If a developer purchases land in advance, they only pay stamp duty, but if they opt for a JDA model, they pay both stamp duty and 18% GST on the JDA deal.
Instead of outright buying the land, the developers are now looking to enter into a joint development agreement where the owner and developer share the built-up area of ââthe property.
And the GST levied on the project increases costs and ultimately reduces returns in case the developer plans to set up a REIT.
Numerous representations have been made to the government by various industry bodies, but to no avail.
âEconomic value accretion mechanisms have not taken off for developers aiming to develop commercial real estate built for rent, due to excessive taxation. If the office complex is ultimately leased, no input tax credit (ITC) is available. This makes most Category A commercial leasehold construction projects unsustainable, âsaid Rishi Raj, Director of Business Development, Max Ventures & Industries Limited.
The developers say the move affects a large number of developers who offer to build shopping malls, multiplexes, hotels, shopping complexes, commercial towers (including office space), industrial parks and warehouses across the country.
“It could also have a negative impact on the supply of Class A business assets, as development models such as joint development etc. would be excluded due to the additional cost of GST resulting from these models,” he said. said Gaurav Karnik, Partner and National Real Estate Leader at EY India.
Experts say it is unfair not to get input credit because such loss of credit becomes a cost, reduces overall yield and, more importantly, breaks the chain, which is not the intention of GST legislation.
Transactions involving the transfer of land development rights were outside the scope of indirect taxes under the old tax system, but the issue has arisen following a recent government notification.
According to the notification, GST was payable by both the landowner and the developer.
The GST notification was aimed at levying taxes on landowners, which was then challenged in court.
âThere are several constitutional challenges regarding the transfer of development rights that are akin to the sale of land in a complex barter transaction. Since land and buildings are not subject to GST, the applicability of the tax depends on the contractual conditions and facts, unless challenged in court, as well as the issue of valuation and the applicability of the reverse charge mechanism, âsaid Abhishek A Rastogi, Partner, Khaitan & Co..
According to Anuj Puri, president of ANAROCK Property Consultants, in commercial projects, the developer currently pays GST on the value of its undivided share (UDS) when entering into a joint development.
ITCs on inputs and input services cannot be claimed either.
âSince most commercial projects are not sold but rather capitalized for rental income, this is more often than not an additional cost for a developer that ultimately impacts their profit margins,â Puri said. .
According to the developers, the cost of the GST is about 34% of the development cost and exceeds the total development cost.
âThe GST has had an impact on the overall cost of the developer and without any input credit facility, this decision puts assets built to rent at a disadvantage. In the old tax system we had an advantage, but this additional tax increased the cost of business assets, âsaid Tina Rawla, MD – CFO & COO of Hines India, a private global real estate investment company.