When a buyer cancels a residential flat booking, the builder may retain a portion of the amount paid as cancellation charges. The GST question is whether the builder can also deduct GST from the refund, and on what basis. The answer turns on the contract and on the characterisation of the cancellation charge. A cancellation charge is consideration for the buyer’s right to cancel or for the builder’s agreement to release the buyer from the contract; it is not automatically a taxable supply of construction services. The builder cannot deduct GST from the refund merely because the transaction was a real-estate transaction.
The Contractual Basis for Deduction
The sale agreement or construction agreement typically contains a cancellation clause that specifies the amount the builder may retain on cancellation. Where the clause authorises the deduction of cancellation charges, the builder may retain that amount. Where the clause does not authorise the deduction of GST in addition to the cancellation charge, the builder cannot deduct GST from the refund merely by labelling the deduction as GST.
The Madras High Court has addressed this issue in a case where the builder deducted 10% of the sale consideration as cancellation charges and also deducted an amount towards GST, even though the sale and construction agreement did not authorise the GST deduction. The Court held that the builder was not entitled to deduct GST before refunding the amount, given the absence of a contractual provision justifying the deduction. The decision reinforces the principle that a deduction towards GST in a cancellation must be backed by statutory or contractual authority, not by an after-the-fact email or a unilateral practice.
Cancellation Charges and the Underlying Supply
The GST treatment of the cancellation charge itself depends on its character. Where the cancellation charge is consideration for the builder’s toleration of the cancellation or for the release of the buyer from the contract, it can be a taxable supply of a service. Where the charge is a forfeiture of a deposit or a genuine pre-estimate of loss, the characterisation may differ.
The more immediate practical issue is the GST already paid on the amounts before cancellation. Where the buyer has paid GST on construction-phase payments and the booking is cancelled, the builder may issue a credit note and adjust the GST liability, subject to the conditions in the GST law. The buyer’s entitlement to a refund of the GST component depends on the contract, the credit-note mechanism and the RERA framework.
RERA and the Refund of the GST Component
RERA authorities have clarified that builders cannot charge GST above the prescribed rate and that buyers are entitled to receive the amount paid, including the GST component, subject to the applicable cancellation terms. The UPRERA clarification on GST refunds for cancelled bookings indicates that eligible buyers can recover excess tax paid on transactions, subject to documentation and thresholds. The buyer should retain the payment receipts, the GST invoices and the cancellation correspondence.
The interaction between RERA and GST is not uniform across states, and the buyer should not assume that a RERA order automatically resolves the GST treatment. The builder and the buyer should reconcile the amounts paid, the GST charged, the cancellation charge permitted by the contract and the refund actually made.
What the Builder and Buyer Should Control
The GST outcome on a cancellation depends on three variables: whether the contract authorises the deduction of GST in addition to the cancellation charge; whether the GST already paid on pre-cancellation payments is adjusted through a credit note; and whether the refund documentation reconciles the amounts paid, the GST component and the contractual deduction. The builder who relies on a unilateral GST deduction without a contractual basis is exposed to a refund direction. The buyer who retains the payment and GST records is better placed to claim the refund of the GST component.
Call to Action: We advise builders, buyers and RERA practitioners on cancellation charges, GST deductions, credit-note adjustments and refund documentation. For a transaction-specific review, contact office@anujdesaiassociates.com, Ph No. 9619456656, Website https://anujdesaiassociates.com, LinkedIn linkedin.com/in/ca-anuj-desai-122547230.