Unlocking the Potential of Redevelopment: Addressing GST concerns on Redevelopment Projects

Ar. Keval Valambhia
COO, CREDAI-MCHI

As India experiences rapid urbanization, its metropolitan cities, as well as tier 1 and tier 2 cities, face a critical challenge of land and resource scarcity. Among these cities, Mumbai stands out, battling the constraints imposed by limited land availability.

In response, redevelopment and joint development have emerged as essential strategies to harness the full potential of existing resources. In this blog, we explore how redevelopment initiatives, specifically in Mumbai, can help alleviate the land scarcity issue while contributing to sustainable urban development.

Redevelopment: A Path to Optimal Land Utilization:

Redevelopment is a transformative process that involves renovating or rebuilding old and dilapidated buildings or slums. Under this arrangement, developers bear the cost of redevelopment, aiming to revitalize the cityscape and provide improved living conditions for residents. The society members, slum dwellers, MHADA (Maharashtra Housing and Area Development Authority), or landowners are allotted apartments in the new buildings, while the remaining inventory is sold
to independent buyers.

Developer’s Role and Financial Dynamics:

Developers play a crucial role in the redevelopment process, undertaking the construction and managing the complexities involved. Their income is derived from the proceeds received from independent buyers, minus the total development costs, which include the value of units handed over to the owners. It's important to note that developers adhere to sound business practices, factoring in the cost of building units allocated to owners when determining the price offered to independent buyers.

GST Implications and Rationalizing Valuation Methodology:

When it comes to goods and services tax (GST) on redevelopment projects, there are certain considerations. Presently, GST is levied at rates ranging from 5% to 1% on the apartments handed over to owners. However, the valuation methodology has been a subject of debate, as the first sale agreement value is considered for determining the GST on apartments provided to owners. This approach has raised concerns about the rationality and comparability of prices, given that the services rendered to buyers are construction-based.

Towards a Balanced Approach:

To address these concerns and foster a more equitable framework, it is suggested that GST on apartments handed over to owners be waived off. Alternatively, suitable clarifications should be issued to allow GST to be charged at 18% on the works contract service, based on the construction cost alone, along with proportionate input tax credit for the units provided to the owners. Such measures would ensure a fair and transparent valuation methodology, promoting consistency and affordability for both buyers and developers.

Unlocking the Potential: A Win-Win Situation:

By streamlining GST regulations and adopting a rational valuation methodology, the redevelopment process can be further enhanced, unlocking its full potential to address land scarcity in Indian cities. These measures would incentivize developers to undertake redevelopment initiatives, leading to more sustainable and aesthetically appealing urban landscapes. Moreover, this would provide residents with upgraded living spaces, revitalized communities, and improved infrastructure facilities.

Conclusion:

Redevelopment and joint development have become essential strategies to tackle the scarcity of land and resources in metropolitan cities like Mumbai. By embracing these approaches, Indian cities can make optimal use of existing resources, foster sustainable urban development, and cater to the growing needs of their populations. It is imperative for policymakers to collaborate with developers and stakeholders to establish a balanced framework, ensuring fair valuation methodologies and promoting the long-term well-being of urban communities.

Together, through strategic partnerships and effective regulations, we can transform the challenges of land scarcity into opportunities for vibrant, inclusive, and resilient cities that will stand as testaments to India’s growth and development.

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