Ever since the concept of taxation evolved, the tax authorities have viewed the real estate sector as “the goose that lays golden eggs”. The nature of real estate is such that it can neither be covered under movable assets (Goods) nor services. The ever evolving, multi-faceted layers of transactions and arrangements in this sector have resulted in framing of various laws to tax these numerous arrangements and transactions. Thus, contributing to making it the most litigation prone sector. One such cause for litigation has been the taxation of TDR under GST.

What is a Transferable Development Right?

 TDR as a concept evolved in 1913 in the USA and has since been followed across the globe for development of large crowded metro cities. The idea is to promote planned development of the city by decongesting the highly congested areas. For this purpose, the development rights in respect of privately owned land is acquired by the authorities for creating public amenities, building roads, etc. In lieu of the same, the owner of land who surrendered rights over his land is issued a TDR certificate, this certificate could be sold / transferred for value to any other person. This concept evolved over the years and took different forms and shapes to suit the development requirements. This concept has been adopted over time for development of large real estate projects in the private sector as well where the typical modus operandi is through execution of a development agreement between a developer and a landowner for transfer of development rights to the developer which enables the developer to either trade in such development rights or itself undertake development of the land for commercial use. Under this arrangement, the Developer may rent out or sell the developed area without any transfer of title in land. Landowner is compensated either in pure monetary terms or by way of ownership rights over certain percentage of the developed area. Such arrangements involve area sharing or revenue sharing models between the landowner and developer.

Under the revenue sharing model, the Developer sells proportionate undivided share in the land to prospective buyers and compensates the landowner in cash.

Whereas, in area sharing model, landowner receives a portion of the developed area in lieu of his portion of land, which the developer sells to prospective buyers along with his (developer’s) share of the apartments.

Liability to pay tax on Developmental rights:

 Who should pay? Developer How? On reverse charge basis

The landowner need not take registration for the purpose of discharging of taxes under the GST law for the transfer of development right made by him. Tax on transfer of Development

rights after 1st April 2019 is liable to be paid by the hapless developer on Reverse charge basis.

Earlier to 1-4-2019, in terms of Notification No. 4/2018-CTR dated 25-1-2018, the registered Land Owner was made liable to pay GST on the transfer of development rights, while the Developer was made liable to pay GST on the value of completed apartments that was transferred to the Land owner, in pursuance of the joint development agreement entered into between both the parties. In the absence of Section 9(4) being implemented, the Developer was not required to pay GST under RCM, in respect of Development Rights.

Effective from 1-4-2019, the Developer will have to carry the albatross of being required to pay GST on transfer of Development Rights to himself, by registered as well as unregistered Land-Owners/Transferors, both in respect of residential projects and commercial projects.

Payable When?

 In case of Area sharing agreement:- GST on the consideration paid in the form of constructed premises is payable at the time of completion certificate or first occupancy, whichever is earlier. The tax is to be discharged by him in cash on reverse charge basis.

In case of revenue sharing agreement:-

Residential :- After completion, GST on the value of development rights shall be paid on the unbooked apartments on reverse charge basis @1% for affordable and 5% for others

Commercial :- Tax @18% on consideration is payable within sixty days from the date of Joint Development Agreement.

Be as it may, the million dollar question is, Is Sale of land taxable under GST?

 There are certain items on which GST does not apply. These are classified under Schedule III of the GST Act as “Neither goods nor services”.

As per Schedule III, GST is not applicable on sale of land and sale of completed building. India, being a federal economy, sale of land is a subject matter of states.

Article 246(1) of the Constitution provides for 3 lists in the Seventh Schedule.

List I (Union List) enlists subjects for which the Parliament alone enjoys legislative powers.

Likewise, List II (State List) enlists such subjects for which the State Legislature enjoys legislative powers.

List III (Concurrent List) allows concurrent legislative powers to both Parliament and State Legislatures on the subjects enlisted therein.

Taxes on land and buildings, house tax, etc. are legislated by the State legislatures basis the powers drawn from the State list, thereby giving no power to Parliament to legislate on the same. Thus, levy of GST on sale of plots, TDR (being an immovable property) is illogical, irrational and unfair.

The above view is further endorsed by the treatment of TDR under the provisions as contained under the Income Tax Act,1961 (‘Income Tax Act’) and The Indian Stamp Act, 1899 (‘Stamp Act’).

Under the Income Tax Act, the transfer of development rights is considered as transfer of land and taxable under long term capital gains tax.

Further, as per the Stamp Act, in cases involving transfer of immovable property, registration is mandatory and a stamp duty at a higher rate is applicable whereas in other cases (like developer agreements, etc.), registration is optional, and the stamp duty rate of around 1 or 2 per cent is payable. The Schedule to Stamp Act has a separate entry for TDR and prescribes for mandatory registration and stamp duty rate equal to that applicable to transfer of immovable property. Thus, even Stamp Act recognizes TDR as a transaction in immovable property and charges stamp duties accordingly.

Was Service tax applicable on TDR?

 Service tax excluded both land and benefits arising out of land from the definition of service. However, under GST the exclusion is only for sale of land not on the benefits arising from land.

Whether land includes benefits arising out of land and is to be classified as land itself or can benefits arising out of land be segregated from sale of land?

Let’s examine step by step:-

Define Land:-

 As we know, the expression ‘land’ has not been defined under the GST law. Hence, we would need to look at definitions of land, as are available under other laws.

The Transfer of Property Act, does not define the term “immovable property”. However, Sec 3 lays down what all “immovable property” does not include

  • standing timber
  • growing crops or
  • Grass

Sadly, what is “included” as immovable property is not defined! So, what do we do now? Let’s check the Registration Act.

As per the Indian Registration Act, Immovable Property includes

  • Land
  • Building
  • Hereditary allowances
  • Right to ways
  • Lights
  • Ferries
  • Fisheries
  • Any benefits to arise out of land and things attached to earth, but not standing timber, growing crops or grass.

The General Clauses Act, 1897 gives a complete definition:-

According to sec 3(26) of the General Clauses Act, “immovable property” shall include:-

  1. Land
  2. Benefits that arise out of land
  3. Things attached to the earth or permanently fastened to anything attached to the earth.

Under Section 3(a) of the Land Acquisition Act, 1894, the expression ‘land’ includes benefits to arise out of land and things attached to the earth or permanently fastened to anything attached to the earth.

As per Explanation to Section 35(2) of the Income tax Act, 1961, land includes any interest in land.

Definition of land as per various Case laws:-

In S N Chandrashekar v State of Karnataka (2006) 3 SCC 208, 214 p.13, the Supreme Court held that the term ‘land’ has to be defined to include benefits to arise out of land. The Supreme Court, in Hansraj Sharma v Collector, Land Acquisition, reported in (2006) 3 SCC 399, 407, P. 16 has held that, the expression “land” includes benefits to arise out of land, things attached to the earth or permanently fastened to anything attached to the earth and rights created by law over any street.

The Courts have consistently held that rights to develop land/property and avail benefits arising from such development/developed land are benefits arising out of the land.

In the case of Chheda Housing Development Corporation v. Bibijan Shaikh Farid, 2007, the Bombay High Court held that development rights being a benefit arising from the land must be held to be immovable property. Following this decision, Bombay High Court in the case of Sadoday Builders Pvt Ltd v. Joint Charity Commissioner, Order dated 23.06.2011 in WP No. 4543/2010 observed that development rights being a benefit arising from the land, must be held to be immovable property.

The Supreme Court in the case of Ananda Behera and Another Vs. State of Orissa AIR (1956) SC 17, has held that Profit a prendre is considered as a right of taking soil, gravel, minerals and the like from the land of another. It is a benefit arising out of land and it is immoveable property within the meaning of Transfer of Property Act, 1882.

The Supreme Court in the case of Canbank Financial Services Ltd. Vs. Custodian (2004) 8 SCC 355 in para 86 has held that title in a property connotes a bundle of rights. Subject to prohibitory or regulatory statutes, such rights are capable of being transferred.

In the case of State of Orissa v Tiitaghar Paper Mills, right to cut bamboo and remove bamboo from the soil was granted to the defendant. It was ruled, that the Bamboo contract was not a sale or purchase of goods but was a creation of interest in the immovable property and the benefit arising out of it. Thus, no sales tax was levied on it.

The taxation authorities cite the judgement made by The Bombay High Court in the case of Chaturbhuj Dwarkadas, wherein it ruled that the Builder is merely a licensee. License means a right to enter land, take out something from it. The licensee does not have any interest in the land. So can be taxed under GST.

However the Calcutta HC in the case of Ashok Kumar Jaiswal, has ruled that it is not merely a licence. The landlord gives up a portion of his land. License means the developer can merely take something out of the land. No interest in the land is created. But, Builder has an interest! An irrevocable power of attorney is executed in favour of the builder for taking permissions, for water, power etc. When landlord executes a power of attorney, the builder becomes an agent. Plus, agency is coupled with interest. This agency cannot be revoked. As a result, it is out of the purview of GST but covered under Transfer of Property Act.


We can go on and on…. From the above discussion it is evident that there is a very strong basis for the legal view that, Development Rights are nothing but rights that arise or accrue from land and consequently, levying GST on Development Rights would tantamount to levying GST on land itself, which is impermissible under the GST law.

Under the service tax law no attempt was made to levy service tax on transfer of Development Rights in terms of Circular No. 151/2/2012- ST dated 10-2-2012.

The tax authorities in their anxiety to tax TDRs came up with Notification No.4/2018- CTR dated 25-1-2018 and here too, only registered Land-Owners / Transferors of Development Rights were made liable to pay GST. Now, to shift the GST liability to the Developers, irrespective of whether the Land-Owner/ Transferor is registered or not, is a highly unwelcome step from the Government and this development could severely affect the commercial realty sector, considering the fact that the GST rate for transfer of Development Rights is 18% as contrasted to the residential realty sector, wherein, the GST levy on Development Rights is restricted to a rate of 1% of the unsold flats in an affordable project and 5% for others.


Based on the above, levy of GST on TDRs is illogical, irrational and unfair. But, until the issue is well settled it is advisable to pay GST under protest and make application for refund under unjust enrichment.

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