GST applicable on compensation received by tenant for alternate accommodation, rules AAR

The tenant had sought an advance ruling on whether GST was applicable on compensation paid by developer for the damages paid for delay in project.(Representational Image)

THE GOODS and Services Tax (GST) is applicable on the compensation for alternate accommodation to be paid to the tenant by a developer, in case of redevelopment projects, according to a ruling of the Maharashtra Authority for Advance Ruling (AAR).

In an order passed on May 22, the AAR said the GST was applicable on the compensation or rent that developers paid tenants for an alternative accommodation during the time of construction as well as the damages paid for delay in handover of the project.

A case was filed before the AAR by Zaver Shankarlal Bhanushali, who was a tenant of a commercial building that is now undergoing redevelopment. While the property is owned by Future Communications Limited, it is being redeveloped by Spenta Residency Private Limited. As part of the agreement, Bhanushali will get compensation of Rs 2.05 lakh a month for the first two years. The compensation would increase if the project was delayed.
He had sought an advance ruling on whether GST was applicable on compensation paid by the developer for alternate accommodation and the damages paid for the delay in the project.

The AAR observed: “The act of vacating premises for facilitating the developer implies that the applicant has agreed to do an act and such act, of vacating the premises, by the applicant, squarely falls under clause 5(e) of the Schedule II [of the GST Act]… and therefore the amounts received the applicant for having agreed to do such an act, would attract tax liability.”

In clause 5(e), agreeing to the obligation to refrain from an act, or to tolerate an act or a situation or to do an act is defined as a supply of services. This order is likely to bring down the rent component received by tenants from developers in redevelopment projects.