Rajarshi Dasgupta, Executive Director & Head of Taxes, AQUILAW
Swarnali Chanda, Senior Associate, AQUILAW
The Real Estate (Regulation and Development) Act, 2016 (“RERA”) is an act of the Parliament of India, primarily to strengthen the regulations of the real estate sector and to provide protection to the home-buyers. Further, the State of West Bengal has brought into effect a separate legislation named the West Bengal Housing Industry Regulation Act, 2017 (“WBHIRA Act”) in the similar lines of RERA, together with the West Bengal Housing Industry Regulation Rules, 2018 (“WBHIRA Rules”).
Section 13 (1) of the WBHIRA Act mandates inter alia that no developer shall receive any sum more than 10% of the cost of the apartment/plot without first executing and registering an Agreement for Sale in the prescribed format, which otherwise means that the developer is not entitled to receive any sum exceeding 10% of the cost of the apartment/plot, under the head of application money or booking amount. Further, the term ’cost of the apartment/plot’ in terms of the Explanation provided in Clause 1.2 of the proforma Agreement for Sale as appended with the WBHIRA Rules, includes applicable GST component in the total price of the apartment/plot. Thus, the sum paid by the allottee under the head of application money or booking amount, being 10% of the total cost of the apartment/plot, is inclusive of the GST component.
Now what would happen if the buyer cancels his booking without any fault on the part of the developer and what are the important areas that the developer would look into.
In terms of the provisions of WBHIRA Act, the developer at the time of cancellation, at its discretion may refund the entire amount to the allottees or may deduct the booking amount and refund the balance amount and since the term ’booking amount’ has not being defined in the WBHIRA Act, reference can be made to section 13 (1) of the WBHIRA Act and such forfeiture will be limited to or will not exceed the 10% of the amount received by the developer towards the cost of the apartment/plot prior to execution of the Agreement to Sale. Now the following points need to be considered, at the time of the said refund:
· In case the amount forfeited is termed as ’cancellation fee’, the same would entail the levy of GST. Further, since, it’s a complete separate transaction, the developer ideally should raise an invoice on the allottee and non-compliance of the same may entail penal provisions.
· Since the forfeiture amount cannot exceed 10% of the amount received by the developer towards the cost of the apartment/plot, GST should always be included in the same and to be computed on a cum-tax basis.
· However, in the event, the said forfeiture amount is termed as ’liquidated damages’ there is a possibility that the same may not attract GST.
· The clauses of the agreement should be worded very carefully to incorporate necessary amendments, in order to safeguard the rights of the developer.
Here it would be significant to note that in terms of the provisions of GST, in case of cancellation, the option of raising credit note for cancellation of booking and adjustment of GST paid is allowed only till end of September of the next financial year and hence for cancellation beyond such period, any refund of GST to the allottees, needs to be carefully looked into and examined as such payment or refund may entail undue financial hardship in the hands of the developers. The pertinent question that arises are, how to tackle such situation, how to incorporate such details in the agreement for sale, so that even if GST is not refunded, it would not violate the provisions of the WBHIRA Act.
Resale as a Condition for Refund:
It has been noticed that the developers tweak the language of the Agreement for Sale in such manner that, the developer reselling the said apartment to a new allottee is made a condition precedent for the refund to the cancelling allottee, and differential price, if any, is adjusted from the said refund. In this regard, it is relevant to discuss Clause 7.5 of the proforma Agreement for Sale as appended with the WBHIRA Rules. The said clause essentially means that no amount other than the booking amount, can be forfeited by the developer in case of aforesaid cancellation by the allottee, and the balance amount shall be refunded to the allottee within 45 days from the date of such cancellation. Adding a condition of resale by the developer prior to making the said refund or adjusting the differential price against the refund amount in case the resale is carried out at a lower price, defies the object of timely protection to home-buyers intended to be given under the WBHIRA Act. Therefore it is recommended that the purpose and intention of the proforma Agreement for Sale, is adhered to in principle and any such deviation changing the core essence of the same may be litigated.
In the light of the above, it may be concluded that the developer should have a robust mechanism of checks and balances to ensure proper compliance both under the GST regime as well as under the WBHIRA and the agreements should be worded very carefully so that the interests of the developer is well protected.