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GST Implications on Redevelopment of Societies

Updated on :  

08 min read.

The levy of Goods and Service Tax (GST) on the redevelopment of housing society buildings is a litigious and argumentative issue. However, these were subject to service tax and VAT in the pre-GST era.

Under the previous tax regime, the immovable property wasn’t part of the term ‘activity’. The definition of activity under the previous regime was broader and unrestricted. However, under GST, a ‘supply’ is taxable only if it is done in business. This difference of law has resulted in complexities and debates.

Taxability of Redevelopment of Societies During the pre-GST Regime

Budget 2010-11 brought construction activities under the purview of service tax. According to the budget, construction is deemed a taxable service if the building is still under construction. In 2012, the Indian Government issued Circular no. 151/02/2012, clarifying the taxation in various scenarios in the construction industry.

This circular clarified that the construction service is taxable if any part of the payment or right to development of the land was given to the builder. Provided such payment or right is given before a completion certificate is issued. In such a case, service tax would be levied and needed to be paid by the builder. The service tax will also be levied for the flats given to the landowner, equal to the value of comparable flats charged by such builders to other purchasers.

Applicability of GST on Redevelopment of Societies

In the case of redevelopment projects, the builder pays his entire GST liability on the gross amount he receives for selling the flats to an independent buyer. Once this tax liability is discharged on the gross consideration received on the sale of such flats to the independent buyers, the GST demands on flats given to existing society members for free cannot be sustained.

Also, as per the judgment given by the tribunal in the case of Vasantha Green Projects (Supra), the tax demand raised by the Department was dropped and was held that the flats given for free to the members aren’t taxable. 

Moreover, the development rights being a benefit rising from the land must be held as immovable property and is outside the purview of GST. Therefore, given the specific provision of the sale of land and building, it isn’t applicable here. The key ingredient here in this contract is redevelopment. Hence, the members are not liable to GST even under this entry.

Input Tax Credit Availability

When a developer offers allotted units free of cost to members of the society and offers part of the building to other members for consideration, the service is taxable. Hence, ITC for part of the building sold for review is available and could be used for the GST for such sale.  

Without receiving inputs and input services, constructing that part of the building where GST is payable isn’t possible. Hence, inputs and input services can be used to construct the building, which is used for providing the taxable supply.