Introduction
In recent times, real estate transactions have become increasingly complex, and with that, the GST implications surrounding such transactions have also grown more intricate. Among the various arrangements in the real estate and construction sector, one of the most nuanced and challenging to interpret under GST law is the development agreement. This article focuses on a specific aspect of such agreements — determining the time of transfer of development rights in the context of a joint development arrangement.
Why is determining time of transfer of development rights crucial for GST compliance?
A development agreement is a contract wherein a landowner who may not have the expertise and resources to develop construction projects on his land engages a developer to undertake such projects in return for grant of development rights in the land.
In the pre-GST regime prior to 1 July 2017, the activity of ‘transfer of title in immovable property by way of sale or in any other manner’ was specifically excluded from the definition of ‘service’. Therefore, transfer of development rights was not taxable in the service tax regime.
However, as per GST law, transactions involving transfer of immovable properties are taxable unless specifically exempted. In this regard, only sale of ‘land’ and ‘building’ are kept outside the purview of GST. Since ‘transfer of development rights’ cannot be equated with ‘sale of land’ itself, it is a taxable supply of service in the GST regime.
Further, post April 2019, the developer/promoter of a project is not just liable to discharge GST on construction services he provides to the landowner. Rather, the liability to discharge tax on supply of development rights for construction of a project is also on the developer on reverse charge basis. In this regard, certain limited exemptions are provided if the development rights are transferred on or after 1 April 2019.
Therefore, the question as to when and how development rights under a joint development agreement are transferred from landowner to developer assume significance since the taxability of such transfer will differ depending on the answer.
Let us take the example of a development agreement which was signed in the year 2016. However, since the construction activity span over years, the consideration in the form of revenue/area share will be given to the landowner entirely in the GST regime.
One may take a view that the development rights are transferred on date of entering into the development agreement. If this view is adopted, in case of the example given above, development rights would be transferred in 2016. Since the development rights were not taxable in the service tax regime, such transfer would not be subject to any tax.
However, there are other schools of thought as per which development rights are transferred only at a later point of time. The joint development agreement is subject to various terms and conditions like the developer constructing the building as agreed between the parties and sharing the revenue from the sale of the building or giving constructed flats to the landowner etc. Therefore, the rights for the developer may not be unconditional or absolute on the date of execution of the development agreement. In other words, the rights of the developer may crystalise only over a period of time as and when he fulfils the conditions of the development agreement. In that case there may not be any outright transfer of development rights on the date of agreement itself.
If this view is adopted, in the example in our case even though the development agreement was executed in 2016, the supply of development rights may get taxed under GST law by virtue of sub-section (10) of Section 142 of the CGST Act. Further, there may be added liability in the hands of the developer if such supply happens post April 2019.
Judicial analysis of transfer of development rights
There are conflicting decisions from various High Courts in the context of levy of income tax on capital gains arising from transfer of development rights.
In a number of cases, the Supreme Court and the High Courts have opined that merely entering into a development agreement for undertaking construction activity on an immoveable property would not be construed as ‘transfer’ under Section 2(47)(v) of the Income-tax Act, 1961 for the purpose of imposing tax on the income to be earned by the landowner under the agreement.[1] The courts have opined that the landowner has merely given a license to the developer to enter the land and construct. These decisions opine that transfer in case of development agreements will only take place only when the construction activity is completed and the consideration in terms of share in the built-up area/revenue share from sale of units is handed over to the landowner.
However, in case of Chaturbhuj Dwarkadas Kapadia v. CIT [260 ITR 491(Bom)] the Bombay High Court has taken a contrary view that transfer of property under Section 2(47)(v) of Income Tax Act was complete in the year in which the builder is given irrevocable license by the landowner to enter upon the land to carry out construction.
The recent judgment by Patna High Court in Shashi Ranjan Constructions Pvt. Ltd. v. Union of India [2025 (5) TMI 633] has touched upon this issue in the context of levy of GST. In this case, the court was primarily dealing with taxability of construction services provided by developer to landowner in pursuance of a development agreement entered in pre-GST regime. However, in the judgement, the Court made an observation that developer does not get any right in the land until the completion of the project. The High Court did not elaborate on this finding and has not laid down any clear legal principles so as to resolve the issue.
In light of the divergent judicial pronouncements discussed above, it is evident that the issue regarding the timing of transfer of development rights remains legally unsettled and continues to be a matter of interpretational uncertainty.
Conclusion
For developers and landowners, understanding when development rights are transferred under a joint development agreement is not just a legal question — it is a financial necessity. The timing determines who bears the GST liability, what exemptions may apply and ultimately, the overall cost structure of the project. Further clarifications from government in future will bring more certainty in these matters. Till then, a careful examination of the development agreement is essential, both from a GST standpoint and from the perspective of overall project cost management.
[The authors are Executive Partner, Associate Partner and Senior Associate, respectively, in GST Advisory practice at Lakshmikumaran & Sridharan Attorneys, Mumbai]
[1] Please see: Commissioner of Income Tax v. Balbir Singh Maini [(2018) 12 SCC 354]; Principal Commissioner of Income Tax, Kolkata-1 v. Infinity Infotech Parks Limited [[2018] 257 TAXMAN 359 (Cal)]; Bharat Jayantilal Patel v. Deputy Commissioner of Income Tax [[2023] 292 TAXMAN 276 (Bom)]
