The Goods and Services Tax (GST) on real estate transactions, particularly in cases of cancellation of property bookings, has been a source of disputes between buyers and builders. The primary concerns arise from GST refund eligibility, procedural compliance, and the timing of cancellations in relation to tax filings.
The landmark ruling by the Madras High Court in Emerald Haven Realty Developers (Paraniputhur) Pvt. Ltd. vs. S.V. Ramesh (2023) has further clarified the legal framework around who bears the burden of GST refunds when a buyer cancels a booked property.
Key Takeaways from This Article
✅ Case study analysis of recent GST cancellation rulings
✅ Precautionary measures for builders to avoid GST disputes
✅ Recommended agreement amendments to protect builders and buyers
✅ Legal interpretation of GST refunds and tax adjustments
2. GST Law on Property Cancellations
The applicability of GST varies depending on whether the property is:
| Type of Property | GST Applicability | Rate of GST |
|---|---|---|
| Under-Construction Property | GST applicable | 5% (without ITC) / 1% (affordable housing) |
| Ready-to-Move Property (with OC) | No GST applicable | NIL |
| Land Sale | No GST applicable | NIL |
GST on Booking Advances & Cancellation
When a buyer books an under-construction property, the builder collects GST and deposits it with the government. If the buyer later cancels the booking, the GST refund depends on:
1️⃣ Timing of cancellation (before or after GST return filing)
2️⃣ Whether the builder has already filed GST returns
3️⃣ Applicability of credit note provisions under Section 34 of CGST Act
4️⃣ Buyer's eligibility to apply for a GST refund under Section 54 of CGST Act
3. Case Study: Emerald Haven Realty Developers vs. S.V. Ramesh (2023)
A. Facts of the Case
- The buyer, S.V. Ramesh, booked an apartment and paid GST on the advance amount.
- Due to personal reasons, he canceled the booking and demanded a full refund, including GST.
- The builder, Emerald Haven Realty Developers, refused to refund GST, stating that it had already been deposited with the government.
- The matter reached the Madras High Court, which was asked to decide whether the builder was legally required to refund GST.
B. Court’s Decision & Interpretation
✅ GST once deposited with the government cannot be refunded by the builder if the credit note period has expired (as per Section 34 of the CGST Act, 2017).
✅ If cancellation occurs before the due date for credit notes (30th September of the next financial year), the builder can issue a credit note and adjust GST liability.
✅ If cancellation occurs after the credit note period expires, the buyer must apply for a GST refund directly under Section 54 of CGST Act.
✅ The builder is not automatically liable to refund GST once it has been deposited with the government.
Key Takeaway:
Builders must clearly define GST refund policies in agreements to prevent disputes with buyers.
4. Case Study: Bai Mamubai Trust vs. Superintendent of Stamps & Others (2021)
A similar issue was addressed by the Maharashtra Authority for Advance Ruling (AAR) in Bai Mamubai Trust vs. Superintendent of Stamps & Others [2021] 130 taxmann.com 290 (Maharashtra).
A. AAR’s Ruling
| Scenario | GST Treatment | Builder’s Responsibility |
|---|---|---|
| Cancellation before GST return filing | GST can be adjusted | Refund GST fully |
| Cancellation after GST return filing (but within the credit note period) | Credit note can be issued | Refund GST after adjustment |
| Cancellation after credit note period expires | Buyer must apply for refund under Section 54 | Builder is not liable for refund |
| Cancellation after project completion (OC issued) | No GST refund | Buyer cannot claim GST back |
| Cancellation charges levied | 18% GST applicable on cancellation fee | Builder must issue a tax invoice |
These rulings highlight the importance of timely GST adjustments and the need for precise agreement drafting to avoid financial losses.
5. Precautionary Measures for Builders
To prevent legal disputes and ensure GST compliance, builders should:
✅ Clearly Define GST Refund Terms in Agreements
- Specify that GST refunds depend on the credit note window.
- Clarify that if cancellation occurs after this period, buyers must claim GST refund from the tax department.
✅ Ensure Timely Adjustment of GST in Returns
- If a cancellation request is received before filing GSTR-3B, adjust GST liability immediately.
- If the GST is already deposited, apply for a refund under Section 54.
✅ Maintain Proper Documentation
- Keep records of invoices, refund requests, cancellation approvals, and credit notes.
- Issue a credit note for canceled transactions within the statutory period.
✅ Charge GST Correctly on Cancellation Fees
- If charging a cancellation fee, GST at 18% must be applied.
- Issue a tax invoice for cancellation fees to remain GST-compliant.
6. Recommended Amendments in the Builder-Buyer Agreement
To avoid disputes, builders should include specific GST clauses in agreements.
Sample Agreement Clause for GST Refund on Cancellation
"In case of cancellation of this Agreement by the Buyer, the refund of amounts paid shall be subject to the following GST treatment:
1️⃣ If cancellation occurs before the GST return for the relevant period is filed, the Developer shall refund the entire amount, including GST, after adjusting for administrative charges.
2️⃣ If cancellation occurs after the GST return has been filed, GST shall only be refunded if a refund claim under Section 54 of the CGST Act is approved by the tax authorities.
3️⃣ If cancellation occurs after project completion or after obtaining the Occupancy Certificate, no refund of GST shall be permitted under applicable laws.
4️⃣ If a cancellation charge is levied, GST at 18% shall apply, and the Buyer shall bear such tax liability.
5️⃣ The Developer shall issue a credit note for canceled transactions within the statutory period to facilitate any refund claims.
The Buyer acknowledges that GST is governed by statutory provisions, and refunds are subject to government approval. The Developer shall not be responsible for any delays or rejections in GST refund processing by the authorities."
7. Conclusion: Key Takeaways for Builders
✔ Ensure GST refund terms are clearly defined in agreements.
✔ Adjust GST before filing GSTR-3B if a cancellation request is received in time.
✔ Apply for GST refunds under Section 54 if already deposited.
✔ Maintain proper documentation for compliance.
✔ Charge 18% GST on cancellation fees and issue proper invoices.
By implementing these legal best practices, builders can avoid unnecessary tax liabilities, prevent buyer disputes, and ensure smooth GST compliance. A well-drafted agreement and timely GST adjustments are crucial to safeguarding both the builder’s financial interests and the buyer’s legal rights.
