GST: Completion Certificate or first Occupancy- An Understanding

1. As per Sec. 9(1) of the Central Goods and Services Tax (“CGST”) Act, 2017, tax shall be levied on supply of goods or services or both. Further scope of supply is provided u/s 7 of the said Act. Sec. 7(2) is relevant and hence reproduced below:

“Sec. 7. Scope of supply —

(2) Notwithstanding anything contained in sub-section (1), —

(a) activities or transactions specified in Schedule III; or

(b) such activities or transactions undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities, as may be notified by the Government on the recommendations of the Council,

shall be treated neither as a supply of goods nor a supply of services.”

2. On perusal of the above provisions you will observe that the activities or transactions specified in Schedule III shall not be regarded as supply of goods or supply of services. Relevant Entry of the said Schedule is reproduced below for ready reference:

“SCHEDULE III

[See Section 7]

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

5. Sale of land and, subject to clause (b) of paragraph 5 of Schedule II, sale of building”

3. Above Entry clearly provides that sale of building subject to clause (b) of paragraph 5 of Schedule II shall be regarded as neither supply of goods nor supply of services and hence tax shall not be payable. It is thus relevant to reproduce the said Entry of Schedule II.

“SCHEDULE II

[See Section 7]

ACTIVITIES TO BE TREATED AS SUPPLY OF GOODS OR SUPPLY OF SERVICES

5. Supply of services”

The following shall be treated as supply of services, namely :—

(b) 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.”

4. Above Entry thus provides that construction of building intended for sale to a buyer 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 shall be regarded as supply of service and hence will be subjected to tax.

5. One needs to thus understand as to when the “completion certificate” is issued and also when will “first occupation” take place. Only then can one determine the relevant date after which sale of units where entire consideration is received after such relevant date will not be subjected to GST.

6. To understand the issue one is required to refer to various “Development Control Regulations” issued by Urban Development Authorities under Town Planning Legislations. For the present article we shall refer to the Second Revised General Development Control Regulations, 2006 issued under the Gujarat Town Planning and Urban Development Act 1976 by Vadodara Urban Development Authority (“VUDA”). We shall also refer to similar Regulations issued by Ahmedabad Urban Development Authority (“AUDA”).

7. Regulation 6.2 (6)(c) under VUDA provides as under:

“6.2 PROCEDURE DURING CONSTRUCTION

6(c) Completion Report.

1. It shall be incumbent on every person whose plans have been approved, to submit a completion report in Form No. 7.

2. It shall also be incumbent on every person who is engaged under this Development Control Regulations to supervise the erection or reerection of the building, to submit the building completion certificate in Form No. 8 prescribed under these Development Control Regulations.

3. No completion report shall be accepted unless completion plan is approved by the Competent Authority.”

8. Reading of the above regulations along with the basic examination of Form No. 7 & 8 leads us to conclude that the completion certificate is to be submitted by the builder/developer along with the signature of Structural Designer. Such certificate is thus not issued by the Developmental Authority.

9. Reference is also invited to Regulation 4.5.1 (6) under AUDA which provides that Architect on record shall on behalf of the owner, submit the progress certificates, completion certificates and obtain the Building Use Permission as required under the regulations. Hence with respect to completion certificate only submission is required. Such certificate will not be issued by the Developmental Authority under above stated regulations.

10. Going further Regulation 6.3 under VUDA provides as under with respect to occupancy certificate:

“6.3 OCCUPANCY CERTIFICATE

The applicant shall obtain occupancy certificate from the Competent Authority prior to any occupancy or use of development so completed.”

11. Regulation 7 under VUDA further provides for the necessary checks that the development authority must make before issuing the occupancy certificate. Such checks includes obtaining certificate from fire protection department to ensure that the building is adequately safeguarded. It also includes inspection of lifts, planted trees, etc. to confirm adherence to various regulations made in this respect.

12. Regulation 3.9 under AUDA contains similar provisions. However the nomenclature used is “Building use permission” instead of “occupancy certificate”. Said regulation is also reproduced below:

“3.9 Building Use Permission Required

It is mandatory to obtain a Building Use Permission from the Competent Authority prior to occupancy or use being made of any building.”

13. Above discussion clearly indicates that the “completion certificate” is never issued by a Competent Authority as per the Regulations referred. It is only “occupancy certificate” or “building use permission” which is issued by the Developmental Authority.

14. With such background it is now worthwhile to refer to Entry 5(b) of Schedule II. Same is again reproduced below along with Explanation (1) to the said Entry for ready reference:

“5. Supply of services

The following shall be treated as supply of services, namely :—

(b) 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.”

Explanation. — For the purposes of this clause —

(1) the expression “competent authority” means the Government or any authority authorised to issue completion certificate under any law for the time being in force and in case of non-requirement of such certificate from such authority, from any of the following, namely :—

(i) an architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

(ii) a chartered engineer registered with the Institution of Engineers (India); or

(iii) a licensed surveyor of the respective local body of the city or town or village or development or planning authority;”

15. Above Explanation clearly provides that in cases where completion certificate is not issued by any Governmental Authority, the certificate issued by an architect or a chartered engineer or a licensed surveyor shall be regarded as the completion certificate and hence the date of issuance of such certificate is to be reckoned.

16. As already discussed before, only submission of the completion certificate as mandated by the Regulation duly signed by the Structural Designer (refer Form 8 under VUDA) is required. Such completion certificate is never issued by any Governmental Authority. Hence in our opinion the date such certificate issued by Structural Designer (viz. Architect) shall be considered as the relevant date.

17. With the above background can it still be possible that “first occupation” can take place before the issuance of “completion certificate” ?

18. Above referred Entry 5(b) clearly visualizes a scenario wherein if first occupation takes place before the issuance of completion certificate, such date of “first occupation” shall be the relevant date. Any booking in respect of which entire consideration is received after such date will not be subjected to GST.

19. Cambridge Dictionary defines the term “occupation” as under:

“a situation in which an army or group of people moves into and takes control of a place”

20. One may find a situation wherein builder/developer has issued allotment letter before the date of “completion certificate”. Even electricity connection is granted based on such allotment letter (refer the list of documents required as prescribed by Madhya Gujarat Vij Company Limited). Can such date be reckoned as the relevant date when it can be said that the “first occupation” has taken place since the buyer takes control of the relevant unit ?

21. Attention is invited to Regulation 9.3.6 of VUDA which prescribes that developer shall not commence the use of building or shall not give the possession to occupy the building to any one before obtaining the occupancy certificate from the Competent Authority. Hence the developer should not just wait for the “completion certificate” issued by Architect but must also wait for “occupancy certificate/building use permission” issued by the concerned Development Authority before allowing the use of the building. Practically allotment letters are given well before the issuance of “occupancy certificate” or “building use permission” since such certificates take lot of time for issuance (mainly because permission from fire safety department is required). However allotment letters are usually given only after receiving “completion certificate” from the Architect. Hence date of “first occupation” will be only after the date of issuance of “completion certificate”. Thus it will be the date of issuance of the “completion certificate” which will be the relevant date to determine the taxability of the units.

22. Before we part we shall also draw kind attention of the readers to a decision of Hon. Delhi High Court in the case of K. Industries v. Mohan Investments and Properties Private Limited (Suit No. 507 of 1984). Issue before the Court was whether possession can be granted before obtaining occupancy certificate from Delhi Development Authority. Court held as under:

“The next point to be seen is whether the defendant could give vacant possession of the premises to the plaintiff in absence of obtaining any occupancy certificate from the DDA. From the bye laws 7.5.1, 7.5.2 and 7.6 of the Bye Laws in question applicable, it is evident that without obtaining any occupancy certificate the building could not be occupied. However, this Court in Municipal Corporation Of Delhi…Petitioner v. M/S. Piyush Traders (P) Ltd.…, 1988 Rajdhani LR 651, has held that the contract of letting does not become void even if no occupancy certificate had been obtained. The question which came up for consideration before the court was whether the rental being obtained by the landlord by letting out the premises in absence of occupancy certificate could be taken into consideration for fixing the rateable value for purposes of house tax. The contention was raised that as no occupancy certificate had been obtained by the landlord before letting out the premises the rental being obtained could not be taken into consideration for purposes of fixing the rateable value. This contention was negatived by this court observing that neither the letting of such a building in respect of which occupancy certificate is not obtained had been made invalid by any provision of law nor there is any prohibition in the statute that no contract would be made for letting before obtaining the completion certificate and if such contract is made, the same would be void. Under S. 246 of the Delhi municipal corporation act, there is a provision not to occupy the building till the permission is obtained. s. 351 read with schedule 12 of the Delhi municipal corporation act lays down certain fine to be imposed if there takes place any violation of provisions of S. 346(2) of the said Act. However, this Court held that mere fact that certain penalties are to be imposed for occupying the building in absence of occupancy certificate will not vitiate the contract of lease.”

23. Above ruling may thus aid in cases where “first occupation” takes place before the issuance of “completion certificate” especially when such certificate is required to be issued by the Governmental Authority. In such cases the date of first occupation will be the relevant date even if the occupation is granted in violation of other laws.