No GST on Redevelopment Without Transfer of Rights: Bombay HC Ruling Explained
In a significant judgment that brings clarity and relief to property owners, the Bombay High Court has ruled that Goods and Services Tax (GST) is not applicable on redevelopment agreements where homeowners engage a builder solely for construction services without transferring development rights. This ruling, delivered on April 8, 2025, could reshape how homeowners and cooperative societies across India structure their redevelopment deals.
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What Was the Case About?
The matter involved a homeowner who owned a parcel of land and entered into an agreement with a builder for redevelopment. As part of this deal:
- The landowner agreed to pay ₹7 crore and allot two flats to the builder.
- Importantly, there was no sale or transfer of development rights—such as Floor Space Index (FSI) or Transfer of Development Rights (TDR)—to the builder.
Despite this, the tax authorities issued a notice claiming GST was applicable under the Reverse Charge Mechanism (RCM).
Court’s Observations: Substance Over Form
The Bombay High Court took a substance-over-form approach and held that no GST can be levied under RCM if the builder is only providing construction services without acquiring any rights over the land or its development potential.
The Court emphasized:
- The absence of a transfer of TDR or FSI is critical.
- There is no “supply” of service under Entry 5B of Notification No. 11/2017-Central Tax (Rate), as amended, if rights are not passed on.
- Thus, no GST is payable on such agreements under RCM.
Typical Redevelopment Models and GST Exposure
Usually, in Joint Development Agreements (JDAs), the homeowner transfers part of the land or development rights to the builder. This creates two distinct GST obligations:
- Transfer of Development Rights (TDR/FSI)
- GST is payable under RCM.
- The liability falls on the builder, but the cost is usually passed back to the landowner.
Construction Services by Builder to Landowner
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Taxed under the forward charge mechanism.
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In contrast, if no rights are transferred, and the homeowner merely hires the builder for construction, then only the construction component attracts GST, and RCM does not apply.
Impact of the Ruling
✅ For Homeowners and Societies
- Significant tax savings in genuine redevelopment projects.
- Reduced compliance burden.
- Encourages clearer structuring of agreements to avoid litigation.
⚠️ For Developers
- Must review agreement structures and avoid assuming rights unless necessary.
- Carefully determine who bears the GST liability under each clause.
Legal and Tax Insights
This ruling is rooted in the interpretation of Entry 5B of the GST rate notification for construction services. The Court ruled:
- Mere provision of construction services without receiving development rights does not fall under this entry.
- Thus, GST notices demanding tax under RCM in such scenarios are invalid.
The decision reinforces the principle that the nature of a transaction, not its label, determines tax liability.
Precautions for Homeowners Entering Redevelopment Deals
If you're a landowner or cooperative society planning redevelopment:
- Ensure your agreement does not transfer FSI, TDR, or similar rights unless absolutely required.
- Mention explicitly that the builder is only rendering construction services.
- Take expert advice to structure contracts in line with this ruling to avoid GST complications.
Conclusion: A Game-Changer for Urban Redevelopment
The Bombay High Court’s verdict is a major win for homeowners, especially in metro cities where redevelopment is a norm. It recognizes the distinction between own-use redevelopment and commercial exploitation by developers.
By eliminating GST liability on genuine redevelopment without rights transfer, the judgment:
- Encourages smoother housing renewal.
- Reduces tax disputes.
- Promotes fairness in taxation for private property owners.