GST Applies to Tenant Compensation for Redevelopment and Delay Damages
The Maharashtra tax authority ruled that tenants must pay GST on compensation received from developers for alternate accommodation and project delays.
- Ruling
- GST-ARA- 29/2017-18/B-37 dated 22.05.2018
- Dated
- 22 May 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- A tenant asked if GST applies to redevelopment compensation and delay damages.
- The tax authority ruled both types of payments attract Goods and Services Tax.
- Vacating an old building is treated as performing a taxable service for developers.
- Tolerating project delays in getting new premises is also treated as a service.
In short
A tenant vacating a commercial or residential premises for building redevelopment often receives monthly money from the builder to rent another place. They may also get extra payments if the builder delays handing over the new property. In order GST-ARA- 29/2017-18/B-37, a Maharashtra tenant asked the Authority for Advance Ruling (AAR) whether these payments attract Goods and Services Tax (GST). The core dispute was whether receiving rent allowance or delay compensation counts as selling a service to the property developer.
What has changed
How it worked before
Before this ruling, tenants generally assumed that alternate accommodation payments and delay compensation were simple personal expense reimbursements or damage claims. Most business occupants believed these payouts were tax-free because they were not actively selling any service to the builder.
What has changed
The tax authority decided that both alternate accommodation allowances and delay damages received by tenants attract GST. The authority held that vacating a property to let a builder redevelop it counts as doing an act, and accepting project delays counts as tolerating a situation. In practice, this means tax officers can view such compensation payments as taxable income for services rendered to the developer.
Who this affects
Commercial tenants, shop owners, and business occupants vacating premises for redevelopment who receive rent allowances or delay penalties from real estate developers.
An example
ABC Retailers ran a shop in Mumbai as a tenant in an old commercial building. The building went into redevelopment, and the developer agreed to pay ABC Retailers fifty thousand rupees per month for alternate shop rent, plus compensation if construction took longer than two years. ABC Retailers asked whether they must collect GST on these monthly payouts. Based on this ruling, the tax office would view vacating the premises and tolerating construction delays as taxable services provided to the developer, requiring GST on the compensation.
What you should do
Remember that an advance ruling binds only the business that asked for it and their specific tax office. Other tenants facing redevelopment should not automatically start charging GST on their compensation. Instead, consult a tax professional to evaluate recent government circulars, court decisions, and your specific agreement terms before filing your GSTR-3B tax returns.
If you do nothing
If you assume this ruling applies directly to you without checking current tax position, you might unnecessarily charge developers tax that they refuse to reimburse. On the other hand, if your local tax officer adopts this interpretation during an audit, they could demand unpaid GST along with interest and penalties. Misinterpreting your liability on large redevelopment payouts can lead to expensive tax disputes and unexpected cash flow disruption.
The terms explained
- input tax credit
- A mechanism that lets businesses reduce the GST they pay on sales by the amount of GST they already paid on business purchases.
- tolerating an act
- A GST concept where accepting a delay, inconvenience, or non-performance by another party in exchange for money is treated as a taxable service.
- supply of service
- Any commercial activity, including agreeing to do, tolerate, or refrain from an act in exchange for payment, that attracts GST.
The ruling in detail
Authority for Advance Ruling
ZAVER SHANKARLAL BHANUSHALI
GST-ARA- 29/2017-18/B-37 dated 22.05.2018 · Maharashtra
Questions before the authority
- Is GST applicable on the compensation for alternate accommodation to be paid to me (the tenant of the old building) by the developer/owner?
- Is GST applicable on the compensation for alternate accommodation / damages for delayed handover of possession of the new premises to be paid to me (the tenant of the old building) by the developer/owner?
Facts
The Applicant was a tenant in a building owned by M/s Future Communications Limited. The owner and developer (M/s Spenta Residency Private Limited) entered into a tripartite redevelopment agreement requiring the tenant to vacate the premises. Under the agreement, the developer agreed to pay monthly compensation for temporary alternate accommodation and liquidated damages/compensation in case of delayed handover of the newly constructed premises.
Ruling
| Question | What the authority ruled |
|---|---|
| Compensation for alternate accommodation paid to tenant | Answered in the affirmative (GST applicable) Treated as supply of service under Schedule II Para 5(e) |
| Compensation/damages for delayed handover of possession | Answered in the affirmative (GST applicable) Treated as supply of service under Schedule II Para 5(e) |
The Authority held that **GST is applicable** on both compensation for alternate accommodation and damages for delayed handover received by the tenant. Vacating the premises to facilitate redevelopment and tolerating delays constitute agreeing to do an act or tolerating a situation, which qualifies as a **taxable supply of service**.
Reasoning
The decision turned on Section 7 read with **Schedule II, Para 5(e)** of the CGST Act, 2017, which defines agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act as a supply of services. By vacating the tenanted premises to allow redevelopment and tolerating construction delays beyond the agreed timeline, the tenant is agreeing to do an act and to tolerate an act/situation. Therefore, compensation and delay damages received from the developer constitute consideration for a **supply of service** subject to GST.
Provisions relied on
- Section 7 of the CGST Act, 2017
- Section 9 of the CGST Act, 2017
- Schedule I of the CGST Act, 2017
- Schedule II, Para 5(e) of the CGST Act, 2017
For the practitioner
This order shows an early aggressive interpretation by the Authority treating tenant compensation for redevelopment as a **taxable supply of service** under the 'tolerating an act' clause. Tax practitioners advising developers or tenants should note this risk, though subsequent circulars and judicial rulings on liquidated damages and tenancy rights surrender should also be evaluated.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/mah_aar_29_2017-18_b-37_zaver_shankar_bhanushali.pdf
Legibility of the scan, as read: high.
Prepared 18-10-2026.
About Patron Accounting LLP
Patron Accounting LLP is a CA and CS-led accounting and compliance firm that has been working with businesses across India since 2019. We handle the work that keeps a company correct with every department it answers to: day-to-day bookkeeping and accounting, GST registration and returns, income tax filing and assessments, TDS, payroll and PF/ESI, company and LLP incorporation, ROC and MCA compliance, statutory and internal audit, physical stock and inventory audits, trademark and other registrations, and the certificates and reports that banks, buyers and regulators ask for.
Our clients range from a first proprietorship registering for GST to established companies running operations across several states. Much of our work is exactly this: reading what a department has published and telling a business, in plain terms, whether it changes anything for them.
We operate from five offices and serve clients across the rest of India remotely:
- Pune (HQ): RTC Silver, B4-708, Sai Satyam Park, Wagholi, Pune, Maharashtra 412207
- Mumbai: 104, Rajshila Building, 597 J.S.S. Road, Marine Lines, Mumbai 400002
- Delhi: 3rd Floor, B-6/154-155, Sector 5, Rohini, Delhi 110085
- Gurugram: Pioneer Urban Square, B109, Golf Course Ext Road, Sector 62, Gurugram 122098
- Ahmedabad: Phoenix Tower, 1107, near Commerce Six Road, Drive In Road, Navrangpura, Ahmedabad, Gujarat 380009
If anything on this page affects you and you would like somebody to look at your own position, we are glad to help. Call +91 94594 56700, write to sales@patronaccounting.com, or visit patronaccounting.com. The first conversation costs nothing.