With onset of Goods and Service Tax (GST) w.e.f. 01st July, 2017, various indirect taxes levied by Central and State Governments has been subsumed under the GST mainly Excise Duty, Service Tax and Value Added Tax. Under the GST, the rate of tax as decided for construction of complex, building, civil structure intended for sale where value of land is included in the amount charged from buyer is decided @ 18% with 1/3rd deduction towards value of land.
Real-estate industry generally operates in various models such as i) Joint-development Model, ii) Slum Rehabilitation Projects and iii) Redevelopment of Societies. Under the said note, we have briefly discussed how GST will impact the redevelopment model under taken by the builders/developers. Under the redevelopment model, the land is owned by the society. Generally, society enters into development agreement with the builder for re-construction of the building. Under the redevelopment model, the builder/developer get consideration as under
i. From existing tenant/society member in the form of development rights over the land including the permission to construct the additional flats and
ii. From new flat buyers whom the builder/developer sells additional flats.
In case of the second category i.e free sale area to new flat buyers, as the value charged includes value of land, the rate of tax under GST will be 18% with 1/3rd deduction for value of land. Thus effective rate of tax is 12%
However, in case of service provided to existing society members the rate at which the GST will be charged i.e 18% with deduction of land or 18% without deduction of land and the value on which the same will charged is matter of debate and litigation. There are two possible views on rate of tax at which GST would be levied on supply of services to existing flat owners/society members.
i. One view is that, as the land is owned by the society and only development right are transferred to builders and no point in time the land is conveyed to developer, the rate of tax shall be 18% without any deduction for value of land.
ii. Other view is that, transfer of development right in land being the benefit arising from land, thus the same shall be considered as benefit arising from immoveable property as defined under section 3(26) of the General Clause Act, 1987, therefore even the development rights in land shall be considered as immoveable property i.e land. According to this view there being two transactions, the first being transfer of rights in land by the exiting society members to the builder/developer and second being the free sale of flats by the builder/developer to exiting society members along with interest in land and the rate of tax under the GST will be 18% with 1/3rd deduction towards the value of land.
We will also like to briefly discuss how the redevelopment transaction were taxed under service tax regime. Under the service tax regime, vide notification no. 151/2012 dated 10th February, 2012 up till 30th June, 2012, the services provided by builders to the existing flat owner/society was not liable to service tax. W.e.f 01st July, 2012 vide education guide issued by CBEC and letter issued by Service Tax Commissioner to MCHI dated 31st August, 2012 wherein it was clarified that construction made for existing flat owners for which no consideration or part consideration is paid to developer will be liable to service tax. Further, in respect of valuation, the Ministry of Finance vide F.no 354/311/2015 dated 20th January, 2016 read with notification no. 151/2012 has clarified in case of Joint development as value of land/development rights in land may not be ascertainable ordinarily and therefore, value, in case of flat given to first category of service receiver i.e land owner, would be equal to the value of similar flats charged by the builder/developer from the second category of service receivers i.e new flat buyers. Further, it is clarified that in case the prices of the flat undergo a change over the period of sale, the value of similar flats as are sold nearer to date when land is made available for construction should be used.
It can be reasonable presumed, under GST regime, the ministry may consider the redevelopment transaction in light of clarification given in educational guide and various clarification/letter issued in service tax regime.
Further, as the redevelopment model, consideration received by the builders/developer is by way of development of right in land i.e not in money. The transaction value under GST will be arrived as per valuation rule. According to rule 1 of Determination of value of supply “Where the supply of goods or services is for a consideration not wholly in money, the value of the supply shall,
(a) be the open market value of such supply;
(b) if open market value is not available, be the sum total of consideration in money and any such further amount in money as is equivalent to the consideration not in money if such amount is known at the time of supply;
(c) if the value of supply is not determinable under clause (a) or clause (b), be the value of supply of goods or services or both of like kind and quality;
(d) if value is not determinable under clause (a) or clause (b) or clause (c), be the sum total of consideration in money and such further amount in money that is equivalent to consideration not in money as determined by application of rule 4 or rule 5 in that order.
Further rule 4 states “Where the value of a supply of goods or services or both is not determinable by any of the preceding rules, the value shall be one hundred and ten percent of the cost of production or manufacture or cost of acquisition of such goods or cost of provision of such services.”
In the GST regime, the provision pertaining to taxability of redevelopment of Society are in pari-materia with service tax laws and one may reasonably presume that same will be taxable as per service tax laws. However, the taxation of Redevelopment Project under GST regime will be matter of debate and litigation. Thus, there is need for the government to look into these issues in more detail and provide clarification to avoid any ambiguity which might affect the economic environment of the real estate industry.