VAT, A RIDDLE TO GENERATE MORE RIDDLES

“God Save the King / Buyers of Flats”  The State government’s decision to stick to its stand on the Value Added Tax (VAT) on residential properties in the State sold during the period between 20^th June 2006 to 31^st March 2010 will undoubtedly lead to multiple legal cases and cause  antagonism between the Builders and home buyers.

After the Bombay High Court declined to interfere with the State’s discretion to decide the Tax Rate on October 30 and the State declined to change the Tax Rate it had declared earlier and forced the Builders across the State had to pay VAT on October 31. However, though some couldn’t remit their entire dues before the deadline, the process of paying the VAT is on and the Sales Tax Authorities have been requested to condone the delay as their own system could not accept the rush of remittances which kept coming through the night of October 31, 2012.

Simultaneously, the Builders have started to recover the VAT which they paid on behalf of the Flat Buyers. It is feared that the assessment of the VAT returns, which the Builders have filed, and the recovery of the VAT from buyers are likely to lead to prolonged litigation. Rule 58 of the Sales Tax Rules recommends three methods to determine the base value of a flat for calculation of VAT but the Sales Tax Officers may demand the same based on the method that gives the highest amount. This will certainly be subject of appeals and Court Cases which will take years to reach a solution.

On the other hand, the buyers are apparently in no mood to pay anything as VAT dues compelling the Builders to resort to legal remedies such as Civil Suits for recovering the VAT. However, the Supreme Court has upheld the State’s approach to the issue and the flat buyers will have to ultimately cough up the dues.

The complexity of calculations necessary to arrive at the VAT amount for each flat shall cause periodical deadlocks as the State has over 10,000 Builders who have to file 26 quarterly returns to fulfil their obligation to pay VAT. This works out to 2,60,000 returns for the Sales Tax Officials to scrutinize. Also, as each flat is sold at different points of time and at different stages of construction, the base value for working out VAT will be different to arrive at for every flat.

It is pleaded with the Bombay high court that the State should be directed to modify the Rate of Tax to a flat 1% on the agreement value, which is being charged on transactions done on or after April 1, 2010. The Bombay High Court asked the State’s counsel if this was acceptable and when the State declined the suggestion, dismissed the Builders’ case.

Builders across Maharashtra who have paid VAT to the Sales Tax Department have warned the buyers to pay or face legal action. Buyers yet to pay have been issued reminder notices asking to pay the principal amount first failing which, the Builders will move legally against them as most Builders have reportedly paid the VAT before the deadline of 31^st October, 2012. Buyers on the other hand argue that they have spent all the savings to buy the flat and are ignoring calls from Builders to pay VAT.

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