Amid boom in Mumbai redevelopment projects, triple GST sees court cases build up
September 14th, 2023
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Redevelopment of cooperative housing societies is going on in full swing in Mumbai, but various
issues relating to the goods and services tax (GST) in redevelopment schemes are leading to litigation.
Appeals are also being made to the finance ministry to streamline the tax mechanism.
Typically, members of a CHS collectively transfer the development rights to a redeveloper and after
completion of the project they get a brand new flat in lieu of their old one. The builder uses the
additional FSI (floor space index) available to it under the redevelopment regulations to construct
additional flats that can be sold in the open market.
This helps the builder recoup the cost of rehabilitation— the new flats available free to the original
members. Redevelopment projects face a triple GST effect adding to the costs and impacting the
viability of the projects. The first levy at 18% applies on transfer of development rights to the builder
(redeveloper), subject to there being a sale of flats post-acquisition of the completion certificate.
It should be noted that no GST levy arises on transfer of development rights if all the flats constructed
by utilising the FSI are booked before receipt of this certificate or first occupancy by a buyer/member,
whichever is earlier. In all other instances, a partial exemption based on a prescribed formula is
available.
Sunil Gabhawalla, founder of a chartered accountancy firm, said, “GST provisions recognise the
transfer of development rights as a ‘barter,’ which is a taxable supply. This builder pays this levy at a
later stage, it is paid at the time of first occupancy or receipt of the completion certificate. whichever is
earlier.”
Rohit Jain, partner at Economic Laws Practice, said that writ petitions have been filed in various
courts challenging this levy.
“Development right is an immovable property and its acquisition is akin to a purchase of land, which
is not subject to GST. Further, when the completion certificate is received, the land is transferred to the
new society members,” he said.
The builder also incurs GST during the construction phase which according to the industry averages
18%, for which no input tax credit is available. For example, the GST paid by the builder on cement or
steel cannot be offset later against its own GST liability.
Lastly, the GST incidence at 5% arises when the new flat is transferred to the CHS members. “The
developers are statutorily liable to pay this 5% levy. But commercially, being an indirect tax, it
depends on the negotiations between the parties on whether the GST burden will be passed on to the
members or not. In most cases, as the members are getting new flats, they are willing to bear it. The
sting is that this tax is paid on the market value even as the new flat is in lieu of the earlier one,” said
Jain.
Boman Irani, president of CREDAI-National (a real estate association), recently made a representation
to the finance minister. It was stressed that in redevelopment schemes, the GST department is charging
GST on the market value of the flats given to existing CHS members free of cost, which is in lieu of
their existing flats.
This effectively leads to double taxation as the cost of this rehabilitation component is already
ingrained in the cost of flats being sold in the open market on which the developers are already
collecting GST and discharging their liability.
Gabhawalla refers to an indirect tax tribunal decision in the case of Vasantha Green Projects, which
pertains to the service tax era, but is applicable under the GST regime too. Here the tribunal had
recognised the double tax impact, but the matter is pending before the Supreme Court.
He adds, “A view can be taken that no GST is payable at the time of possession of the new flats by the
members, since the free area allotted to members is an expenditure for the developer and not an
income and the said expenditure is indirectly loaded into the price finally payable by the new buyers
on which tax is already paid.”
For now, till the Supreme Court gives its verdict, members of CHSs and developers are in a flux
Source: realty.economictimes.indiatimes.com
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