Mumbai Metropolitan Region (MMR) real estate developers are now under the scrutiny of the Directorate General of GST Intelligence (DGGI) for their financial transactions among group companies and joint venture partners. The DGGI has issued tax demand notices for the payment of Goods and Services Tax (GST) on these transactions, which include royalty charged by parent companies to subsidiaries and joint ventures.
According to a senior GST official, fees for management services and royalty for the use of brand names fall under the 18% GST slab for most services. The DGGI has specifically identified royalty charged by parent companies to their special purpose vehicles (SPVs) for using their brand names as taxable under GST. The investigation also covers intra-group and intra-joint venture transactions commonly conducted by major real estate firms for operational strategies and cash management.
In particular, the DGGI’s investigation into 50:50 joint ventures revealed that major developers charge a management fee of 7-8% for construction and approval-related services. Additionally, developers pay royalties for brands, which can account for 12 to 15% of their overall costs. As a result, the GST demand is likely to further increase the already high real estate prices in MMR. Developers are expected to pass on the tax burden to home buyers since input tax credit is unavailable for residential projects.
Real estate companies typically operate on a special purpose vehicle (SPV) model, where each project is undertaken in a separate SPV. Vivek Abrol, a leading real estate developer with multiple projects in the Malad and Vasai-Virar regions, stated that the GST department considers the royalty charged by SPVs for the name and logo of the flagship company as subject to GST. Home buyers already pay GST without input tax credit when purchasing under-construction properties, with rates of 1% for affordable housing and 5% for premium properties.
1. What is the purpose of the DGGI’s investigation?
The DGGI is investigating financial transactions among group companies and joint venture partners in the real estate sector to identify potential GST evasion and enforce tax compliance.
2. What types of transactions are under scrutiny?
The investigation covers royalty charged by parent companies to subsidiaries and joint ventures, as well as intra-group and intra-joint venture transactions related to operational strategies and cash management.
3. How will the GST demand impact real estate prices in MMR?
The GST demand is likely to push up the already high real estate prices in MMR. Developers are expected to pass on the tax burden to home buyers, as input tax credit is unavailable for residential projects.
4. What is the SPV model mentioned in the article?
The SPV model refers to the practice of carrying out each real estate project in a separate special purpose vehicle, which allows for better financial and operational management.
5. How much GST do home buyers currently pay on under-construction properties?
Home buyers currently pay a nominal GST of 1% for affordable housing and 5% for premium properties on the purchase of under-construction properties without input tax credit.