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Joint Development Agreements (‘JDA’) are very prominent in India. It ensures value to both the owner and the developer. The owner receives a new and well-built property, and the developer gets his consideration either in the form of a share in the property and/or money from the sale of the developed property.
Given the typical nature of a JDA, one may wonder how the taxation of such arrangements is to be handled. Well, if you are thinking capital gains, then you have forayed in the right direction. But since a JDA is not akin to any usual purchase/sale transaction of a property, the taxation rules that apply to a JDA are also slightly different. This article attempts to discuss this aspect in detail and also shed light on certain nuances to be borne in mind. Read on to find out more.
Under a typical JDA, a landowner provides his land and enters into an agreement with the developer for developing and constructing a real estate project at the costs incurred by the developer. Thus, the land is provided by the owner of the land, and the developer incurs the cost/expenses of the development and construction of property on the land provided by the owner.
The developer also assumes the responsibility of obtaining necessary approvals, undertaking legal formalities, marketing the project, selling and registering the properties in the name of the buyers, etc. In return, the owner may either receive a lump sum consideration or a certain share in the constructed property or a percentage of the revenue from the sale of such constructed property. The mode of consideration would purely depend on the commercial arrangement agreed upon between the parties.
A JDA is a win-win for both the landowner and the developer. The landowner may not necessarily have the adequate resources to undertake a construction project, and the developer with the resources may not have land to build upon. Thus, such JDAs ensure that the resources of landowners and developers are pooled together and create value for both parties.
The Finance Act of 2017 introduced section 45(5A) of the Act, which states that individuals and Hindu Undivided Families (HUFs) will have to pay tax on capital gains in the fiscal year when authorities issue a completion certificate for all or part of a project, provided they have entered into a specified agreement for project development.
Essentially, this provision helps postpone the payment of capital gain taxes until the year in which a portion of the complete project is finished and certified. Unlike the previous provisions, property owners are no longer required to settle the tax liability upon entering a Joint Development Agreement (JDA).
The Taxability of incomes arising in the hands of the owner and the developer in a JDA is discussed in the ensuing paragraphs.
JDA necessarily leads to the transfer of a capital asset by the owner of the land or building, and hence, capital gain taxation would become relevant. However, multiple questions could arise in such a case, for instance, when is the owner liable to pay the tax, i.e., the timing of payment? Whether mere entering/signing of a JDA would trigger the taxable event and lead to taxability in the hands of the owner? What is the amount of consideration that would be subject to tax etc? The computation of capital gain is a highly litigated subject matter, with the tax offices generally challenging the taxable event/point of taxation and determination of the taxable amount in the hands of the landowner. This discussion on taxability can further be categorized as the tax on JDAs entered till March 31, 2017, and JDAs entered after that.
Up till March 31, 2017, the capital gain arising in the hands of the owner was governed by section 45(1) of the Act, i.e., it was taxable in the year in which the transfer of capital assets took place. The definition of 'transfer' under the Act, inter alia, includes any arrangement or transaction wherein the rights are handed over on execution of part performance of a contract. Such transfers are similar to the transfers which are referred to in section 53A of the Transfer of Property Act, 1882, even though the legal right has not been transferred. By virtue of this, the mere execution of JDA between the owner and the developer triggered the tax liability under the head capital gains. Such gains were taxable in the hands of the owner in the year in which the JDA was entered into, and the possession of the immovable property was handed over to the developer.
It is to be noted that under a JDA, the owner would generally receive the consideration only in the future, once the project has been completed, which could take as long as 2-3 years. Therefore, the existing mechanism of taxation posed serious challenges to the owner, as he was expected to pay the capital gain tax at the time of entering into a JDA, while in reality, he never received any consideration at that point in time. The owner had to pay the taxes from his pocket in the absence of any real consideration, which caused a genuine hardship. Not just this, to add to the woes of the land owners, the tax offices typically invoked section 50D of the Act, which provided that the fair market value of the project, including land, as on the date of transfer, would be the deemed consideration for such transfer of capital asset. A fundamental flaw in such assumed/deemed consideration was that it completely disregarded that the projects under such JDAs generally take time to complete and are subject to fluctuation risks. Therefore, the fair market value as of the date of execution of JDA would never give an accurate picture and hence, cannot be justified. This provision of the Act, which existed till March 31, 2017, was unclear and led to several litigations.
In order to ease the genuine hardships faced by the owners, Finance Act, 2017 introduced section 45(5A) of the Income Tax Act. As per this new provision, capital gains arising to individuals and HUF, by entering into a prescribed agreement for the development of a project, would be taxable in the year in which the designated authorities issue a certificate of completion for the whole or part of the project. In other words, this provision aims to defer the payment of capital gain taxes to that year in which a part or whole of the project is completed, as supported by a certificate. The owners would no longer be required to discharge the tax at the time of entering into a JDA, as was the case in the erstwhile provisions. Further, the provisions also explicitly laid down the consideration which would be subject to the tax, i.e. the stamp duty value (‘SDV’) of the land or building or both, pertaining to the owner’s share in the project, on the date of issue of said certificate, plus the consideration received in cash, if any, by the owner.
However, in a scenario where the owner transfers his share of the project before the said certificate is issued, the capital gains shall be taxable in the year in which the transfer takes place and the new provision under section 45(5A) would not be applicable. Consequently, the normal provisions under section 45, before the insertion of subsection 5A would only be applicable.
Thus, the key takeaways and certain nuances of the new section 45(5A) can be summarised as follows -
Let’s now understand the taxability by way of a simple illustration -
| S. No. | Particulars | Amount (in INR) |
|---|---|---|
| 1 | Mr. ‘V’ purchased a residential plot on 01.01.2005 for | 30,00,000 |
| 2 |
VE Builders entered into a development agreement with Mr. ‘V’ on 01.06.2017 on the following terms and conditions - (a) Mr. ‘V’ will hand over the possession of the plot to VE Builders on 01.06.2017. (b) VE Builders will pay a cheque of INR 50,00,000 to Mr. ‘V’ on 01.06.2017. (c) VE Builders will construct 20 residential units on the plot of land and will give 15 units to Mr. ‘V’. The 20 units will be completed by 30.06.2020, and on that date, 15 units will be handed over to Mr. ‘V’. (d) The stamp duty value of the plot as of 01.06.2017 is INR 80,00,000. (d) The stamp duty value of the plot as of 01.06.2017 is INR 80,00,000. (e) The stamp duty value of each flat on 30.06.2020 is 45,00,000. |
|
| Computation of capital gains | ||
| 1 |
Sale Consideration: Stamp Duty Value (SDV) of 15 flats on 30.06.2020 plus the cash received i.e., [(45,00,000*15)+50,00,000] |
7,25,00,000 |
| 2 | Less: Indexed Cost of acquisition [30,00,000*272(FY 17-18)/ 113(FY 04-05)] | 72,21,239 |
| 3 | Long-term capital gain taxable in FY 2020-21 | 6,52,78,761 |
Taxability in the hands of the developer
In the developer’s case, the income arising from the sale of the completed project would be in the nature of business income. The property would constitute stock in trade for the developer. The sale proceeds received from the buyers of the developed project would be the income, and the expenditure incurred on the development of the project would be the cost.
Separately, section 194-IC was introduced by the Finance Act, 2017, which cast liability on the developer in a JDA to deducted taxes by way of TDS on the monetary consideration paid to the landowner, in addition to the share in the project. The rate of tax on such payments would be 10% and 20%, where the PAN of the owner is not available. Further, the tax is deductible at the time of credit of such sum to the account of the owner or payment of the cash, whichever is earlier.
Hope this article helped you understand the various nuances of Joint Development Agreements in India and section 45(5A) of the Income Tax Act. Understanding the various sections and provisions of the Income Tax Act can be complex and intimidating. But don’t worry! You don’t have to juggle with the complicated tax provisions. Tax2win’s tax experts are here to help you smoothen the compliance process.
Under a Joint Development Agreement, a landowner provides his land and enters into an agreement with the developer for developing and constructing a real estate project at the costs incurred by the developer. Thus, the land is provided by the owner of the land, and the developer incurs the cost/expenses of the development and construction of a property on the land provided by the owner.
Both a joint venture (JV) and a Joint Development Agreement is an agreements between the parties, where JV is primarily characterized by shared ownership, returns, risks, and governance; in other words, it is basically a sharing of business whereas, in a JDA, there is no sharing of business. Instead, it is characterized by contributing to a business.
For the landowner as per section 45(5A) of the Income tax Act, stamp duty value, on the date of issue of the said certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any, shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset
Yes, GST is applicable to the supply of development rights under a joint development agreement. However, in such a case the responsibility to pay tax is no more in the hands of landowners, it has been shifted to the builder/developer under the reverse charge mechanism (RCM)
A detailed description of taxability in the hands of both landowners and developers has been explained above.
Section 45(5A) of the Income Tax Act,1961 lays down the provision for taxability under the transfer of assets in the joint development agreement. It clarifies the time on which such tax implications will arise and the value which is to be taken as the full value of consideration.
