Tax alert real_estate_vat_presentation

September 2012

VAT on sale of under-construction

flats in Maharashtra

download From :www.simpletaxindia.net

http://www.simpletaxindia.net/2012/04/tds-rate-chart-fy-2012-13-tcs-rates.html

Origin of VAT levy on

under-construction

properties



Page 3

The origin of VAT levy

► In 1983 Constitution of India was amended permitting the State

governments to levy of tax on goods being transferred while executing

services

► The above amendment enabled the State governments to levy tax on

works contract such as construction contracts



Page 4

Judicial Precedents

► Landmark judgement delivered by the Supreme Court in the case of K

Raheja Development Corporation vs. State of Karnataka [(2005) 141

STC 298 (S.C.)] upheld levy of VAT on under-construction property

► Builder carried on the business of real estate development and allied

contracts and specifically entered into development agreements with

the owners of the lands.

► On completion of the construction, the residential apartment would be

handed over to the purchasers, who would get an undivided interest

in the land also



Page 5

Judicial Precedents (contd…)

► The owner of the land would transfer the ownership of the land

directly to a society which was being formed under the Karnataka

Ownership Flats Act,1974

► Question was whether the appellant was a dealer and liable to pay

turnover tax under the Karnataka Sales Tax Act,1957 as ‘works

contracts’ in relation to the contracts with the purchasers

► The Supreme Court held that works contract is an ‘inclusive’ definition

and the Developers build the flat on behalf of prospective purchasers.

However, to the extent of flats sold after the construction, the same

would not tantamount to works contract



Page 6

Changes in VAT legislation in Maharashtra

► Taking cue from the judgment of the Supreme Court, the Government

of Maharashtra, amended the definition of ‘sale’ as per section 2(24)

of the Maharashtra Value Added Tax Act, 2002 by Ordinance No. VI

of 2006 dated 20th June,2006 and introduced a scheme of 5% tax on

construction contracts

► Separately, Maharashtra Government introduced 1% composition

scheme for agreements registered from 1 April 2010 onwards

► However, the transaction structure in K Raheja case is distinguishable

from the arrangement typically executed in Maharashtra, where

generally the intention is to sell an immoveable property (flat) and not

of transferring undivided interest in land and thereafter undertaking

construction on behalf of a prospective buyer



Page 7

Industry reaction and litigation status

► Maharashtra Chamber of Housing Society (MCHI) filed a writ petition

challenging the amendment made in the definition of ‘sale’ in Bombay

High Court

► Bombay High court stayed the payment of VAT after filing of the

petition by MCHI on December 7th, 2007

► On 10th April 2012, Bombay High court dismissed the writ petition

filed by MCHI on the grounds that the amendments in VAT law did not

infringe the relevant provisions stated in article 246 of the constitution

of India

► Trade circular issued by Commissioner of Sales Tax on 6 August

2012, to pay VAT for period from 2006 to 2010 by 31st August 2012



Page 8

Industry reaction and litigation status (contd…)

► MCHI filed special leave petition to Supreme court against the

decision of Bombay high court

► Supreme court has granted interim relief to the real estate developers

in Maharashtra on 28 August 2012 by staying the operation of a

circular and extended the timeline for the payment of VAT by real

estate developers up to October 31st without any interest and penalty

► The constitutional validity of the amendment in VAT legislation would

be decided by the Supreme Court in due course



Options to discharge

VAT liability



Page 10

Options to discharge VAT for the period from 20 June 2006 to 31 March 2010

Particulars Composition

Scheme

Presumptive

deduction

Specific deduction

Applicability Unable to identify the

actual value of

material and services

transferred

Not maintaining

separate books of

account

Goods and service

portion are

separately

identifiable

VAT liability

5% of the total value

of works contract

VAT payable at

schedule rate on 70%

of the total value of

works contract

VAT is payable at

schedule rate after

taking the deduction

of specified service

portion involved

Deduction from

contract value

Subcontract value paid

to registered

subcontractors

► Subcontract value

on which tax is paid

by subcontractors

► Cost of land*

► Specified services

► Cost of land



Page 11

Options to discharge VAT (Cont....)

Particulars Composition

Scheme

Presumptive

deduction

Specific

deduction

Restriction on set off of

VAT paid on purchases

Set off will be

available @ tax paid

% minus 4% (No

reduction on capital

goods)

No reduction of

set off otherwise

eligible

No reduction of

set off otherwise

eligible

Cost of land to be determined based on the provisions of Bombay Stamp

Rules, 1995 for the year in which the agreement to sell the property is

registered.

From 1 April 2010, composition scheme of 1% is specified for

agreements registered after 1 April, 2010.



Way forward



Page 13

Way Forward

► Option to minimize VAT liability

► For sale between 20 June 2006 to 31 March 2010

► Where labour and other deductions are more than 30% of agreement value

Specific deduction method would be a better option compared to a option of

Presumptive deduction

► Generally Composition scheme of 5% may not be beneficial as it does not

allow deduction of value of land.

► For agreements registered on or after 1st April 2010

► Amongst four alternatives, composition scheme of 1% may be a better

option for discharging VAT liability for eligible transactions



Page 14

Way forward (contd…)

► Payment of VAT by

► Builder/Developer

► Primary responsibility to pay VAT is on the Builder/Developer

► To ensure necessary compliance as directed by the Supreme Court and the

law

► As the position of taxability has not attained finality and is pending before the

Supreme Court, developers should pay VAT ‘under protest’

► Flat owners

► Depending on the commercial terms agreed with the builder, Flat owner may

make payment to developer after verifying his VAT registration certificate.

► In order to ensure the developer makes onward payment to the government,

one may consider informing the Sales Tax department about such payment to

the developer by marking a copy of the letter written to the developer

► Insist on a invoice or receipt for the VAT payment

► Stake your claim to seek refund if the Supreme Court decides favourably

► Take appropriate actions after Supreme court verdict



Page 15

Disclaimer

This document covers comments on applicability of VAT in the State of Maharashtra in connection with

sale of flats. Any reference to VAT in this document should be read in this context.

This document is intended for a generic use of clients and is not intended to be used as a professional

advice on the subject matter. Users of this document are advised to seek professional advice before

taking or refraining from taking any decision on the subject matter.



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Tax alert real_estate_vat_presentation