged on WC ?
In a normal sale, there is delivery of ascertained goods. However, in a works contract there is a material and labour component involved , states have power to levy VAT on "Transfer of Property" in goods. ie. MATERIAL VALUE only and not on the labour portion of Works contract.
So, in a works contract, one needs to find out the the value of Material portion. Various state laws have various methods to calculate this.
In Karnataka, we take Total Contract value less deduction for labour (actuals or prescribed %) less subcontractor bills. On this we need to calculate tax ( rate and Input tax credits depends on Scheme - Rgualr or composition). There are various other deductions once can claim. Refer Rule 3(2) of KVAT rules.
Under ST, you will get abatements of 60% for construction works.
Coming to Real Estate transactions, Real estate transactions are basically Works contract. The Developer is nothing but a Works contractor, hence he would be liable to VAT. Generally, buyers are supposed to pay advance and milestone payments to developers, hence arises the liability to VAT.
The situation is however different when the developer builds all flats and later finds the buyer to buy the flats, in which case it is a sale of Immovable property exempt from VAT & ST.
Kindly refer to L&T Judgement to understand basics and the conclusions of Supreme Court wrt to Real Estate transactions predominantly JDA .
You need to understand there are two types of Flats
1. Ready-to-occupy flats
2. Under construction flats
Ready to occupy flats are those flats, in which Sale agreement is entered into after issuance of completion certificate of Apartmet, in this case this is just a Sale of immovanble property, hence not liable to VAT & ST.
However, if sale agreement is entered into before issuance of completion certificate, then VAT & ST is leviable as confirmed by L&T Judgment
I read in Institute's publication of Karnataka VAT that in case dealer adopted Composite scheme, his turnover will inlude consideration received from customers towards undivided share of land in case of Joint Development Projects. Could you please clarify on this.
and also can you please give more clarity on VAT implication on sale of landlord portion from Developers to third party on behalf of landlord. or handing over specified no. of flats directly to landlord after completion.
Mr.A(Land owner) Entered into JD with MR.B(Builder).
As per agreement Land owner share-45%
The Developed property is leased to a hospital (not sold)
What will be the Service tax and VAT implications?
How we will arrive at Sale consideration in this situation(where there is no sale of flats)?