Analysis of Various Business Agreements from GST Audit Perspective and Technical Analysis of GST Applicability in case of Joint Development Agreement in case of Real Estate Sector
- A business contract/agreement is the statement, either oral or written, of an exchange of promises in It is a negotiated and legally enforceable understanding between two or more legally competent parties.
- There are different types of business agreements/contracts. Scrutiny of these contracts or agreements constitutes one of the important functions of audit, some of which are discussed below:-
- Foreign Technical Collaboration Agreement: This agreement may be a pure technical collaboration agreement or technical-cum-financial collaboration In the latter, there is equity participation also. Sometimes, collaboration agreements are only financial in nature wherein only equity participation by a foreign company is involved. This is relevant for the following reasons:
- Where there is equity participation, imports from the collaborator may be subjected to scrutiny;
- Payment of royalty/technical know-how fee may involve GST liability towards import of services including IPR;
- Whether consideration paid to the collaborator has been taken into account in arriving at cost of production; etc.
- When the supply is from a related party (a) with consideration, (b) without consideration .
- Joint Venture Agreement: Many times, a joint venture company is set up by Indian Companies with equity participation. Generally, there is a joint venture agreement or promoter‘s agreement which defines various terms and conditions subject to which a joint venture has been formed. This is relevant for the following reasons:-
- Nature of shareholding in the company;
- If there are any clauses regarding pricing pattern for sale to one of the joint venture partners that may have a bearing on related persons sale or sale at arms-length. This may impact valuation;
- The agreement may contain clauses for payment for certain services which may have tax implication;
- There may be provisions for common Managing Director or common Directorship indicating control/management of various companies which may have a bearing on related persons concept ; etc,
Joint Development Agreement in Real Estate Sector and GST Audit
Joint Development Agreements are common in the real estate industry wherein the Land Owner enters into an agreement with a Builder/Developer for the development of the land in lieu of certain consideration. The consideration in such cases can be varied- ranging from a lump sum payment by the builder to the land owner to a share in the ultimately constructed flats/property or a combination of both.
Such agreements involve an element of transfer of land for developmental purposes. Transfer of Development Rights (TDR) are covered under the GST and there is no ambiguity in this regard unlike the Service Tax period.
Various transactions in a JDA with concomitant GST implications are as follows:
- Land Owner to Builder/Developer.
- Builder/Developer to Land
- Land Owner to Customers/buyers.
- Builder/Developer to Customers/buyers.
- Retention of flats/property for own
All such transactions have GST implications like the eligibility of ITC, Time of Supply, Rate of Tax, Value of Supply etc. which would require a detailed reading of the various agreements entered between the concerned parties. A case in point is the eligibility of ITC in such cases only for the portion of the flats/property sold before a completion certificate is obtained. The ITC availed and utilized in the flats/property sold after the completion certificate is obtained has to be reversed. The exact liability of the GST on such projects can be arrived at only after the details of the agreements are studied thoroughly in consonance with the provisions of the GST Act and Rules. The treatment of transfer of development rights and implications in varied schemes like rehabilitation also have to be understood clearly.
