September 2012
VAT on sale of under-construction
flats in Maharashtra
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Origin of VAT levy on
under-construction
properties
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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
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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
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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
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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
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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
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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
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Options to discharge
VAT liability
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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
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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.
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Way forward
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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
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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
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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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