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BUILDERS PLEA QUASHED ON VAT BY BOMBAY HIGH COURT

The Bombay High Court on 31st October, 2012 dismissed a bouquet of petitions challenging the State Government’s decision to charge Builders a 5% VAT on buildings that were under construction from June 20, 2006 to March 31, 2010. The ruling came a day before the October 31, 2012 which was deadline to pay the VAT.

The Judges ruled that there was no merit in the disputing the decision of the State and that a wide degree of latitude was enjoyed by the legislature in tax matters. The Court held that the composition scheme formulated by the State in two Circulars of August and September 2012 were not against the Constitution.

Builders had challenged the State’s decision on grounds that it discriminated between buildings built before and after 2010. As per the State’s formulated scheme, Builders of buildings under construction from 20th June, 2006 to 31st March, 2010 should pay VAT at 5% of the Works Contract which includes the Cost of Construction and excludes the Land Value, amount paid to Subcontractor, Service Charges, etc. But for buildings under construction from April 2010, builders have to pay VAT of only 1% of the entire Agreement Value.

Flats sold in buildings under construction from 20th June, 2006 to 31st March, 2010 will attract VAT of 5% of the Works Contract. Flats sold in buildings under construction from April 1, 2010 will attract VAT of 1% of the Agreement Value. Builders must pay VAT flats by today or pay annual 15% penalty. Builders have decided that they will pass on cost to buyers
and the Assessing officer would decide on Contract Type.

Buyers who purchased flats that were under construction from 20th June, 2006 to 31st March, 2010 are facing demand from Builders who have decided to pass on the costs to them. There have been reports of Builders demanding that flat Buyers deposit the money with them or face a penalty. While the Builders are supposed to pay VAT of 5% on just the Works Contract, experts say that flat buyers are being charged 5% on the entire Value of Agreement of the flat.

The VAT applies only to under construction buildings and not those that were ready with Occupation Certificates when flats were sold. On behalf of the Builders, the Maharashtra Chamber of Housing Industry (MCHI) and Confederation of Real Estate Developers Association of India (CREDAI) had taken the lead to the Bombay High Court. The Court further maintained that it was improper to assume that the State had applied the April 2010 date inadvertently. The Court ruled that the State had the right to frame a scheme and determine the cut-off date to bring it to the effect.

However, the Court held that the order would not restrict the State taking any decision to hear the pleas of Builders, who wanted the post-April 2010 scheme made applicable to buildings under construction from 20th June, 2006 to 31st March, 2010. The Court also held that, if the builder raised the issue, the Assessing Officer, Sales Tax, could decide on whether a particular type of Development Contract was not a Works Contract. VAT would not be applicable if it was not a Works Contract.

However, a point of debate here is that the Court held that every Agreement with a Builder need not be a works contract and that it is for the Assessing Officer of Sales Tax to verify each Agreement with Builders to determine if a particular Agreement is a Works Contract and VAT can be levied. It is a matter of skepticism whether VAT can be charged on such flats sales.

When a person signs the Sale Agreement, his intention is very clear and that is he is actually buying an immovable property and not cement and steel. Moreover, when the said Agreement is registered, the State Government Charges Stamp Duty at a higher rate (6%) considering the same as an immovable property.

Further, since the buyer is not hiring a Builder to construct a house for him, the Sale Agreement does not fulfill the criteria of a Works Contract. Hence, the State cannot assess the same Agreement on two different grounds and demand VAT and Stamp Duty. If VAT is levied, proportionate Stamp Duty should be refunded to the buyers. In a Work Contract, the buyer generally hires a Developer / Contractor to build a house based on his / her design and a requirement as he is the land owner.

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