You’ve just voted yes for redevelopment. The builder has been selected, the development agreement is being drafted, and everyone in your housing society is excited about getting a bigger, better flat. But then someone in the managing committee meeting asks a question that stumps everyone: “Who pays the GST?”
It’s a question that causes more confusion, arguments, and delays in Mumbai’s redevelopment projects than almost any other issue. And the confusion is understandable — the GST rules around redevelopment are genuinely complex, and they’ve changed multiple times since GST was introduced in 2017.
In this comprehensive guide, we break down everything you need to know about GST in the context of housing society redevelopment in Mumbai — who pays what, when, and how much.
The Basics: What Is GST on Redevelopment?
GST (Goods and Services Tax) applies to the construction of new buildings. When a housing society undergoes redevelopment, the builder constructs new flats — some for the existing members (rehabilitation component) and some for sale in the open market (sale component). The construction activity attracts GST, but the question of who bears this tax depends on several factors.
The key principle to understand is this: GST is levied on the supply of construction services. The builder is the supplier of these services, and the recipients are either the existing members (for the rehabilitation flats) or the new buyers (for the sale flats). The rate and applicability of GST differ based on the type of flat and the area involved.
GST on Rehabilitation Flats for Existing Members
This is where the good news begins. Under the current GST framework, the construction of rehabilitation flats for existing members up to the existing carpet area is generally exempt from GST. This means if your old flat was 500 sq ft carpet area and you are getting the same 500 sq ft in the new building, there is no GST liability on this portion.
However, many redevelopment agreements offer existing members additional carpet area — say, an extra 200-300 sq ft beyond their original entitlement. The GST treatment of this additional area is where things get complicated. If the additional area is provided free of cost by the builder as part of the development agreement, it may be treated as part of the rehabilitation component and could still be exempt. But if the member is paying for the additional area (even at a concessional rate), GST at the applicable rate will apply on that payment.
The applicable rate for residential properties after the 2019 amendments is 5% (without input tax credit) for non-affordable housing and 1% for affordable housing. Most redevelopment flats in Mumbai fall under the non-affordable category given the property values, so the effective rate is typically 5%.
GST on Sale Flats (Free Sale Component)
The builder’s profit in a redevelopment project comes primarily from selling the additional flats (free sale component) in the open market. These sale flats attract GST at the standard rate applicable to new residential construction. Currently, this is 5% without input tax credit for non-affordable housing units (those exceeding Rs 45 lakhs in value or 60 sq metres carpet area in metro cities).
For affordable housing units (up to Rs 45 lakhs and up to 60 sq metres carpet area), the rate is 1% without input tax credit. In Mumbai’s market, most sale flats in redevelopment projects will exceed the affordable housing threshold, so the 5% rate typically applies.
This GST is borne by the buyer of the sale flat, not the society or its members. The builder collects this GST from the buyer and remits it to the government. However, it’s important to note that GST is only applicable on flats sold before the completion certificate is received. If the builder sells a flat after obtaining the occupancy certificate, no GST applies — only stamp duty and registration charges are payable.
The Reverse Charge Mechanism
One area that catches many societies off guard is the reverse charge mechanism for certain services used during construction. Under the reverse charge mechanism, the recipient of the service (rather than the provider) is liable to pay the GST. This can apply to services procured from unregistered suppliers, such as individual labour contractors, transporters, or certain goods and services used in the construction process.
In the context of self-redevelopment, where the society itself acts as the developer, the reverse charge mechanism becomes particularly relevant. The society may need to pay GST on certain supplies received from unregistered vendors, which can add to the project cost if not planned for in advance.
Stamp Duty vs GST: Don’t Confuse the Two
Many society members confuse stamp duty with GST, but they are completely different taxes levied by different authorities. Stamp duty is a state government levy charged on the registration of property documents. GST is a central tax on the supply of goods and services. Both can apply simultaneously to a redevelopment transaction.
For existing members receiving rehabilitation flats, stamp duty is payable on the development agreement and on the conveyance of the new flat. The stamp duty on conveyance is calculated on the market value of the new flat (as determined by the ready reckoner rate), even though the member is not paying for the flat in cash. This can be a significant amount and should be factored into the overall cost calculation.
Key Clauses to Include in Your Development Agreement
Given the complexity of GST in redevelopment, it is essential that the development agreement clearly addresses the following points. First, who bears the GST on the rehabilitation component — the builder or the society members? In most standard agreements, the builder bears all taxes related to the construction of rehabilitation flats. Second, if members are paying for additional carpet area, the agreement should specify whether the quoted price is inclusive or exclusive of GST. Third, the agreement should include an indemnity clause where the builder indemnifies the society against any future GST demands related to the rehabilitation component. Fourth, the treatment of input tax credit should be clearly documented — since the 2019 amendments eliminated ITC for most residential projects, this is less of an issue than before, but it’s still worth documenting.
Common Mistakes Societies Make Regarding GST
Based on our experience at Asahi Legal, here are the most common GST-related mistakes housing societies make during redevelopment. The first mistake is not addressing GST in the development agreement at all. Many agreements are silent on GST, which leads to disputes later when the builder claims that the members should bear the GST. The second mistake is confusing the old service tax regime with the current GST regime. Some societies rely on advice that was correct under the pre-2017 service tax framework but is no longer applicable. The third mistake is not consulting a chartered accountant or tax advisor before signing the development agreement. GST rules are complex and change frequently — what was true last year may not be true today.
The fourth mistake is not accounting for GST in the overall project cost analysis. When comparing offers from different builders, societies often compare only the carpet area, corpus fund, and transit rent, without factoring in the GST implications. A builder who offers more carpet area but makes the members bear GST may actually be offering a worse deal than a builder who offers slightly less area but bears all taxes.
Recent Changes and Current Position
The GST Council has amended the rates and rules for the real estate sector multiple times since 2017. The most significant change came in March 2019, when the council reduced the GST rate for non-affordable housing from 12% (with ITC) to 5% (without ITC) and for affordable housing from 8% to 1%. These changes simplified the tax structure but also eliminated the builder’s ability to claim input tax credit on raw materials and services used in construction.
For redevelopment projects specifically, the government has issued various circulars and notifications clarifying the GST treatment of rehabilitation flats, additional area, and TDR (transferable development rights). The position continues to evolve, and it is important to get up-to-date advice at the time of entering into the development agreement.
How Asahi Legal Can Help
At Asahi Legal, we work closely with chartered accountants and tax advisors who specialise in real estate GST to ensure that our clients’ development agreements properly address all tax obligations. We help societies understand their GST exposure, negotiate tax-related clauses in development agreements, and resolve disputes with builders over GST payments. If your society is considering redevelopment, contact Asahi Legal today for comprehensive legal and tax guidance.
This article is for general information only and is not legal advice or an invitation to engage the firm. Laws and judgments change; please obtain specific legal advice before acting.
