The classification of service apartments under the Goods and Services Tax (GST) regime has been a matter of frequent dispute, particularly regarding whether such constructions should be treated as residential or commercial buildings. The distinction holds significant tax implications, as GST rates differ based on the classification of the project.
In a recent and noteworthy decision, the West Bengal Authority for Advance Ruling (AAR) examined this issue in the case of M/s Eden Realty Ventures Pvt. Ltd., ruling that the construction of service apartments constitutes the construction of a commercial building for GST purposes. The AAR clarified that the intended use and commercial character of the property take precedence over how municipal or local authorities classify the project.
This ruling provides crucial clarity for real estate developers, investors, and tax professionals on how service apartment projects are to be treated under GST law.
Case Title:
Applicant: M/s Eden Realty Ventures Pvt. Ltd.
Authority: West Bengal Authority for Advance Ruling (AAR)
Order No.: 19/WBAAR/2025-26
Date of Order: September 2025
Background of the Case:
The applicant, M/s Eden Realty Ventures Pvt. Ltd., was engaged in the construction of a service apartment project consisting of multiple furnished units to be provided on a long-term or short-term rental basis.
The applicant sought a ruling on whether the construction of such a building would qualify as “residential” or “commercial” for the purpose of applicability of Goods and Services Tax (GST) and the relevant rate of tax.
The applicant contended that since service apartments are similar in design and structure to residential units, the project should be treated as a residential building, and hence eligible for a lower GST rate applicable to residential construction.
Issue for Consideration:
Whether the construction of a service apartment building is to be treated as:
- “Construction of residential building”, or
- “Construction of commercial building” under GST law.
Applicant’s Argument:
- The service apartments were designed with all features typical of residential flats, such as kitchens, living spaces, and attached bathrooms.
- The building plans were approved by the municipal authorities under the residential category.
- Hence, the construction should be covered under residential construction services eligible for concessional GST rate.
Findings of the AAR:
- The purpose and usage of the building determine its classification under GST, not merely the architectural features or approval category.
- Service apartments are constructed for commercial exploitation — rented out or leased to customers for short-term or long-term stays, often with additional facilities like housekeeping and room service.
- Such activities constitute business or commercial use, similar to hotels or guest houses.
- Therefore, even if a municipal authority treats the project as “residential,” its inherent commercial character makes it a commercial construction under GST law.
Ruling of the AAR:
The construction of a service apartment building shall be treated as the construction of a commercial building, and accordingly:
- GST is applicable at the rate prescribed for commercial construction services, not the concessional residential rate.
- The classification made by municipal or development authorities does not alter the commercial nature of the property under GST.
Key Takeaway:
The nature of use—not the structural design or municipal classification—is the decisive factor for determining the GST treatment of construction projects.
Thus, service apartments, being intended for commercial rental or hospitality use, are liable to be taxed as commercial buildings under GST law.
Significance of the Ruling:
- Clarifies GST treatment for developers and builders engaged in constructing service apartments.
- Ensures consistency between intended use and tax classification, avoiding misuse of residential rate concessions.
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Reinforces that functional use and commercial intent prevail over local authority labeling in determining GST liability.