The Gujarat bench of Authority for Advance Rulings (AAR) recently held goods and services tax (GST) would be applicable to a one-time maintenance deposit collected by a builder from its buyers as it is “non-returnable” in nature and is “for supply of services”.
The AAR bench, though, added the amount will be subject to GST at the time of actual supply of service—when maintenance services or repairs of common areas and facilities are carried out, in future, by utilising these deposits. Deposits collected from buyers are typically pooled into a common maintenance deposit fund. In other words, according to this ruling, the buyer’s GST burden is deferred.
The ruling comes at a time when a sharp reduction in stamp duties has boosted buying of flats in Mumbai. The builder usually charges a one-time maintenance deposit, which is computed at a certain per square foot rate of the property purchased. The applicability of GST on this deposit amount and the time of such levy has been a contentious issue.
The AAR rejected the arguments of Ahmedabad-based Capital Commercial Coop Service Society, which had sought the advance ruling. This society had said the maintenance deposits collected are refunded to members as and when they cease to be so. Under GST laws, there needs to be a supply of goods or services for a consideration. As the deposit is refunded, it is not a consideration and does not qualify as a “supply”. Hence, no GST can be levied, the society had submitted.
The AAR, in its order, though, observed the maintenance deposit in the name of the member who was leaving the society was transferred to a new member coming in, in his place. In other words, the deposit was not refunded but transferred by passing an accounting entry. Thus, it was non-refundable and taxable under GST.
“Going by this ruling, the builder would collect the maintenance deposits and transfer the gross amount to the cooperative housing society (CHS), when the society is set up,” says Yusuf Hakim, indirect tax partner at CNK & Associates.
“Under service tax law, there have been favourable rulings holding that the builder is not liable for service tax on such maintenance deposits. In practice, though, most builders in Mumbai prefer a conservative approach and collect and pay GST at 18% upfront at the time of receipt of a maintenance deposit. What is therefore handed over to the CHS is the net amount after discharge of GST,” says Sunil Gabhawalla, a CA and indirect tax specialist.
Hakim concurs and says, “In case no GST has been collected by builders from flat owners, then when the CHS utilises the maintenance deposits for repairs or maintenance, it would need to raise a tax invoice. The CHS can either proportionately collect the 18% GST component from individual members or can use the proceeds of the maintenance deposit fund itself to clear the GST liability.”
Indirect tax experts say as AAR rulings do not set a precedent, to avoid GST litigation, builders may continue collecting and paying GST upfront.