Fractional Ownership Platforms (FOPs) and GST Products, Services, or Neither? A Critical Examination

Fractional Ownership Platforms (FOPs) and GST Products, Services, or Neither? A Critical Examination

1. Introduction: India’s Growing Fractional Ownership

The growth of Fractional Ownership Platforms (FOPs) has caused a structural change in the real estate investment market in India. With investments as little as ₹10 to ₹25 lakhs, these platforms enable retail investors to co-invest in high-value commercial properties, such as Grade-A offices, warehouses, and retail spaces. These platforms, which were mostly organized around Special Purpose Vehicles (SPVs) and Power of Attorney agreements, functioned in a regulatory void prior to 2024.

The SEBI (Real Estate Investment Trusts) Amendment Regulations, 2024 (Circular No. SEBI/LAD-NRO/GN/2024/166 dated March 8, 2024) introduced a specific framework for Small and Medium REITs (SM REITs) after the Securities and Exchange Board of India (SEBI) recognized both the opportunity and the systemic risk. Any FOP with 200 or more investors and assets worth ₹50 crore or more must register as an SM REIT under this framework.

The Goods and Services Tax Act, 2017 (CGST Act) now contains a gray area, despite the SEBI regulation providing much-needed investor protection. CBIC has not addressed the crucial question of whether transactions on FOPs and SM REITs are taxable supplies under GST, and if so, what their nature and rate are.

This article seeks to map each taxable event in the FOP lifecycle against the current GST framework through an organized legal analysis.

2. Comprehending the FOP / SM REIT Transaction Framework

It is crucial to comprehend the transaction architecture of a typical SM REIT before examining the GST implications:

Under the GST framework, each of these five tiers raises a different legal and tax question. Each layer is covered in turn in the analysis that follows.

3. Layer 1: Property Transfer to SPV: Is This a GST Supply?

3.1 The Main Question

The first GST question that comes up when a property owner transfers real estate to an SPV (either as a capital contribution or in exchange for shares of the SPV) is whether the transfer represents a taxable supply.

3.2 Analysis of Schedule III

According to Schedule III Entry 5 and Section 7(2) of the CGST Act:

“Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building” will not be regarded as a supply of goods or services.

This seems to take the property-to-SPV transfer outside of GST at first glance. However, the following factors make the stance difficult to understand:

• The transfer is a “supply for consideration other than money” since it is a contribution to an SPV in exchange for shares rather than a “sale” in the traditional sense.
• Although immovable property is not included in the definition of “goods” under Section 2(52) of the CGST Act, the shares acquired in exchange are classified as “securities”, which raises additional questions.
• Schedule III Entry 4 (High Sea Sales/Merchant Trade) does not apply if the transfer is organized as a slump sale or business transfer; nevertheless, a specific exemption may be requested under Section 11 notifications.

3.3 The Author’s Perspective

Even as a capital contribution in exchange for shares, the transfer of real estate to an SPV should only be covered by Schedule III Entry 5 if the real estate is being transferred and not a collection of services. On this particular situation, CBIC has not provided any clarification. The possibility of being reclassified as a “taxable service” by the GST authorities is still a real concern, especially if the transfer entails any continuing obligations, like a leaseback arrangement.

Critical Trap: The transfer may be regarded as an “exempt supply” under Section 17(3) of the CGST Act, necessitating proportionate ITC reversal under Rule 42/43, even if the transfer itself avoids GST. The majority of practitioners overlook this hidden expense.

4. Layer 2: SM REIT Unit Issuance to Investors — Supply or Securities?

4.1 The Essential Position

According to Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA), SM REIT units are considered “securities” after they are listed. The CGST Act’s Section 2(52) defines “goods” as any type of movable property, excluding cash and securities.

Consequently, SM REIT units are specifically excluded from the definition of “goods” because they are securities. As a result:

• Under GST, the issuing of SM REIT units to investors does not constitute a supply of goods.
• According to the CGST structure, the transfer of units on the secondary market is also not a supply.
• The purchase or sale of SM REIT units, whether in the primary market (IPO) or secondary market (stock exchange trading), is not subject to GST.

4.2 SM REIT Entities’ ITC Trap

Section 17(3) of the CGST Act imposes a substantial compliance cost even though the unit transaction itself is exempt from GST. It states that “transactions in securities” are included in the “value of exempt supply.” This means that the SM REIT’s transactions in its own units are considered “exempt supply” for the purposes of Rule 42/43 (ITC proportionate reversal), necessitating ITC reversal on all common inputs and input services.

This can result in lakhs in ITC reversal on legal fees, management fees, professional charges, and other usual costs for an SM REIT with a large issue. This is a commercially important consequence that isn’t mentioned in offer documents required by SEBI.

Note: According to the Explanation to Chapter V of the CGST Rules, the value of securities for ITC reversal purposes under Rule 42/43 is determined at 1% of the securities’ sale value, not at face value. Although this offers some respite, the provision is still a trap for those who are not familiar with it.

5. Layer 3: Investment Manager’s Fee: The Fundamental GST Taxability Problem

In the entire FOP ecosystem, this is the most unclear and commercially significant GST question. Every SM REIT is required under the SEBI Master Circular for REITs (Circular No. SEBI/HO/DDHS-PoD-2/P/CIR/2024/43, dated May 15, 2024) to designate an Investment Manager registered with SEBI who charges a management fee represented as a percentage of the Net Asset Value (NAV) or Assets Under Management (AUM).

5.1 Nature of the Service

The SM REIT scheme receives the following services from the Investment Manager:

• Portfolio management (purchasing and selling real estate assets)
• Supervision of property management
• Management of regulatory compliance
• SEBI reporting and investor relations
• Calculation of distribution and payment

As actions for consideration, these are unquestionably “services” under Section 2(102) of the CGST Act.

5.2 SAC Code Classification

There is disagreement over the proper SAC code classification for investment manager services:

Author’s Opinion: Based on a composite or mixed supply analysis, the Investment Manager’s fee is best categorized under SAC 997221 (Property Management Services) and SAC 997119 (Fund Management). Under the regular service rate, the applicable GST rate is 18% in both situations.

5.3 The Problem of Exempt Supplies

The nature of what the investment manager is overseeing presents a crucial problem. The main source of income for the SM REIT scheme is rental income from commercial properties — which is taxable at 18% under Forward Charge when received by the SPV from tenants.

Why then is there a problem with exempt supply? The value chain holds the key to the solution:

• Since the SPV is a recognized taxable entity, it pays GST on the rental revenue it receives.
• The SPV distributes to the SM REIT — these are dividends and distributions, not a supply.
• The SM REIT distributes to unit holders — once more, this is not a supply.
• The fee is assessed at the Investment Manager level based on total AUM, which includes both taxable and non-taxable operations.

When it comes to ITC claims on inputs used to manage the “exempt” portion of the supply chain, the investment manager needs to exercise caution.

6. Place of Supply: Where Does the GST Liability Occur?

6.1 The Problem of Multiple States

Properties in certain states are often owned by SM REITs. With investors dispersed throughout India and outside (NRIs via the FEMA-permitted method), an SM REIT formed in Maharashtra may own properties in Delhi NCR, Bengaluru, and Hyderabad. This leads to a multifaceted place of supply issue.

6.2 Relevant Provisions

6.3 Critical: Multiple State GST Registration

When using SPVs to operate multi-state properties, an SM REIT must make sure that each SPV is independently registered for GST in the state in which the property is situated. If this isn’t done, there could be cascading tax costs and IGST misclassification. In actuality, this is a frequent instance of noncompliance.

7. Layer 4: Rental Income from SPV: A Clear Picture (With a Catch)

The SPV’s rental income from business tenants is comparatively clear under GST, in contrast to the ambiguity in other layers:

• Commercial real estate rentals are subject to 18% GST (Forward Charge).
• As the owner of the property, the SPV is the supplier of the rental service.
• Rental or leasing services involving owned or leased non-residential property are covered by SAC Code 997212.
• Unless the tenant is a registered individual and the property is used for purposes other than business — an edge case in commercial leasing — GST is paid by the SPV on a forward charge basis, not under RCM.

7.1 The Catch: NDCF Distribution Is Not a Supply

It is a distribution of income — not a provision of services — when the SPV gives the Net Distributable Cash Flow (NDCF) to the SM REIT trust and the SM REIT trust gives it to unit holders. These distribution flows are exempt from GST.

Note: Distributions from business trusts to unit holders are subject to TDS under Section 194LBA of the Income Tax Act, 1961 — a distinct compliance requirement that practitioners should not mistake with GST liability.

8. The Unanswered Questions: When CBIC Has to Step In

As of the writing of this article, the GST law still fails to address a number of important issues. These are real ambiguities that need to be clarified by CBIC or guided by the GST Council:

9. A Practical GST Compliance Guide for SM REIT Participants

For Investment Managers:

• Register for GST and apply 18% GST to all management fees collected through the SM REIT scheme.
• Keep SAC-specific billing records and separate fee components (fund management, property management, and compliance).
• Every year, perform a Rule 42/43 ITC reversal analysis and account for units issued (at 1% declared exempt supply value).
• Ensure SPVs are registered for GST in every state where they own properties (different GSTIN for each state).

For Asset Owners Transferring Property to SPV:

• To find out if the property transfer is subject to GST, get a legal opinion (Schedule III analysis).
• Examine whether there are any incorporated leaseback or service components; if so, GST is applicable.
• Stamp duty must be calculated separately — Schedule III exempts GST but not stamp duty.

For Tax Professionals Advising Investors:

• Verify that secondary market purchases of SM REIT units are exempt from GST (securities exclusion).
• Provide advice on TDS under Section 194LBA on distributions — separate from GST compliance.
• For NRI investors, examine the FEMA-approved investment method and evaluate any possible IGST on ‘services received from India.’
• Corporate investors holding SM REIT units on their balance sheet should be aware of the ITC reversal risk — they are not eligible to claim ITC on units held as investments.

10. Conclusion

The SM REIT is an investment entity that sits at the nexus of indirect taxation, real estate law, and securities law thanks to the SEBI (REIT) Amendment Regulations, 2024. The GST framework has not kept up with SEBI’s quick action to put FOPs under regulatory control.

The present situation can be summarised as follows:

• SM REIT unit transfers (primary or secondary market) are exempt from GST — securities exclusion under Section 2(52).
• Investment Manager fees are taxable at 18% GST — relatively clear, but SAC classification requires careful consideration.
• SPV rental revenue is explicit and subject to 18% GST on forward charges.
• Property transfer to SPV: Grey zone — Schedule III might be applicable, however there is a risk of recharacterization.
• ITC entitlement: Limited, subject to required reversal requirements under Rules 42 and 43 and Sections 17(2)/(3).

The author urges CBIC to produce a comprehensive circular on the GST treatment of SM REIT/FOP transactions — akin to CBIC Circular No. 178/10/2022-GST on the GST treatment of crypto assets — before the asset class reaches a size where ad hoc litigation becomes the sole option for resolution.

Until such clarity arises, the practitioner’s motto should be: document everything, reverse what is necessary, and seek advance rulings where the stakes are high.

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Disclaimer: The opinions presented in this article are the author’s own opinions and should only be used for educational and informational purposes. This article does not offer legal advice. Before acting on the analysis presented here, readers are encouraged to obtain independent legal and tax advice. The mentioned law is effective April 2026.

About the Author: Adv. Mohit Jain is a Delhi-based Advocate and Tax Advisor with more than ten years of experience in GST and Income Tax litigation. He represents clients before the Delhi High Court, ITAT, CIT(A), GST Appellate Authority, and NCLT. Qualifications: BBA LLB, B.Com, CA-Final* (ICAI). Contact: mjlexlegal@gmail.com