Redevelopment of existing building.

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Vishrut (Querist)
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07 June 2014 In redevelopment of existing building, the existing owners five development rights to the developer and in return they get a newly constructed flat with:
a. more area;
b. same area;
c. same area with additional monetary consideration;
d. combination of a. and c. above or b. and c.above.

What will be the value of taxable service on all of the above scenarios i.e. for existing residential flat owners.

Amol S Joglekar

Amol S Joglekar (Expert)
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07 June 2014 not a service tax issue. it is rather capital gain issue.

Vishrut

Vishrut (Querist)
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09 June 2014 Agreed that it is a capital gain issue, but this does not prevent it from service tax liability as it is a declared service under clause (b) Section 66E of the Finance Act, 1994.

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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20 July 2025 You're absolutely right to bring up both aspects—capital gains and service tax (now GST)—when discussing redevelopment of existing buildings. Here's a detailed analysis of service tax implications (pre-GST era) under various scenarios, specifically in light of Section 66E(b) of the Finance Act, 1994, which treated certain transactions as “declared services”:

📘 Legal Background (Service Tax Era – Before 1 July 2017)

Section 66E(b) – Declared Service:
“Construction of a complex, building, civil structure or part thereof, intended for sale to a buyer, wholly or partly, except where the entire consideration is received after the issuance of completion certificate, by a competent authority.”
This essentially covered developer-owner agreements in redevelopment projects as a service, where consideration is not just monetary but may be in kind (e.g., transfer of development rights).

🏗️ Redevelopment Transaction: Parties & Flow

Party Role
Existing flat owners Transfer development rights (TDR/FSI) to developer
Developer Constructs new building and gives flats (with/without extra area/money) to original owners; sells remaining flats to new buyers
Under service tax law, developer is deemed to be providing construction service to existing flat owners, and existing flat owners are providing development rights (intangible asset) to the developer.

💰 Taxable Value Scenarios – Existing Flat Owners

Let’s analyze service tax applicability on different types of consideration received by existing owners.

✅ Common Rule:
If any part of the consideration (including value of land or development rights) is received before the completion certificate, service tax is applicable.

🔹 (a) More Area (Additional Built-Up Area)
Taxable Service Value:

Consideration = value of additional construction done by developer over and above existing flat area.
Service tax applies on:

Construction cost/value of additional area.
To be determined as per construction agreement or comparable market value.
🔹 (b) Same Area
If existing owners get same area in the new building:

The construction is still a declared service (unless the flat is handed over after completion certificate).
However, valuation is a grey area.
📌 Case law (e.g., Vaswani Associates): If it's a pure rebuild with no commercial intent or revenue to developer, may not be taxable.

But department view: Still taxable since developer receives FSI rights = non-monetary consideration.

🔹 (c) Same Area + Monetary Consideration
Value of taxable service = construction cost of flat + additional monetary consideration
Developer may also pay service tax under reverse charge mechanism (RCM) on TDR received (see below under GST).
🔹 (d) Combo of (a) + (c) or (b) + (c)
Taxable value = market value of flat + cash consideration, reduced by land/development rights value (if quantifiable).
Proportionate abatement may be available for land component (e.g., 25% in some cases pre-GST).
📌 Developer's Liability (Service Provider)

In all above cases:

Developer is treated as providing construction service to original flat owners.
Service tax was applicable unless the entire consideration (including rights) was received after completion.
Developers usually paid service tax on 40% of the total amount charged (under abatement rules, Notification No. 26/2012-ST).

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