Taxability of other charges collected by real estate developers

Brief Background: Whenever a real-estate developer sold an immovable property either in the form of developed plots or residential units or commercial space (hereinafter collectively known as property), there may be various other charges which may be collected from the customers/buyers, such as Preferential location charges, interest on delayed payment, club membership fees, interest free refundable maintenance security, external development charges (EDC), internal development charges (IDC), electric meter installation charges, power Back-up charges, water connection charges, drainage, sewerage, development charges, transfer/endorsement fees, documentation charges, legal fees, basement storage charges, car parking charges, open area car parking usage charges etc. (herein after collectively known as other charges).

Out of aforesaid mentioned other charges, few on them are government levies which are first paid by the developer to the concerned government authorities and then reimbursement is claimed from the customer (either on cost-to-cost basis or by adding mark-up component) and few of them are the charges which are recovered by the developer against any additional facilities provided which may be incidental to the sale of property or not.

In this article we are only discussing the taxability of all the various other charges under GST laws.

Valuation: In terms of Section 15 of the CGST Act, 2017 (herein after known as CGST Act or The Act), value of supply shall be the price actually paid or payable for the supply and it shall include:

  • any taxes, duties, cesses, fees and charges levied under any law other than GST, if charged separately by the supplier;
  • interest or late fee or penalty for delayed payment of any consideration for any supply.

           (relevant extracts)

Taxability:

A. GST on Preferential Location Charges (PLC)

1. We understand that PLC represents the charges collected from the customers on account of certain additional advantage available to customers such as the directions in which a flat is constructed, the floor on which it is located, the views from the unit (i.e., park facing, lake facing, sun facing etc.), accessibility to other facilities provide near the units etc.

2. From the above, it can be understood that such a service does not constitute an aim in itself for the customers but it is meant for better enjoyment of the flat to be purchased by the customers. In other words, such a service does not have an independent existence which the customer can independently procure from the developer without buying the flat, rather it is a service which walks hand-in-hand with purchase of property.

3. Therefore, it is safely concluded that such supply of PLC shall be qualified to be composite supply of property as defined under Section 2(30) of the CGST Act, where sale of units shall be principal supply.

4. Further, as per various discussions at various levels of adjudication, it comes out that PLC is incidental to supply of property and it is part and parcel of the main service of construction of property. Therefore, such supply shall qualify to be a composite supply of property irrespective of whether the said charges are included in the computation of stamp duty charges or not. Accordingly, PLC shall be subject to the same rate of GST as leviable on principal services, i.e., supply of property.

Real-Estate Developer

B. GST on interest on delayed payment:

1. As per Section 15(2)(d) of the CGST Act, 2017, value of supply shall include interest for delayed payment of consideration. Accordingly, interest shall be subject to the same rate of GST as leviable on principal services, i.e., supply of property.

Nature of Property Rate of tax on principal supply* Rate of tax on PLC* Rate of tax on Interest on delayed payment*
Commercial 12% 12% 12%
Residential (Old Scheme) 12% 12% 12%
Residential (New-Scheme) (Non-Affordable) 5% 5% 5%
Residential (New-Scheme) (Affordable) 1% 1% 1%
Plots Nil Nil Nil

Let us understand the aforesaid two points in tabular form in below:

*Rates mentioned above are effective rate after 1/3rd abatement of Land as per Notification No. 11/2017-Central Tax (Rate) dated 28th June 2017.

C. GST on Club Membership Fee:

1. If this cost is included in the computation of stamp duty charges of the property and proportionate ownership of the club is being transferred to the members as well, the same shall qualify as composite supply of property and accordingly, GST shall be leviable at the same rate as leviable on principal services, i.e., supply of property as enumerated in above table.

2. Otherwise, i.e., the aforesaid conditions are not satisfied, tax shall be levied at 18%.

D. GST on Refundable Interest free maintenance security deposits (IFMS) or any other refundable security deposits (Other deposits):

1. In terms of Proviso of Section 2(31) of the Act, any refundable deposits would not be considered as consideration. Therefore, the collection of any refundable security would be considered as receipt against any supply. Accordingly, the same shall be qualified as supply of any services and hence, deemed as non-gst supply and rate of tax on IFMS and Other deposits would be NIL.

E. GST on EDC/IDC:

1. These are the charges which are payable to the Government as per their respective state laws. These are not applicable on every state rather these are levied on few states in India. Generally, developers pay the amount of EDC/IDC to the authorities and then recover the same from customers on either actual basis or mark-up basis.

2. In our view, to the extent the amount of EDC and IDC paid to Government is recovered by developer from its customers on actuals and without any profit mark-up/margin, the said recovery will not be leviable to GST, subject to the provisions of pure agent mentioned in Rule 33 of the CGST Rules’2017. However, the Department may dispute this view and in such a case, the matter will have to be litigated before the appropriate judicial forum because Section 15 of the GST Act determine value of supply which includes all other charges received for the supply of services except GST.

3. However, if the EDC/IDC are recovered with margins, then the whole amount collected from the customers would be chargeable to GST @ 18%.

4. Therefore, to avoid future litigations as well as cost of 18% to the customer, developers can make these charges part of stamp duty and accordingly GST would be leviable at the same rate of GST as leviable on supply of property as enumerated in above table.

F. GST on other charges like electric meter installation charges, power back-up charges, water connection charges, drainage, sewerage, development charges, transfer/endorsement fees, documentation charges, legal fees, basement storage charges, car parking charges, open area car parking usage charges etc.:

1. If the aforesaid charges (collectively or individually) become part of stamp duty of the property, we can safely argue that the said charges are in relation to or incidental to supply of construction services and therefore, will form a part of composite supply of property. Accordingly, GST shall be leviable at the same rate as leviable on principal services, i.e., supply of property as enumerated in above table.

2. However, if the said charges are not included in the computation of stamp duty charges, it will be considered as individual independent supply and it will be difficult to argue the same as composite supply of property and accordingly, GST @ 18% shall be leviable.

To conclude:

Nature

Rate of Tax
If the aforesaid charges are part of registry cost for paying stamp duty. As per rate applicable on supply of property.
If these charges are not part of the registry cost. 18%

Note: List of charges provided in note are only illustrative and not exhaustive in nature.

Author Bio

Qualification: CA in Job / Business
Company: Own Practice
Location: Delhi, New Delhi, IN
Member Since: 16 Sep 2017 | Total Posts: 28
I am member of ICAI since Novemer, 2011. Having experience in Taxation and public speaking. i also posted few videos on you tube for GST. View Full Profile

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