Redevelopment

Going by the show cause notices issued to builders engaged in housing society redevelopment and their subsequent handling by revenue officers, there seems to be lack of clairty on both sides; resulting in litigation going in unintended ways, with the Tribunals yet to start functioning.

The transactions with new independent buyers for the sale of available area are clearly defined as "supply" under GST. The judgment states that construction or redevelopment activities, when conducted as part of the developer's business, qualify as supply (as per the analysis of transactions with new buyers). This is further supported by the provisions that classify construction activities as a supply of services when consideration is received before the issuance of a completion certificate. 

Application of Schedule II and III The argument that if the entire consideration is received after the issuance of a completion certificate, the transaction would not be treated as a supply is critical. This is supported by Section 7(2) of the CGST Act, which states that certain transactions are deemed neither a supply of goods nor services. This finding is consistent with other rulings that have clarified the distinction between supply and non-supply transactions (e.g., Apsara Co-operative Housing Society Ltd, Appellate Authority for Advance Ruling, GST, 2020). 

Activities conducted by the developer for new buyers, such as selling flats before receipt of the Completion Certificate, classify as "supply of services." Sales of flats where consideration is received entirely post-issuance of the Completion Certificate are neither the supply of goods nor services. Hence, no GST is applicable on these sales.

The transactions involving the allotment to existing society members can be characterized as a "free supply" because no revenue is generated from these members; instead, the developer incurs costs to provide new accommodation. - Supporting Judgment: The Hyderabad Tribunal in Vasantha Green Projects v. Commissioner of GST [2019 (20) GSTL 568 (Hyderabad Tribunal)] held that no service tax is payable on free supplies provided to existing members in a redevelopment project. This principle can be applied under GST as well, arguing that imposing GST on free supplies would lead to double taxation. 

Since the developer is providing new flats free of cost to existing members, and considering the provisions of Schedule I of the CGST Act, which applies only to transactions between related persons, GST should not be levied on these free supplies. The GST Law specifies that no tax is payable on free supplies unless explicitly stated in Schedule I. Since existing society members and the developer are not related parties, the provisions of Schedule I are not applicable.  The sale of new flats qualifies as supply, a taxed activity. Ongoing projects with pre-completion payments are treated as a "supply of services" and are subject to GST. Post-completion transactions, receiving entire consideration after completion, are considered neither supplies of goods nor services. 

Taxable Value Determination - The value of construction services for free flats is already included in the sale price of flats sold to new independent buyers. Therefore, taxing the free area would result in double taxation. Notification No. 11/2017 – CT (Rate) states that the value of construction services to old existing society members should be deemed equal to the total amount charged for similar flats sold to independent buyers. Hence, tax is already accounted for in the sale of new flats. 

Payments for free allotment can lead to double taxation concerns, which should be avoided.  Additional Purchase by Existing Members is viewed similarly to transactions with new buyers

GST law generally imposes a tax on the transaction value. However, no tax is levied on free supplies unless specified in Schedule I. Since the developer and existing members are not related, these provisions should not apply, suggesting no GST should be payable. The Hyderabad Tribunal found no service tax liability on area allotted free to existing members in redevelopment projects. The principles from this case remain persuasive, even under GST, despite being pending appeal. The law recognizes consideration can be paid by persons other than the service recipient. Here, revenue comes from new buyers, potentially supporting a stand that consideration for free flats to existing members was received from new buyers indirectly. 

The case of Suresh Kumar Bansal v. Union Of India (2016) 92 VST 330 (Del.) is relevant here, where it was held that there must be a clear mechanism for deriving the value of services in transactions involving land. This supports the argument that the valuation of development rights should be based on established norms, such as those used for stamp duty assessment. 

The redevelopment project involves non-monetary consideration in the form of development rights. The value of these rights can be argued based on the stamp duty valuation, which provides a recognized basis for determining the monetary value of non-monetary consideration. Vilas Chandanmal Gandhi (Appellate Authority for Advance Ruling, GST, 2020) discusses the need to ascertain the monetary value of non-monetary consideration, which aligns with using stamp duty valuation as a basis for development rights. 

The transactions in the redevelopment project can be classified as a composite supply, where the developer provides both construction services and receives development rights. This aligns with the interpretation of composite contracts as per the Larsen & Toubro v. State of Karnataka (2014) 1 SCC 708, which states that such contracts involve a combination of goods and services. The Nagpur Integrated Township Pvt. Ltd. (Authority for Advance Rulings, GST, 2019) ruling emphasizes that a works contract includes both the supply of goods and services, which is the essence of the developer-landowner arrangement. 

Exclusion of Land Value: The valuation of the construction services must exclude the value of land, which is a principle established in various judgments. The Gannon Dunkerley case (1958) highlighted that the property in goods does not pass as chattel in construction contracts, indicating that the value of land should not be included in the taxable value. The MUNJAAL MANISHBHAI BHATT v. UNION OF INDIA (Gujarat High Court, 2022) case reiterates that the cost of land should be excluded from the total value of the works contract, reinforcing the argument that the developer's valuation should not consider land value. 

Courts have ruled that the value of services in redevelopment projects must be assessed without arbitrary deductions or assumptions about land value. This is crucial for ensuring that the tax liability is computed fairly. 

The agreement may qualify under Para 5 of Schedule III, as activities associated with land and buildings are neither supply of goods nor services. A purposive interpretation supports the argument that redevelopment agreements fall outside the GST's ambit. Exclusion from tax applies when the nature of the transaction aligns with Schedule III criteria which stand outside the levy.

Section 15(4) and Rule 27 of the CGST Rules allow valuation based on the open market value, comparable value, or the cost of supply. The valuation for stamp duty on development agreements can guide identification of price, as most times, open market value for similar services may not be applicable. The need for proper valuation is essential for tax purposes, and the rules provide multiple ways to ascertain the value, with priority depending on circumstances.

Cost Plus 10% Method Rule 30 of CGST allows determining value based on the cost of service plus a 10% markup. Utilization of accounting principles helps derive construction service cost, offering a robust basis against which development rights can be valued, beneficial in markets like Mumbai where land value significantly surpasses construction costs. The CGST’s valuation framework supports cost-based valuation methods, rendering them viable especially when other methods under Rules 27-29 fail.

The residual rule under Rule 31 must only be considered on thorough establishment that all prior rules don't lead to a reliable value. The decision to opt for alternative methods rests with the taxpayer and not necessarily the authorities unless substantiated otherwise.

The point of taxation is crucial in determining when the tax liability arises. According to the judgments, particularly in the cases of M/S. Jaipuria Infrastructure Developers Pvt. Ltd. v. C.S.T, Delhi and M S Larsen Toubro Limited And Others v. State Of Karnataka, it has been established that the construction service provided by builders/developers is considered a "works contract" and the tax liability arises at the time of completion of the service. In this case, since the JDA was entered into in 2014, the relevant point of taxation would be the completion of the construction or the possession of the units by the society members, which aligns with the provisions of the GST law.

In the case of Prayatna Developers Private Ltd. v. National Thermal Power Corporation Ltd., it was held that the time of supply of services shall be the earlier of the date of issuing the invoice or the date of receipt of payment. This indicates that the point of taxation is determined based on these two criteria. The Commissioner Of Service Tax v. Consulting Engineering Services (I) Pvt. Ltd. also emphasizes that the effective rate of service tax is based on the date when the service is provided rather than the date of billing. This further clarifies the point of taxation under GST

The valuation of the service provided is determined based on the rules prescribed under the GST regime. The judgments emphasize that the value of the service must exclude the value of land, as clarified in Ratish Nair, A 604 And Another Applicants; v. Man Realty Ltd. and Arjun Kumar Parwani And Another Applicants; v. Signature Builders Pvt. Ltd.. The valuation should be based on the actual consideration received for the construction service, and any markup should be appropriately reflected in the valuation to ensure compliance with the GST provisions.

In M/s GALAXY HOMES PRIVATE LIMITED, the valuation for construction services is discussed, where the promoter has to pay central tax on construction of apartments at specified rates. The valuation must consider the conditions specified in the relevant entries.

The judgment in VKL Builders India Private Limited discusses that the applicant is eligible for deduction of one-third of the total amount charged for the supply in determining the taxable value of such supply, which is crucial for understanding how valuation is calculated for GST purposes.

 Add to this the complications of leasehold land undergoing TDR & FSI changes.

A lot depends of the specifics of the situation which varies. So do the charges and demands levelled in show cause notices. I have come across many such notices where some real charges are skipped, hence you need to focus only on the demands raised.

For any specific case analysis help and relief, I remain available.