GST applies to flat buyer’s maintenance deposit: Gujarat bench of Authority for Advance Rulings

The Gujarat bench of the Authority for Advance Rulings (AAR) recently held that goods and services tax (GST) will be applicable to one-time maintenance deposits collected by builders from buyers as it is “non-returnable” in nature and is “for supply of services”.

The AAR bench, though, added that 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 by use of 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.

Builders usually charge a one-time maintenance deposit, which is computed at a certain per square foot rate for the property purchased. The applicability of GST on this deposit amount and 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 said maintenance deposits collected are refunded to members as and when they cease to be members. Under GST laws, there needs to be a supply of goods or services for 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 that 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 will collect maintenance deposits and transfer the gross amount to the cooperative housing society (CHS), when the society is set up.” 
“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 prefer a conservative approach and collect and pay GST at 18% upfront at the time of receipt of the maintenance deposit. What is therefore handed over to the CHS is the net amount after the discharge of GST.”