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REDEVLOPMENT OF REAL ESTATE PROJECTS AND GST IMPLICATIONS

REDEVELOPMENT OF PROJECTS UNDER GST

The Goods and Services Tax (GST), the ultimate tax reform since independence, aims to eliminate the complex and ambiguous tax structure plaguing the country currently. GST is expected to be a sentiment booster for the real estate industry and will seek to revive buyer and investor interest by bringing more transparency in taxation. 

Real-estate industry generally operates in various models such as

  1. Joint-development Model
  2. Slum Rehabilitation Projects
  3. Redevelopment of Societies.

Joint-development Model

In case of joint development model, the land owner and the builder get into an agreement (Joint Development Agreement – JDA) to construct the building, sell the flats, and share the profits in a particular ratio. Under a JDA, the land belongs to the owner which is with the developer doing the construction. Once the developer has performed his obligation and completed the project, the two parties share revenues or the areas in a pre-requisite ratio. To illustrate, if under the revenue-share model the ratio is 25:75 and apartments in a project are sold for Rs 100 crore, out of the total revenue realised, 25% will go into an escrow account as part of the landlord’s share. Under the area-share agreement in the same ratio, 25% apartments may form part of the landlord’s share and the rest will go to the builder.

Slum Rehabilitation Projects

Under slum rehabilitation scheme, land of slum dwellers, that are eligible under the criteria of Slum Rehabilitation Authority (SRA), is given to a developer who builds a permanent structure for slum residents. The developer in return gets additional Floor Space Index who can then build a sale component and make profit.

Redevelopment of Societies

Under the redevelopment model, the land is owned by the society. Generally, society or the members of the society, enter into an agreement with the builder for re-construction/re-development of the property owned by the society or the members of the society. Under the redevelopment model, the builder/developer get consideration as under:

  1. From existing tenant/society member in the form of development rights over the land including the permission to construct the additional flats and
  2. From new flat buyers whom the builder/developer sells additional flats.

 

Redevelopment of Societies and GST implications

This can be explained well with the help of a practical example:

  1. A society consists of 3 complexes and a slum area. The members of the society decide to redevelop the existing properties and rehabilitate the slum area. They get into an agreement with a builder who agrees to demolish the existing property and develop 4 new complexes and a slum area.
  2. As per the terms of the agreement between the society and the builder, the existing owners of the 3 complexes and slum area shall get the additional 20% of the constructed area than the present area.
  3. The builder will pay the rent and other compensation to the dwellers of the society for temporary accommodation during the construction period. The builder shall also pay some amount towards society’s corpus fund.
  4. The additional complex constructed by the builder shall be sold by him to new buyers at his own discretion.

 

Understanding the chain of events

The chain of events and the GST impact is given as under:

Event-1: Transfer of Development Rights by land owner and society to builder

GST in the hands of builder

Not applicable

GST in hands of society/complex owners

All the activities specified in Schedule III under Section 7 shall be treated neither as supply of goods nor supply of services. Entry No. 5 of Schedule III covers sale of land.  Further to various judgements passed by the Apex Court, the word 'sale' denotes transfer of title which is irrevocable and permanent. Hence 'sale of land' denotes 'transfer of title in land'. The word 'land' not just includes full title in land but also rights which gives benefits associated with it. Land development right is a right to carry out development or to develop the land or building or both (see Girnar Traders v. State Of Maharashtra [2011] 3 SCC 1). It is thus a benefit arising out of land included within the word 'land'. Hence the expression 'sale of land' connotes 'transfer (irrevocably and permanently) of title in land including rights in the form of benefits arising from it'.

Thus the above paragraph concludes that transfer of land rights is neither supply of goods nor supply of services and hence is out of the ambit of GST. Thus GST will not be charged on the same.

 

Event-2: Registration for development, plan passing and permission from local authority by builder

GST in the hands of builder

Such services received from Local Authority shall be covered under Reverse charge and GST will be payable under reverse charge by the builder.

GST in hands of society/complex owners

Not applicable

 

Event-3: Payment towards Society’s Corpus Fund

GST in the hands of builder

Not applicable

GST in hands of society/complex owners

This payment received by the society/members towards the Corpus Fund constitute consideration for land development rights and cannot be taken into account in an isolated manner. Since the transfer of land rights is neither supply of goods nor supply of services and hence is out of the ambit of GST, consideration received for the same will also remain non-taxable.

 

Event-4 - Rentals and other compensation paid to owners of Buildings and Society

GST in the hands of builder

Not applicable

GST in hands of society/complex owners

This rental amount and other compensation received by the society/members towards the Corpus Fund constitute consideration for land development rights and cannot be taken into account in an isolated manner. Since the transfer of land rights is neither supply of goods nor supply of services and hence is out of the ambit of GST, consideration received for the same will also remain non-taxable.

 

Event-5-Collections from the new owners (Before and after completion certificate)

GST in the hands of builder

  1. before completion certificate –Consideration received from the new owners before completion certificate shall be taxable under GST. This will be regarded as supply of services under para 5 (b) of Schedule II – “construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate, where required, by the competent authority or after its first occupation, whichever is earlier.”
  2. after completion certificate - Consideration received from the new owners after completion certificate shall not be taxable as this will be considered as sale of building which is neither treated as supply of goods nor a supply of services as per Schedule III, Para 5 of CGST Act.

 GST in hands of society/complex owners

 Not applicable

 

Event-6-Transfer of units to existing building owners

GST in the hands of builder

Units constructed by the developer for the existing owners shall be subject to GST. The time of supply shall be the date of agreement for transfer of rights by the owners and builder. The builder shall be liable to pay full GST on the units allotted to the existing owners. The valuation shall be done as per Valuation rules.

GST in hands of society/complex owners

 Not applicable

 

Valuation Rules in case of transfer of units to existing building owners

According to rule 1 of Determination of value of supply “Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,

(a) be the open market value of such supply;

(b) if open market value is not available, be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money if such amount is known at the time of supply;

(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;

(d) if value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by application of rule 4 or rule 5 in that order.

Further rule 4 states “Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be 110% of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.”

 

GST rate on supply of services to existing flat owners/society members

There are two possible views on rate of tax at which GST would be levied on supply of services ( by way of transfer of units) to existing flat owners/society members.

i. One view is that, as the land is owned by the society and only development right are transferred to builders and no point in time the land is conveyed to developer, the rate of tax shall be 18% without any deduction for value of land.

ii. Other view is that, transfer of development right in land being the benefit arising from land, thus the same shall be considered as benefit arising from immoveable property. Therefore even the development rights in land shall be considered as immovable property i.e land. According to this view there being two transactions, the first being transfer of rights in land by the existing society members to the builder/developer and second being the free sale of flats by the builder/developer to exiting society members along with interest in land and the rate of tax under the GST will be 18% with 1/3rd deduction towards the value of land.

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