GST on Redevelopment Projects

Redevelopment is a method of urban renewal that seeks to provide additional and better quality housing, make land available in the center of the city, eliminate urban decay and improve infrastructure. In the recent past there are two major reasons observed for the rapid surge in the number of redevelopment projects across India.

1.) Increase in Land Prices

Land rates are increasing rapidly in India. For instance, according to data published by makaan.com, the rate of land has increased by approximately 200% in certain areas of Bengaluru as well as well above 400%in certain areas of Noida in the past year.

2.) Need for replacement of old buildings:

Dilapidated buildings on the verge of collapse are a grim reality for thousands of housing societies in India.When a society is in dire need of extensive repairs but is starved of the necessary funds for it, the best option available is Redevelopment where Developers offer additional area, money, and the promise of a new flat with better amenities.

Further the applicability of RERA on projects under redevelopment has made the compliance more complex and challenging. This of course, is in addition to the complexities of GST which are highlighted in this article.

For any project of redevelopment of a Society, the following transactions, as per the Goods and Services Tax Act, 2017, are treated distinctly:

1. Supply of Transfer of Development Rights/Floor Space Index (commonly known as TDR/ FSI) by the Society to a Developer

2. Supply of Residential units by the Developer to the Society in lieu of supply of TDR/ FSI by the Society

3. Sale of Residential units by the Developer to outsiders

4. Sale of Commercial units by the Developer to outsiders.

♦ Redevelopment of a Residential Society by a Developer (Classified as an RREP).

1. Supply of Transfer of Development Rights/Floor Space Index (commonly known as TDR/ FSI) by the Society to a Developer.

Before 01/04/2019 Supply of Transfer of Development rights/FSI was levied @ 18 % and payable by society under forward charge and the liability would arise at the time of receipt of completion certificate or first occupancy, whichever is earlier.

However after 01/04/2019, vide Notification No. 03/2019 CT(R) dated 29 th march 2019 applicability of GST in a Residential Real Estate Project (RREP)on supply of transfer of development rights/FSI by the society to a developer is as elicited below.

A “Residential Real Estate Project (RREP)” shall mean an REP in which the carpet area of the commercial apartments is not more than 15% of the total carpet are a of all the apartments in the REP, where in REP means “Real Estate Project (REP)” as defined in clause (zn) of section 2 of the Real Estate (Regulation and Development) Act, 2016 (16 of 2016).

• • When the /Society provides Development Rights (TDE/ FSI) to a Developer, such a transaction is exempt from payment of GST on the condition that the flats constructed by utilization of such TDR/FSI are booked before receipt of completion certificate or first occupancy, whichever is earlier.
  • Thus, if there are any flats which remain un-booked on the date of receipt of completion certification or first occupancy, GST shall be payable at the rate of 18% on the value of TDR proportion ate to the carpet are a of un-booked flats subject to maximum 1 % / 5% of the value of such un-booked flats.
  • The liability to pay GST shall arise at the time of receipt of completion certificate or first occupancy, which ever is earlier and payable by the Developer under Reverse Charge Mechanism(RCM).
  • The total taxable value of TDR/ FSI will be equal to the rate of the flats sold to in dependent buyers nearest to the date of development agreement.

  2. Supply of Residential units by the Developer to the Society in lieu of supply of TDR/ FSI by the Society.

  • • In are development project the Developer gets the development rights from the Society and in turn he gives flats to them. This is a barter of supplies; here there is no consideration in the form of money. However,for the purposes of levy of GST, the value of services has to be quantified. Therefore, the law provides that in such cases the value of construction service i.e. flats supplied to Society, shall be equal to the rate of the flats sold to independent buyers nearest to the date of development agreement.
    • GST shall be payable by the Developerat the effective rate of 1%/5%,at the time of receipt of completion certification or first occupancy, which ever is earlier.

    3. Sale of Residential unitsby the Developer to outsiders

    • • For Flats sold by the Developer, to other customers, before receipt of Completion Certificate, GST will be chargeable at the effective rate of 1%/5% (after taking in to consideration 1/3rd a bate mentin value towards cost of land) by the Developer. For flats sold post receipt of Completion Certificate, the same shall be exempt from payment of GST. The Liability to charge and pay GST, a rise sat the time of receipt of every in stallment/payment* (refer Section 31(5)).

      4. Sale of Commercial units by the Developer to outsiders

      • • As any REP having commercial are a upto 15 % of total carpet area of all the apartments in the REP is defined as RREP, therefore, the commercial units in the RREP GST is charge able at the concessional rate of 5% and payable at the time of receipt of every installment/payment*(refer Section 31(5))

        To being more clarity the following example can be explored.

        XYZ Housing Society Limited has entered into Re-development agreement with “The ABC Builders” on 1st June 2019 for re-development of society.

        Other relevant details are as under:

        • Total Number of Existing Members 12 having total area of 4800 Sq. Ft. (400 Sq. Ft each)
        • Total area to be constructed post redevelopment is 14,000Sq Ft. fully residential, Out of which Society members will get 6,000 Sq Ft, (500 Sq. Ft each)and Area Available for Builder for Sale is 8,000 Sq. Ft, Hence 16 new flats of 500 Sqft carpet area are available for sale to Developer, out of which 10 flats sold before completion certificate or first occupancy and 6 remained unsold on OC date.
        • First flat was sold to Independent buyers at Rs. 110 lakhs (500 Sq. Ft Carpet Area @ of Rs. 22,000 per Sq. Ft) as on 15th September, 2019.
        • Further one Flat was sold to independent buyer at Rs. 150 lakhs (500 Sq. Ft Carpet Area @ of Rs. 30,000 per Sq. Ft) as on 21st May, 2022.

        i. Calculation of GST on Development Rights Transferred by Society to Developers:

        The liability would be LOWER of the following (A or B):

        (A) GST payable on development rights:

        • The development rights were transferred in June, 2019.
        • the rate of the flats sold to in dependent buyers nearest to the date of development agreement is Rs. 110 lakhs (Rs. 22,000 * 500 Sq. Ft)
        • Since 12 units were to be given to Society Members, the total value of transfer of development rights willbe: 12 * 110 = 1,320 lakhs.
        • Hence the total GST payable on transfer of development rights will be Rs. 237.60 lakhs ( Rs 1,320 lakhs * 18%).
        • However we will be required to pay GST proportionate to construction of residential apartments that remain un-booked on the date of issue of completion certificate

        i.e. Total GST Payable on TDR * Carpet Area of the unbooked Residential Apartments / Total Carpet Area of the Residential Apartments in the Project

        237.60 Lakhs * (6*500) / 14,000 = 50.91 Lakhs

        Liability as per (A) will be Rs. 50.91 lakhs

        B) GST liability un-booked apartments as on OC date

        Per Sq. Ft. Value of unit booked nearest to the OC date * Carpet Area of the unbooked Residential Apartments * GST rate

        30,000 per Sq. Ft. *(500*6)*5% = Rs. 45 lakhs

        Liability as per (B) will be Rs. 45 lakhs

        √ So the Final liability on TDR will be lower of A (Rs. 50.91 lakhs) or B (Rs. 45 lakhs) i.e. Rs. 45 lakhs

        ii. GST liability on Residential units provided by the Developer to the Society in lieu of supply of TDR/ FSI by the Society.

        The GST liability will be (Total Carpet Area to be allotted to old members * the value of apartments sold to independent buyers nearest to the date of Development Agreement * GST Rate)

        6000*22000*5% = Rs. 66,00,000

        So the total liability on construction services provided by the developer to the society will be Rs. 66,00,000/-

        Mr. Sachin Dharwal is a practicing Chartered Accountant and a GST Expert. He is the founding partner of M/s DBMK & Co and his area of expertise is Taxation in real estate. He has been instrumental in structuring and formulating effective tax strategies for various corporates that have culminated into substantial tax advantages. He can be reached at [email protected].

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