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Mumbai is currently witnessing a surge in cooperative housing society (CHS) redevelopment projects, but complex issues related to the Goods and Services Tax (GST) within these schemes are leading to legal disputes. Calls are being made to the finance ministry to simplify the tax mechanism in this context.
In CHS redevelopment, members collectively transfer development rights to a redeveloper, receiving new flats in exchange for their old ones upon project completion. The builder utilizes the additional floor space index (FSI) to construct extra flats for the open market, offsetting the cost of providing new flats to original members. However, GST complexities add to project costs, impacting their viability.
The first GST incident at 18 percent occurs during the transfer of development rights to the builder. It's important to note that no GST applies if all FSI-utilized flats are booked before the completion certificate's receipt or first occupancy by a buyer or member. Otherwise, a partial exemption based on a formula is available.
According to experts GST views the transfer of development rights as a taxable supply, akin to barter. The builder pays this levy when the first occupancy or the completion certificate is received, whichever is earlier. Further, development rights are similar to immovable property acquisition and are not subject to GST.
Builders also incur 18 percent GST during construction, without input tax credit for expenses like cement or steel. Finally, a 5 percent GST applies when new flats are transferred to CHS members. Developers are legally liable for this levy, but commercially, it depends on negotiations on whether the GST burden is passed on to members. In most cases, members receiving new flats bear this cost. Notably, this tax is calculated on the market value, even when the new flat is provided in lieu of the previous one.
Boman Irani, president of CREDAI-National, a real estate association, recently appealed to the finance minister. He emphasized that the GST department charges GST on the market value of flats given free of charge to existing CHS members, effectively resulting in double taxation. The rehabilitation cost is already included in the flats' market prices, on which developers collect GST and discharge their liability.
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