In a significant ruling that has sent ripples through Maharashtra's real estate sector, the Nagpur bench of the Bombay High Court set aside a GST demand issued to a local developer, offering much-needed clarity on the taxation of development agreements.
The real estate community has welcomed the verdict, which has long sought clearer guidance on how Goods and Services Tax applies to such agreements. Industry leaders expressed relief following the judgment, noting that it brings a sense of certainty to an area that has caused concern for numerous developers. While the ruling has sparked mixed reactions, some stakeholders still await further regulatory guidance; it is widely seen as a positive move for the sector.
The decision involved a dispute regarding a development agreement for a residential project in Nagpur, which Shrinivasa Realcon executed on April 7, 2022, for an 8,000 sq ft plot at Mouza Lendra.
The court’s ruling overturned a show-cause notice issued on August 14, 2024, and a subsequent GST order dated December 10, 2024, which had demanded tax on the agreement, contending that it involved a taxable transfer of development rights. The Bombay High Court's division bench, led by Justices Avinash Gharote and Abhay Mantri, held that no taxable transfer of development rights (TDR) occurred in the case, ultimately quashing both the show-cause notice and the final GST order.
The dispute stemmed from a development agreement where the landowner appointed the developer for a consideration of Rs 7 crore, along with two flats. Senior counsel Akshay Naik, assisted by Abhishek Bhoot, argued that the project did not involve any transfer of development rights or floor space index (FSI) from external sources.
Instead, the construction was based solely on the existing FSI or any statutory increase, which is not subject to GST.
The ruling is based on a careful interpretation of Entry 5B of the GST notification dated June 28, 2017, amended on March 29, 2019. This provision deals with taxing services involving the transfer of TDR or FSI for construction purposes. However, the court pointed out that the GST law does not define "transfer of development rights" and concluded that the development agreement did not include such a transfer. It also referred to Clause 11.2 of the Unified Development Control and Promotion Regulations, which defines TDR as compensation in FSI granted by a planning authority, an aspect not applicable to the present case.
In its final judgment, the court rejected the department’s reliance on Clause 18 of the agreement, which merely required compliance under the Maharashtra Apartment Ownership Act, 1970, and held that this did not constitute proof of a transfer of development rights. The court declared that the transaction did not fall within the scope of Entry 5B of the GST notification and quashed both the show-cause notice and the final order.
This ruling is expected to have far-reaching implications for the real estate sector in Maharashtra. It will help to bring clarity to the often complex and debated issue of GST taxation in development agreements. The decision is seen as a step towards improving the ease of doing business for developers while ensuring that taxes are levied accurately and fairly.
