The realty sector has experienced one of the worst hits during the pandemic, and the pre-COVID level sale numbers are still not achieved. While the sector adjusts with various economic and pandemic issues, GST always remains a constant challenge to be taken care of.

One of the controversial topics is that of levying GST on transfer of development rights (‘TDR’). To explain the concept of TDR, it is an arrangement where the Landowner transfers the development rights of land to the Developer to construct the complex or building and in return, the Landowner either receives consideration in cash or portion of constructed flats. Here, the government has been treating TDR as a service liable to GST.

Now typically, GST law is not applicable on immovable property. Land being immovable in nature, no GST is applicable thereupon. In this regard, as per the General Clause Act, 1897, immovable property includes land and benefits to arise out of land. Taking recourse to this, one may say that TDR is a right attached to the land and thus an immovable property, thereby falling out of the ambit of GST net. However, the government thinks otherwise, resulting in higher cost for the buyers due to the GST charged being cost for buyers.

Another disturbing topic for the real estate sector is transfer of Floor Space Index (FSI). FSI is the maximum permissible floor area that a builder can build on a particular plot or piece of land. At times, against surrender of rights to a land by Landowners / Developers to the local municipal authorities, additional FSI is granted to the Developers from the authorities. Currently, upon such grant of FSI, GST is levied and the developers are obliged to discharge the same.

Here, if one carefully observes, FSI is actually a permission given for undertaking construction on any measurable land, in a way that the constructed premise does not exert load on the ground beyond a specific limit. Such activity should ideally not be treated as a “service” exigible to GST. As on date, GST remains applicable on FSI, either issued by local authorities or subsequently sold by others.

Again, another area of controversy where taxpayers expect relief is in case of input tax credit (‘ITC’). It is a known and established principle that ITC is not allowed to taxpayers for construction of immovable assets. There are certain taxpayers who construct on their own or get constructed property for undertaking business from such place. When such property is the core of the business, such as hotels, resorts, commercially rented properties, theatres, etc, and GST is paid upon the revenue generated from such businesses, disallowing ITC of GST paid on inward procurements related to construction certainly proves detrimental to the business. The gravity of this matter was reckoned by Hon’ble Orissa High Court in the matter of Safari Retreats, where the ITC provisions were read down to hold that such ITC related to construction was to be allowed to the business. However, the issue is pending before the Hon’ble Supreme Court and most of the industry players are still hesitating to take the ITC on construction of immovable property.

GST was introduced with the sole purpose of easing out compliances and avoiding the cascading of taxes. However, due to the above issues highlighted, the purpose somewhere appears to have been defeated at least for the real estate sector. A pragmatic approach for this sector would go a long way in fulfilling the basic necessity of “Makaan” in establishing Roti, Kapda aur Makaan for the country.