In a major setback for the real estate sector, the Advance Ruling Authority ( AAR ) of the Maharashtra State held that compensation received by a tenant, covered by a redevelopment plan, for alternative accommodation during construction and any additional compensation for delayed possession of new premises will be subject to Goods and Services Tax ( GST ).
The AAR observed that the act of vacating premises for facilitating the developer would constitute ‘supply’ for the purpose of attracting tax liability under the GST regime.
The applicant, Zaver Shankarlal Bhanushali, was a tenant of a commercial building. Future Communications, a private firm, owning this building, inked a redevelopment pact with Spenta Residency. During construction, the tenants had to arrange for their own alternative accommodation. For this, they received a sum of two lakhs from the builders as compensation as per the agreement.
The applicant approached the AAR seeking clarification on whether the said amount received by them would attract Goods and Services Tax.
After considering the submissions from both the sides, it was observed that the compensation received towards alternative accommodation and delayed possession, if any, in the new premises, are receipt of money for doing an ‘act’ which “comprises of vacating the premises for redevelopment and tolerating the construction cum redevelopment work till possession of the new redevelopment work till possession of the new redeveloped premises. It further added that the act also included tolerating a delay in redevelopment.
Coming to the impact of the ruling in the real estate industry, this may prompt developers to factor in tax cost and offer lower compensation.
Further, a string implementation of this ruling may mandate every tenant participating in a redevelopment plan to register under the GST laws and file returns. Also, tenants will indirectly face a financial impact.Subscribe Taxscan Premium to view the Judgment