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 29th 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).
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 unitsby the Developer to outsiders
4. Sale of Commercial units by the Developer to outsiders
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:
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:
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@example.com.
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