Tax Implication on Re-Development of Co-Operative Housing Society

GST on Redevelopment of Co-operative Housing Society

Any Re-development Project may comprise of following types of transaction associated with it:

1. Supply of Transfer of Development Rights (TDR) /Floor Space Index (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. (new flats provided against old flats)

3. Sale of Residential units by the Developer to outsiders

4. Sale of additional area to existing members (over and above the agreed area)

5. Sale of Commercial units by the Developer to outsiders.

Redevelopment project involves an exchange of redevelopment rights on the land for newly constructed flats between the flat-owners and Builder / promoter. This is a ‘barter transaction’ and attracts Goods and Services Tax (GST).

As per the Goods and Services Tax Act, 2017, all the above transactions associated with redevelopment project are treated distinctly. This article, discusses taxability of all the above transactions in detail.

1. GST on Supply of Transfer of Development Rights (TDS) /Floor Space Index (FSI) by the Society to a Developer.

The transfer of TDR by the flat-owners to the developers prior to 1st April 2019 attracted liability to GST in the hands of the flat-owners under forward charge. The liability would arise at the time of receipt of completion certificate or first occupancy, whichever is earlier.

Vide notification no 05/2019 CT(R) dated 29th March 2019, GST on transfer of TDR / FSI / Loan-term lease after 1st April 2019 is required to be paid by the developer (who is registered under the Real Estate (Regulation and Development) Act, 2016) under Reverse Charge Mechanism (RCM). Hence in case of redevelopment project the liability to pay GST lies with the Developer under RCM.

Vide Notification No. 03/2019 CT(R) dated 29th March 2019, supply of TDS /FSI / Long-term lease attracts GST @ 18%. However, vide Notification No. 04/2019 CT(R) dated 29th March 2019,Service by way of transfer TDR / FSI/ Long term lease for construction of residential apartments by a promoter in a project, intended for sale to a buyer, wholly or partly, except where the entire consideration has been received after issuance of completion certificate (CC), where required, by the competent authority or after its first occupation (OC), whichever is earlier is exempted subject to tax is paid on constructed flat at applicable rates.

The amount of GST exemption is available only for construction of residential apartments in the project no exemption is available for construction of commercial apartments.

GST on TDR / FSI attributable to construction of residential apartments in the project under this notification shall be calculated as under:

(GST payable on TDR or FSI for construction of the project] x (carpet area of the residential apartments in the project) ÷ (Total carpet area of the residential and commercial apartments in the project)

Exemption from GST is available on the condition that the promoter shall be liable to pay tax at the applicable rate, on reverse charge basis, on such proportion of value of TDR / FSI (including additional FSI) / Long-term lease, as is attributable to the residential apartments, which remain un-booked on the date of issuance of completion certificate (CC), or first occupation (OC) of the project, as the case may be.

GST on un-booked residential apartments shall be calculated as under:

[GST payable on TDR or FSI for construction of the residential apartments in the project] x [Carpet area of the residential apartments in the project which remain un-booked on the date of issuance of CC or OC] ÷ [Total carpet area of the residential apartments in the project]

However, GST payable shall not exceed 1% / 5% (as the case may be) of the value of residential apartments remaining un-booked on the date of issuance of CC / OC.

Therefore, GST shall be paid on TDR / FSI attributable to following:

A. Carpet Area of commercial apartment in the project

B. Un-booked residential apartments on the date of issuance of completion certificate or first occupancy of the project

The responsibility to discharge GST on TDR / FSI / Long-term lease thus rests with the developer and the liability for residential projects that will arise will depend on the number of un-booked flats at the time of issuance of CC / OC whichever is earlier.

Taxability of transfer of TDR / FSI / Long-term lease can be summarized as follows:

• Since the responsibility to pay GST on TDR / FSI / Long-term lease is casted upon Developer under RCM, no further action is required from Land owner / society.
• Time of Supply will be earlier of Date of Completion Certificate (CC) or Date of First Occupancy Certificate (OC)
• Place of supply shall be the location of Immovable Property.
• GST to be paid on value of TDR / FSI / Long-term lease attributable to un-booked residential apartments at the time of issuance of CC / OC, whichever is earlier.

Value of TDR shall be deemed to be equal to the value of similar apartments charged by the promoter from independent buyers booked on the date nearest to the date on which such TDS / FSI / Long-term lease is transferred to the promoter.

Value of portion of residential or commercial apartments remaining un-booked on the date of issuance of completion certificate or first occupation, as the case may be, shall be deemed to be equal to the value of similar apartments charged by the promoter nearest to the date ofissuance of completion certificate or first occupation, as the case may be.

2. GST on Supply of Residential units by the Developer to the Society in lieu of supply of TDR / FSI by the Society.(new flats provided against old flats)

In case of redevelopment project, builder provides new flats to the society members in exchange of their old flats. This is a Barter Transaction and is taxable under GST law.

There is no consideration in the form of money. However,for the purposes of levy of GST, the value of services has to be quantified. Therefore, the law provides that in such cases the value of construction service i.e. flats supplied to Society, shall be equal to the rate of the flats sold to independent buyers nearest to the date of development agreement.

GST shall be payable by the Developerat the effective rate of 1%/5%,at the time of receipt of completion certification or first occupancy, whichever is earlier.

3. Sale of Residential units by the Developer to outsiders

As per Schedule III Sale of land and building is not considered as supply, except when it is sold before Completion Certificate.

As per Schedule II Construction of a complex, building, civil structure or a part thereof, including a complex or a building intended for sale to a buyer, wholly or partly, except where entire consideration has been received after the issuance of completion certificate, where required by the competent authority or after its first occupation, whichever is earlier.

Flat sold before receipt of Completion Certificate, shall be chargeable to GST at the effective rate of 1%/5% (after taking in to consideration 1/3rd abatementin value towards cost of land) by the Developer.Liability to charge and pay GST, arise at the time of receipt of every installment/payment

Flats sold post receipt of Completion Certificate (entire consideration has been received after receipt of completion certificate), the same shall be exempt from payment of GST.

4. Sale of additional area to existing members (over and above the agreed area)

Sale of additional area, over and above the agreed area, to existing members of the society for a consideration will be treated similar to sale of residential units by developers to outsiders.

5. Sale of Commercial units by the Developer to outsiders.

As any Real Estate Project (REP) having commercial are a upto 15% of total carpet area of all the apartments in the REP is defined as Residential Real Estate Project (RREP), therefore, for commercial units in the RREP, GST is chargeable at the concessional rate of 5% and payable at the time of receipt of every installment/payment.

ILLUSTRATION

Gokuldham CHS entered into Re-development agreement with M/s Quick Developers on 31/7/2019 for re-developing society.Gokuldham CHS comprise of 8 members & each having area of 650 sq.ft. After re-development each member will get enhanced area of 1,000 sq.ft. Total Re-development Project is of 20,000 sq.ft. Comprising of 20 flats @ 1,000 sq.ft. Out of 20 flats developer shall give 8 flats to existing member and remaining 12 flats are available for sale to outsiders.

Developer received Completion Certificate on 31/1/2020. On the same date 5000 sq.ft. remained unsold.

Flats were sold to outsiders before CC 31/1/2020 @ Rs. 45,000 per sq.ft. (7 flats sold)

Flats were sold to outsiders after CC 31/1/2020 @Rs. 51,000 per sq.ft. (5 flats unsold)

SOLUTION:

Calculating GST on Development Rights

The Builder is liable to pay proportionate amount GST on un-booked flats as on the date of CC, which can be calculated as follows

A) Value of TDR or FSI for construction of the residential apartments in the project

Value of TDR shall be equal to the amount charged by the promoter for similar apartments from independent buyers booked on the date that is nearest to the date on which such development right or FSI is transferred by land owner to the promote.

= 1000sq.ft. x 8 members x 45,000 per sq.ft.

= 3,600 Lakhs

B) Carpet area which remain un-booked on the date of issuance of CC or first occupation

= 5,000sq.ft.

C) Total carpetarea of the residential apartments in the project

= 20,000sq.ft.

GST Payable on TDR for unsold area of the project
=(A x B / C) x 18%

=(3600 lakhs x5000 /20000) x 18%

=162 lakhs

However, tax payable shall not exceed @ 1% in case of affordable housing or 5% in other cases.

GST Liability in case of unsold units

=5,000 x51,000 x 5%

= 127.5 Lakhs

Therefore, GST on TDR shall be restricted to 127.5 Lakhs

GST Liability of M/s Quick Developers on Flats sold before Completion Certificate

As per Schedule III Sale of land and building is not considered as supply, except when it is sold before Completion Certificate.

As per ScheduleII Construction of a complex, building, civil structure or a part thereof, including a complex or a building intended for sale to a buyer, wholly or partly, except where entire consideration has been received after the issuance of completion certificate, where required by the competent authority or after its first occupation, whichever is earlier.

In the given scenario GST shall be payable on 15 flats (8 redeveloped flats + 7 flats sold to outsider) sold before CC date

=15 x 1,000 x 45,000 x 5%

=337.5 Lakhs

Income Tax on Redevelopment of Housing Society

As per Section 45(5A) – When flat-owner being Individual/HUF hands over possession of a flat to the developer in exchange for a new flat / monetary consideration / both the same shall be considered as ‘transfer’ of a capital asset. Such a transfer attracts Capital Gains Tax.

Consequently, the Capital Gains Tax liability is triggered in the year of the transfer by the flat-owner.

Note:Section 45(5A) does not change the year of “Transfer” but only changes the year of “Taxation”. For the Computation of Capital gains Year of Transfer shall be considered as per Sec2(47). Accordingly, indexation benefit should be available only upto year of transfer.

Relief from capital gains earned on transfer of a residential property is available under the provision of section 54 and 54F

Relief from long-term capital gains is available to individuals and a Hindu Undivided Family on transfer of old flats, subject to fulfilment of prescribed conditions. This relief is restricted to the value of the new asset.To claim a benefit under section 54 of the Income-tax Act, 1961 (Act), the flat-owner should purchase the new flat either one year before or within two years from the transfer of the flat or construction of the new flat within three years of its transfer.

ILLUSTRATION:

On 15/4/2016 Mr. Raj handed over his flat to M/s Quick Developers for Re-development, in consideration Mr. Raj will receive new flat along with monetary consideration of Rs. 50 Lakhs.Mr Raj had acquired the said property at Rs. 4 Crore in FY 2009-10. Certificate of completion was issued by competent authority on 31/7/2017. Stamp duty value of the property on the date of issuance of Completion Certificate was Rs. 8 Crore.

Compute the capital gain if Mr. Raj sold the said property to Mr. Saaho For a Sale Consideration of Rs. 12 Crore in following cases:

A)Sale Date: 15/9/2020 (Sale after 3 years from CC Date)

B)Sale Date: 15/8/2019 (Sale after 2 years from CC Date)

C)Sale Date: 15/8/2018 (Sale Within 2 years from CC Date)

D)Sale Date: 15/6/2017 (Sale before CC)

Financial Year	CII
2009-10	148
2016-17	264
2017-18	272
2018-19	280
2019-20	289
2020-21	301

Solution:

Case A: Sale date is 15/09/2020

Capital Gain on Transfer of property to Developer

Since Mr. Raj is transferring property after the issuance of Completion Certificate tax liability would arise in the FY 2017-18.

Particulars	Amount
Sale Consideration (8 Crore + 50 Lakhs)	8,50,00,000
Less: Indexed Cost of Acquisition (4,00,00,000*264/148)	7,13,51,351
Long Term Capital Gain	1,36,48,648
Less: Deduction Under Section 54	1,36,48,648
Taxable Capital Gain	Nil

CII for FY 2016-17 is 264 & for FY 2009-10 is 148

Points to Note:

1) Although year of taxability is FY 2017-18 but indexation would be restricted to year of transfer.Under the provisions of section 45(5A) of the Act, the inflation during the period between year of transfer and year of taxability is ignored, leading to the genuine hardship to the assessee.

2) Since the new property is acquired within the time period specified under section 54, i.e. Purchased one residential house in India within a period of one year before or two years after the date of transfer or Constructed one residential house in India within a period of three years from the date of transfer, hence deduction under section 54 is claimed.

Capital Gain on Transfer of Re-developed property to Mr. Saaho

Tax liability would arise in the FY 2020-21

Gain on transfer will be Long term capital gain, since Period of Holding is more than 24 Months

Particulars	Amount
Sale Consideration	12,00,00,000
Less:Cost of Acquisition (8,50,00,000*301/272)	9,40,62,500
Long Term Capital Gain	2,59,37,500

CII for FY 2020-21 is 301& for FY 2017-18 is 272

Points to Note:

1) Cost of acquisition of re-developed flat as per section 49(7), is full value of consideration charged to tax on transfer of property to developer i.e. Sale Consideration charged to tax in FY 2017-18.

Case B: Sale date is 15/08/2019

Capital Gain on Transfer of property to Developer

Since Mr. Raj is transferring property after the issuance of Completion Certificate tax liability would arise in the FY 2017-18.

Particulars	Amount
Sale Consideration (8 Crore + 50 Lakhs)	8,50,00,000
Less: Indexed Cost of Acquisition (4,00,00,000*264/148)	7,13,51,351
Long Term Capital Gain	1,36,48,648
Less: Deduction Under Section 54	1,36,48,648
Taxable Capital Gain	Nil

CII for FY 2016-17 is 264 & for FY 2009-10 is 148

Points to Note:

1) Although year of taxability is FY 2017-18 but indexation would be restricted to year of transfer.Under the provisions of section 45(5A) of the Act, the inflation during the period between year of transfer and year of taxability is ignored, leading to the genuine hardship to the assessee.

2) Since the new property is acquired within the time period specified under section 54, i.e.purchased one residential house in India within a period of one year before or two years after the date of transfer or constructed one residential house in India within a period of three years from the date of transfer, hence deduction under section 54 is claimed.

Capital Gain on Transfer of Re-developed property to Mr. Saaho

Tax liability would arise in the FY 2019-20

Gain on transfer will be Long term capital gain, since Period of Holding is more than 24 Months

Particulars	Amount
Sale Consideration	12,00,00,000
Less:Cost of Acquisition (8,50,00,000-1,36,48,648)*289/272)	7,58,10,812
Long Term Capital Gain	4,41,89,189

CII for FY 2019-20is 289&for FY 2017-18 is 272

Points to Note:

1) Cost of acquisition of re-developed flat as per section 49(7), is full value of consideration charged to tax on transfer of property to developer i.e. Sale Consideration charged to tax in FY 2017-18.

2) Since the assessee has sold the newly purchased or constructed house before the period of completion of three years from the date of purchase or date of completion of construction, then the exemption benefit availed under section 54 would be withdrawn. Hence the amount claimed as capital gain in FY 2017-18 is reduced from the cost of acquisition.

Case C: Sale date is 15/8/2018

Capital Gain on Transfer of property to Developer

Since Mr. Raj is transferring property after the issuance of Completion Certificate tax liability would arise in the FY 2017-18

Particulars	Amount
Sale Consideration (8 Crore + 50 Lakhs)	8,50,00,000
Less: Indexed Cost of Acquisition (4,00,00,000*264/148)	7,13,51,351
Long Term Capital Gain	1,36,48,648
Less: Deduction Under Section 54	1,36,48,648
Taxable Capital Gain	Nil

CII for FY 2016-17 is 264 & for FY 2009-10 is 148

Points to Note:

1) Although year of taxability is FY 2017-18 but indexation would be restricted to year of transfer. Under the provisions of section 45(5A) of the Act, the inflation during the period between year of transfer and year of taxability is ignored, leading to the genuine hardship to the assessee.

2) Since the new property is acquired within the time period specified under section 54, i.e. Purchased one residential house in India within a period of one year before or two years after the date of transfer or Constructed one residential house in India within a period of three years from the date of transfer, hence deduction under section 54 is claimed.

Capital Gain on Transfer of Re-developed property to Mr. Saaho

Tax liability would arise in the FY 2018-19

Gain on transfer will be Short term capital gain, since Period of Holding is less than 24 Months

Particulars	Amount
Sale Consideration	12,00,00,000
Less:Cost of Acquisition (8,50,00,000-1,36,48,648)	7,13,51,352
Short Term Capital Gain	4,86,48,648

Points to Note:

1) Cost of acquisition of re-developed flat as per section 49(7), is full value of consideration charged to tax on transfer of property to developer i.e. Sale Consideration charged to tax in FY 2017-18.

2) Since the assessee has sold the newly purchased or constructed house before the period of completion of three years from the date of purchase or date of completion of construction, then the exemption benefit availed under section 54 would be withdrawn. Hence the amount claimed as capital gain in FY 2017-18 is reduced from the cost of acquisition.

Case D: Sale date is 15/6/2017

Capital Gain on Transfer of property to Developer

Since Mr. Raj is transferring property before issuance of Completion Certificate tax liability would arise in the year of transfer of right in property i.e. FY 2017-18

Particulars	Amount
Sale Consideration (8 Crore + 50 Lakhs)	8,50,00,000
Less: Indexed Cost of Acquisition (4,00,00,000*264/148)	7,13,51,351
Long Term Capital Gain	1,36,48,648

CII for FY 2016-17 is 264 & for FY 2009-10 is 148

Points to Note:

1) Although year of taxability is FY 2017-18 but indexation would be restricted to year of transfer. Under the provisions of section 45(5A) of the Act, the inflation during the period between year of transfer and year of taxability is ignored, leading to the genuine hardship to the assessee.

Capital Gain on Transfer of right in Re-development property to Mr. Saaho

Tax liability would arise in the FY 2017-18

Gain on transfer will be Short term capital gain, since Period of Holding is less than 24 Months

Particulars	Amount
Sale Consideration	12,00,00,000
Less:Cost of Acquisition	8,00,00,000
Short Term Capital Gain	4,00,00,000

Points to Note:

1) Stamp duty value of the re-developed flat is considered as Cost of Acquisition of the right in re-development property.

FAQ related to Income tax on redevelopment of Housing Societies

Q1) Can Assessee claim deduction under section 54, 54EC, 54F and what shall be the Time Limit for Investments to claim Deduction under Section Like 54,54EC,54F?

Ans: In the case of transfer on immovable property, certain exemptions are provided under the Act out of capital gain arising on such transfer. These exemptions are provided under sections 54, 54E, 54EC, 54F etc. The purpose of all these exemptions seems to give incentive to further invest the sale consideration received on transfer of a capital asset into some other form of capital asset.

         Section 54 and 54F will be reckoned from the date of transfer only.

         However, the two issues which remains unanswered here are:

a) In cases referred to in section 45(5A), as the sale consideration sometime may not be realized in cash at the time of transfer, how can an assessee be expected to reinvest the same after transfer.

b) From where will be the time limit to make investment u/s. 54 and 54F will be reckoned i.e. from date of Joint Development Agreement or from the date of completion certificate?

Q2) Whether Benefits will also be extended to Development Agreement entered on or prior to 31/03/2017?

Ans:  Sec 45(5A) was introduced in Finance Act, 2017, thus applicable from FY 2017-18.Theobjective of this section was to minimize the genuine hardship which the owner of land or building may face in paying capital gain tax in the year of transfer. So, one can apply this provision retrospectively, taking reliance of the decision of Supreme Court in Case of Allied Motors Private Limited V/s CIT and CIT V/s Alom Extrusions Limited.

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