Does a Permanent Alternate Accommodation Agreement (PAAA) Attract GST Before Occupancy Certificate (OC)?

During the redevelopment of a cooperative housing society in Mumbai, Thane, or Kalyan, one of the most critical legal milestones for every flat owner is executing the Permanent Alternate Accommodation Agreement (PAAA) with the developer. The PAAA secures the member’s right to a specific new flat in the reconstructed building, defines their carpet area entitlement, and provides compensation timelines.

Because redevelopment takes years, the PAAA is almost invariably executed and registered well before the building is completed and prior to the grant of an Occupancy Certificate (OC) by the planning authority (MCGM, TMC, KDMC, etc.).

This timing gives rise to significant confusion and anxiety among housing society members: Does entering into a PAAA before the Occupancy Certificate is granted attract Goods and Services Tax (GST)? If so, who is legally obligated to pay it—the developer or the individual flat owner?

Understanding the interplay between the Central Goods and Services Tax (CGST) Act, 2017, relevant CBIC notifications, and Maharashtra cooperative housing laws is crucial for protecting flat owners from unwarranted developer tax demands.

1. The Core Legal Answer: Who Pays GST on PAAA Before OC?

To answer the question clearly and decisively, Maharashtra real estate and tax law draws a sharp distinction between two different scenarios:

Scenario A: Entitled Replacement Flat (Agreed Area in Lieu of Surrendered Flat)

The Legal Nature: The member surrenders their old flat and society development rights to the developer in exchange for a new flat of agreed reconstructed carpet area.
GST Treatment: This transaction constitutes a supply of construction services under Schedule II, Paragraph 5(b) of the CGST Act, 2017. However, under statutory CBIC Notifications (Notification No. 04/2018-Central Tax (Rate) and Notification No. 03/2019-Central Tax (Rate)), the statutory liability to pay GST rests squarely on the PROMOTER / DEVELOPER, not on the individual society member.
Can the Developer Demand GST from the Member? No. Unless the Development Agreement (DA) approved by the society specifically and unambiguously stipulates that members shall bear GST on their entitled flats, the developer cannot unilaterally pass this liability onto existing members. In standard redevelopment practice governed by Section 79A directives, the reconstructed flat is provided free of cost, inclusive of all construction taxes.

Scenario B: Additional Carpet Area Purchased by the Member

The Legal Nature: If an existing member exercises an option to purchase extra carpet area beyond their agreed entitlement (e.g., upgrading from a 2BHK to a 3BHK by paying an additional commercial sum).
GST Treatment: The purchase of additional area is a commercial sale of an under-construction apartment prior to Occupancy Certificate.
GST Liability: This incremental transaction unequivocally attracts GST (currently 5% without Input Tax Credit for standard residential units, or 1% for affordable housing units). This GST must be paid by the purchasing member directly to the developer, who remits it to the government treasury.

2. The Statutory Framework: Pre-OC vs. Post-OC Status

Why does the timing of the Occupancy Certificate (OC) matter under GST law?

Under the GST regime, real estate transactions are governed by the following core provisions:

A. Schedule II, Paragraph 5(b) of the CGST Act, 2017:

The construction of a complex, building, or civil structure intended for sale or transfer to a buyer is classified as a Supply of Service, except where the entire consideration is received after the issuance of the Completion Certificate / Occupancy Certificate (OC).

B. Schedule III, Paragraph 5 of the CGST Act, 2017:

The sale of land and the sale of a completed building where the entire consideration is received after the issuance of the Occupancy Certificate is classified as an actionable transaction that is NEITHER a supply of goods NOR a supply of services. Therefore, post-OC transactions attract 0% GST.

C. Execution Before OC:

Because the PAAA is executed and the non-monetary consideration (transfer of developmental rights / possession of old flat) is provided while construction is ongoing and prior to the grant of OC, the transaction falls squarely within the “under-construction” service bracket.

3. When Does the Developer Pay GST? (Time of Supply Rules)

A frequent point of developer coercion occurs when developers demand advance GST deposits from existing members at the time of registering the PAAA, claiming that tax is immediately due upon agreement signing. This claim is legally unfounded.

Under Notification No. 06/2019-Central Tax (Rate) dated 29th March 2019:

For construction services provided by a promoter to landowners or cooperative housing society members against the transfer of development rights (TDR/FSI), the Time of Supply* is legally deferred.
The liability of the promoter to pay GST to the government arises only on the date of issuance of the Completion Certificate / Occupancy Certificate (OC)* or the date of first occupation of the project, whichever is earlier.

Therefore, the developer has no statutory obligation—and no legal right—to demand premature GST contributions from members prior to project completion and receipt of OC.

4. Key Judicial Precedents & Authoritative Case Law Citations

The rights of cooperative housing society flat owners regarding PAAA documentation, tax non-pass-through, and redevelopment compensation are anchored by definitive judicial precedents:

A. Stamp Duty and Incidental Status of PAAA

Citation: Adityaraj Builders v. State of Maharashtra & Ors., 2023 SCC OnLine Bom 516 / Writ Petition No. 4576 of 2020 (Decided on 17 February 2023 by Bombay High Court Full Bench / Division Bench).
Judicial Principle: The Hon’ble Full Bench / Division Bench of the Bombay High Court held that once the principal Development Agreement (DA) between the cooperative housing society and the developer is duly stamped on the total redevelopment value (including the rehabilitation component), an individual member’s PAAA is merely an incidental document* under Section 4 of the Maharashtra Stamp Act, 1958. Consequently, the member cannot be subjected to double stamp duty, and only a nominal duty of ₹100 is payable (provided no additional carpet area is purchased for separate monetary consideration).
Application to GST:* By extension of this legal doctrine, existing members are not commercial buyers entering into an independent transaction; their rights flow directly from the master DA. The tax on that construction service is an overhead obligation cast exclusively upon the commercial developer.

B. Tax Exemption on Transit Rent & Hardship Allowance

Citations:
Sarfaraz S. Furniturewalla v. Afshan Sharfali Ashok Kumar & Ors., 2023 SCC OnLine Bom 2802 / Writ Petition No. 4958 of 2023 (Bombay High Court).
Jitendra Kumar Soneja v. Income Tax Officer, (2016) 74 taxmann.com 209 / ITA No. 5898/Mum/2014 (ITAT Mumbai Bench).
Delilah Raj Mansukhani v. ITO, ITA No. 3526/Mum/2017 (ITAT Mumbai Bench).
Judicial Principle: The courts and tribunals consistently affirmed that displacement compensation / transit rent paid by a developer to housing society members during redevelopment is in the nature of a non-taxable capital receipt / hardship allowance to mitigate personal distress and dislocation. It does not constitute rental income, is not subject to TDS under Section 194-I of the Income Tax Act, 1961, and does not constitute a commercial service attracting GST.

C. Developer Liability for Construction Services under JDA / Redevelopment

Citations:
In re: Vilas Chandanmal Gandhi, 2020 (38) G.S.T.L. 343 / Advance Ruling No. GST-ARA-58/2018-19/B-06 (Authority for Advance Ruling - GST, Maharashtra).
In re: Durga Projects and Infrastructure Pvt. Ltd., 2019 (28) G.S.T.L. 504 / Advance Ruling No. KAR ADRG 58/2019 (AAR - GST - Karnataka)*.
Judicial Principle:* The Maharashtra Authority for Advance Ruling clarified that in redevelopment agreements where development rights are transferred in exchange for constructed residential units, the developer is the supplier of construction services. Under Notification No. 04/2018-CT® and Notification No. 03/2019-CT®, the statutory liability to discharge GST falls upon the developer/promoter. Furthermore, under Notification No. 06/2019-CT®, the time of supply matures only upon the issuance of the Completion Certificate / Occupancy Certificate (OC).

D. Prohibition on Developer Commercialization of Member Entitlements

Citation: Nahalchand Laloochand Pvt. Ltd. v. Panchali Co-operative Housing Society Ltd., (2010) 9 SCC 536 / AIR 2010 SC 3266 (Supreme Court of India)*.
Judicial Principle:* The Supreme Court settled that promoters cannot monetize or levy unauthorized fees on common areas, amenities, and statutory entitlements under the Maharashtra Ownership Flats Act (MOFA), 1963. In society redevelopment under Section 79A directives, developers are strictly bound to deliver the promised alternate accommodation without inventing unauthorized charges or shifting their statutory indirect tax burdens onto flat owners.

5. Essential Safeguards for Society Members Before Signing PAAA

Managing committees and individual flat owners in Mumbai, Thane, and Kalyan must ensure that their agreements are legally insulated against builder tax pass-through:

A. Incorporate an Explicit Tax Indemnity Clause: Insist that both the Development Agreement and the individual PAAA contain an unambiguous clause stating that the Developer shall be solely responsible for bearing and discharging all statutory taxes, levies, cess, and Goods and Services Tax (GST) payable on the construction and handover of the Permanent Alternate Accommodation.

B. Clear Segregation of Entitled Area vs. Additional Area: If an individual member chooses to buy additional area, the PAAA or supplementary agreement must strictly distinguish between the Rehabilitation Component (tax liability on builder) and the Additional Purchased Component (GST payable by member solely on the incremental amount).

C. No GST on Transit Rent or Hardship Allowance: Ensure that temporary transit rent and displacement allowances paid by the developer are explicitly designated as “Hardship Allowance / Displacement Compensation”. Mumbai ITAT and High Court benches have consistently held that hardship allowances are capital receipts meant to mitigate dislocation distress and do not attract GST or TDS under Section 194-I.

D. Link Final Clearance to Full Occupancy Certificate (OC): The PAAA must stipulate that legal possession and handover of the new flat are contingent upon the receipt of the Full Occupancy Certificate from the local municipal planning authority. Members should never accept “fit-out possession” without an OC.

6. Summary Due Diligence Checklist for Flat Owners

Before affixing signatures to a Permanent Alternate Accommodation Agreement (PAAA), verify the following:

Does the PAAA confirm that the entitled reconstructed carpet area is delivered completely free of cost and free of all builder tax claims?
Is there an express clause stating that all GST arising from the construction of the alternate accommodation is borne exclusively by the developer?
If additional area is being purchased, is the GST calculation restricted strictly to the additional carpet area at 5% (or 1% if affordable)?
Does the agreement reference the MahaRERA registration number and approved sanction plans?
Does the agreement state that the developer’s time of supply and handover obligations are tied to the grant of the official Occupancy Certificate (OC)?

A rigorous contract audit prior to signing ensures that society members safeguard their constitutional right to property and avoid illegal tax extractions during redevelopment.