GST on Redevelopment Projects: Clarity from Bombay High Court

Introduction

The Bombay High Court’s recent ruling has brought significant clarity on the applicability of Goods and Services Tax (GST) in homeowner-led redevelopment projects. The judgment held that GST is not applicable where a homeowner engages a builder for redevelopment without transferring development rights (TDR) or Floor Space Index (FSI). This verdict is especially relevant for redevelopment-heavy cities like Mumbai, where residential societies often partner with builders for rebuilding or upgrading their premises.

Background

In the case before the Bombay High Court, a homeowner entered into an agreement with a builder to construct a residential building on their land. The homeowner compensated the builder partly in cash (₹7 crore) and partly by offering two flats in the redeveloped building. However, no development rights or FSI were transferred to the builder.

The central issue was whether this transaction attracted GST. The Revenue argued that it was a supply under Entry 5B of Notification No. 4/2018-Central Tax (Rate) and hence subject to GST.

Legal Framework and Court’s Findings

Entry 5B of the above notification deals with the transfer of development rights or FSI to a developer for construction services. According to the law, GST is applicable where such a transfer occurs.

However, the Court observed that since no development rights or FSI were transferred in this case, the transaction didn’t fall within the ambit of Entry 5B. The Court clarified that engaging a contractor to construct on land owned by the homeowner, without transferring development rights, is not a taxable supply under GST law.

This decision has far-reaching implications for how redevelopment contracts are structured and interpreted under the GST regime.

Practical Perspective: Customary Practice vs Technical Structuring

In layman’s terms, under the present customary practice, most redevelopment in urban areas is carried out through a Joint Development Agreement (JDA) between the developer and the society. In such cases, GST is applicable since development rights are transferred to the builder, who also becomes the promoter under RERA and sells flats to third parties.

However, GST can be avoided only if the redevelopment is structured as a:

• Development Management (DM) arrangement, where the builder merely acts as a service provider to the society, or

• Barter-based construction agreement, where flats are given as consideration, without the transfer of development rights.

While these structures appear attractive from a tax standpoint, they come with practical challenges.

Key Issues in DM / Barter Arrangements

1. No Land Rights for Developer: Developers have no legal ownership or interest in the land.

2. Not Recognised as Promoter under RERA: Developers cannot independently market, advertise or sell flats.

3. Regulatory Risk: All approvals and permissions must be obtained in the name of the society/landowner.

4. Immediate GST and Stamp Duty Liability:

• Flats received by the builder as consideration attract 5% GST (without input tax credit).

• 6% stamp duty is also applicable immediately.

• There is no deferment of liability, which affects cash flows.

Why Developers Prefer JDAs Despite GST

While DM or barter deals can technically save GST on development rights, most developers find the Joint Development Agreement (JDA) model more viable, for several reasons:

• In JDAs, developers receive development rights and land share, offering legal certainty and business flexibility.

• They are recognized as promoters under RERA, enabling them to sell units to homebuyers and raise funds.

• All regulatory permissions can be obtained in their name, streamlining project execution.

• Most importantly, in case of residential redevelopment, the GST liability on transfer of development rights arises only at the time of Occupation Certificate (OC). This defers the tax payment, allowing better cash flow management.

• Conversely, in a barter arrangement, GST become payable immediately upon receipt of consideration flats, burdening developers with upfront costs.

This timing difference in tax liability is often the decisive factor in preferring JDAs over barter arrangements, despite the nominal tax saving.

Conclusion

The Bombay High Court’s ruling provides much-needed clarity for landowners and societies considering redevelopment. It confirms that no GST is applicable if development rights are not transferred and the builder is merely executing construction for the landowner.

However, while alternate models like DM or barter-based construction may appear tax-efficient on paper, they come with substantial commercial and regulatory limitations. For developers, JDAs remain the preferred structure, balancing legal ownership, marketability, regulatory compliance, and cash flow management—despite the associated GST cost.

As the real estate and tax landscapes continue to evolve, it is critical for stakeholders to seek robust legal and tax advisory to structure redevelopment agreements that are not just tax-efficient, but also legally sound and commercially practical.