The State Appellate Authority of Advance Ruling (AAAR), Maharashtra has recently held that GST was rightly levied on real estate developers engaged in the development of land and construction of flats to be given on lease.
According to the bench, the transaction of sale of flats in the under-construction building has been “projected” by the developer as a lease transaction of residential units.
While upholding the AAR order, the bench clarified that the transaction between the developer and the lessee is taxable under GST and that it is composite supply of works contract in relation to construction of a complex, building which is intended to be handed over to the buyer and will attract tax at the rate of 18 per cent.
It should be noted that the rental income from residential properties is not subject to GST.
The applicant, Nagpur Integrated Township Private Limited was developing the property by constructing commercial and residential units and integrated facilities and was transferring the property to the customer on a long-term lease basis on payment of the amount referred to as lease consideration.
The AAAR noted that customers would pay the developer 10 percent of the lease consideration as advance and balance in instalments slab-wise as the construction progressed. “The applicant has paid instalments of completion of slabs and that this type of payment is made only when a person has entered into an agreement with a builder to purchase a flat in an ongoing project,” the Authority noted.
It observed that the entire consideration had been received by the applicant from the buyers before the completion certificate issued by the competent authority which “generally does not happen in a lease transaction.”
The authority also noted that the there was not much difference between the lease price and the ready reckoner rates of the properties in that area and, therefore, concluded that “the transaction of sale of flats in a building under construction is being projected as a lease transaction of residential units by the applicant.”
The AAAR has observed that normally the flats given on lease are completed flats with occupancy certificates, and the general lease rent in the Mumbai market amounts to 2 percent to 3 percent of the property value per month. It, however, found that that the amount paid as the lease consideration without having possession of the land was around 50 percent to 60 percent of the price of ready-to-move flats.
“Such payments are generally liable to tax under GST laws but in the subject case the applicant is showing such payments as towards lease amount paid under a lease agreement,” the Authority noted.
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