Understanding Goods and Services Tax on Property Redevelopment Projects

The application of Goods and Services Tax (GST) to the redevelopment of cooperative housing society buildings frequently presents complex legal challenges. Before the GST regime, these activities were subject to service tax and Value Added Tax (VAT). In the earlier tax framework, ‘immovable property’ was not included in the definition of ‘activity,’ which was broad and encompassing. Conversely, under GST, a transaction is only taxable if it constitutes a ‘supply’ conducted in the course of business, leading to ongoing complexities and discussions regarding its implementation in redevelopment projects.

Pre-GST Taxation of Society Redevelopment

The Union Budget for 2010-11 extended service tax to construction activities. It stipulated that construction services were taxable if a building was still under development. In 2012, the Indian government released Circular No. 151/02/2012 to clarify tax implications across various construction sector scenarios. This circular specified that construction services became taxable if a builder received any portion of payment or development rights for the land before the issuance of a completion certificate. In such instances, the builder was responsible for remitting service tax. Additionally, service tax was imposed on units provided to landowners, calculated based on the market value of similar units sold by the builder to other buyers.

GST Application to Redevelopment Initiatives

For redevelopment undertakings, a builder is obligated to settle their full GST liability on the total sum obtained from selling residential units to external purchasers. After this tax obligation is fulfilled concerning the overall proceeds from these sales, any GST claims on units allocated freely to existing society members become invalid. Furthermore, in alignment with the tribunal’s ruling in the Vasantha Green Projects case, the tax department’s demand was dismissed, affirming that flats provided gratuitously to members are exempt from tax. Additionally, development rights, as benefits derived from land, are considered immovable property and thus fall outside the scope of GST. Consequently, the specific provisions for the sale of land and buildings do not apply in this context, where redevelopment is the primary contractual element. Therefore, society members are not subject to GST under this provision.

Input Tax Credit Eligibility

When a developer supplies some units without charge to society members while also selling other portions of the building for a fee, the latter service is taxable. Therefore, Input Tax Credit (ITC) can be claimed for the taxable portion of the building sold for consideration, which can then offset the GST liability on that sale. The construction of the taxable part of the building necessitates various inputs and input services. Consequently, these inputs and services can be used to construct the building section that contributes to the provision of taxable supply.

FAQs on GST for Property Redevelopment

• Is GST charged on flats given free to society members in a redevelopment?
  No. Flats provided without consideration to existing society members are exempt from GST, as affirmed in the Vasantha Green Projects ruling.
• Does GST apply to units sold to outside buyers in a redevelopment?
  Yes. The builder pays full GST on the consideration received from selling units to external buyers.
• Are development rights subject to GST?
  No. Development rights are a benefit arising from land and are treated as immovable property, so they fall outside the scope of GST. See also our guide on GST on land vs developed property.
• Can a developer claim ITC on a redevelopment project?
  Yes, on the taxable portion – the units sold for consideration – which can offset the GST liability on that sale.
• How was society redevelopment taxed before GST?
  Under service tax and VAT; construction services were taxable if any payment or development rights were received before the completion certificate was issued.