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GST and Service tax on redevelopment of societies

1. GST and service tax on flats given free of cost to members of the society has been a bone of contention

2. Even though Hyderabad bench of honorable Tribunal in the case of Vasantha Green Projects [2019 (20) GSTL 568] has held that when the developer has already paid service tax on the consideration value of flats sold to independent buyers, there cannot be any further levy on the value of flats given free of cost to land owners

3. In spite of the same, Department has been constantly raising demands quoting Circular No. 151/2/2012-S.T., dated 10-2- 2012 and a judgment LCS City Makers Pvt. Ltd. [2013 (30) S.T.R. 33 (Tri.-Chennai)]. A particular para of the aforesaid circular provides that the taxable value of flats given to the land owner free of cost can not be ascertained ordinarily and therefore, the market value of the same should be taken as taxable value. Judgment of Chennai Bench of Tribunal (supra) affirms the same

4. One such incidence came up for consideration before Mumbai bench of Tribunal where my learned friend Adv. Bharat Raichandani successfully argued the matter. Tribunal once again clarified in the case of M/s Ethics Infra Development Pvt. Ltd. (Service Tax Appeal No. 85459 of 2020) that no service tax is payable by the developer on flats given free of cost to members of the society in the case of redevelopment of the Society on the following grounds:

a. There is no material change in the law pre and post 1.7.2012

b. If Department pleads that there is a material change in the law post 1.7.2012, what makes them rely upon the judgment of LCS City Makers (Supra) which is rendered for the period prior to 1.7.2012

c. CBEC Instruction issued as per F. No. 354/311/2015-TRU dated 20.1.2016, lays down that circular of 10.2.2012 is valid even after 1.7.2012. Even though, the circular provides that market value of the flats given free of cost to the land owner should be considered for paying taxes, same circular in para 2.2.(A) (i) provides that flats given to society are for personal use of the society/ its members and therefore, not leviable to Service tax

d. The developer had already discharged the complete service tax liability on the gross amount received by him for providing the taxable services to independent buyers. Once having discharged the tax liability on the gross consideration received by him on sale of flats to independent buyers, the demand of service tax on flats handed over to the existing members of the societies without any consideration cannot be sustained

GST and Service tax on redevelopment of societies

e. Finally, relying on the judgment of Vasantha Green Projects (Supra), the Tribunal upheld the order of the adjudicating authority. The adjudicating authority had dropped the demand raised by the Department and held that flats given free of cost to the members of the society are not taxable

5. It may be, however, noted that the above case has placed a heavy reliance on the ruling of Tribunal in the case of Vasantha Green Projects (Supra). This case is pending before the Supreme Court for the consideration

6. Interestingly, though the appellant placed reliance on one more tribunal judgment- DLF Commercial Projects Corporation Pvt. Ltd., the same has not been discussed at length in the judgment of Ethics Infra (Supra) delivered by Mumbai Bench of Tribunal

7. However, this is certainly one more ruling of the tribunal which confirms non-taxability of service tax on free of cost flats given by the developers

8. If there are any pending demands/show cause notices on the above matter, developers may consider challenging the same based on the above arguments and judgments

9. The concept of valuation or double taxation upheld in the case of Vasantha Green Projects (Supra) (based on which the present case of Ethics Infra (Supra) has been decided) is pending before the Supreme Court. Therefore, developers need to develop alternative arguments while contesting any demands

10. If Service tax has already paid by the developers on free flats, they may explore the option of claiming refunds

11. If society members have also paid service tax to developers, society members may examine the option of claiming refunds

12. It may also be noted that the provisions of the GST law and notifications issued thereunder are quite different from those under Service tax law. Therefore, taxability of free flats given in the projects after 1.7.2017 i.e. in the GST regime, needs to be re-examined carefully

13. Also, the arguments for non-levy of GST on free of cost flats could be more divergent and forceful.

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