SC upholds VAT on sale of flats - Builders Will Have To Pay Tax

SC upholds VAT on sale of flats

Builders Will Have To Pay Tax

The Supreme Court on Thursday upheld the validity of the Valued Added Tax (VAT) on sale of flats imposed by the state government and dismissed a petition filed by developers challenging the state’s powers to levy the tax.

A bench headed by Justice R M Lodha upheld a 2012 Bombay HC judgment which had said the state was right in imposing VAT. “We do not find any error in the HC judgement. Moreover, the Maharashtra advocate general Darius Khambata has informed us this would not amount to double taxation,” the SC said. 

BUYERS BEING PRESSURED Flat buyers in buildings sans OC say builders demanding VAT component from them 
Builders are even demanding that those who bought flats under construction from 2006 to ’10 deposit the money with them or face penalty 
Builders have to pay 5% VAT on just the works contract. But some builders are trying to extract 5% on the total house agreement Experts say pay VAT only if sale deed mentions it 

The SC was hearing 26 appeals against VAT on sale of flats, of which 12 were from Maharashtra and the rest from Karnataka while upholding the states’ right to impose VAT. 
    The verdict means flats sold since July 1, 2006 will be liable for payment of the tax, unless the building was issued an Occupancy Certificate before the sale agreement. 
    Experts said builders can seek to recover the amount from flat buyers only if the sale agreement provides for collection of VAT from the purchaser, not otherwise. Else, builders are liable to pay. 
    The state had, in August 2012, issued a circular asking developers to pay 5% of the works contract value as VAT for flats under construction between June 20, 2006 and March 31, 2010. 
    The developers challenged the applicability of the tax through the Maharashtra Chamber of Housing Industry (MCHI), claiming that sale of immovable property was not a “works contract” and therefore could not attract VAT. They argued that VAT could be imposed only on sale of goods. 
    

They suffered their first defeat last year when an HC bench headed by Justice D Y Chandrachud upheld the state’s move and said sale of flats amounted to a works contract. He found “no merit” in the developers’ reasoning and said 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, under which the tax was introduced (see box), was not against the Constitution. The state had the right to frame a scheme and determine the cut-off date for bringing it into effect, the court said. 
    When the builders appealed in the Supreme Court, the apex court declined to stay the state’s circular but gave them time till October 31, 2012, to pay. 

What builders said about the composition scheme Builders had challenged the state’s ‘composition scheme’ on grounds of discrimination. The state hadsaid that developers of buildings under construction from 2006 to 2010 should pay VAT at 5% of the works contract, which includes cost of construction and excludes the land value, amount paid to sub-contractor, service charges etc. But for buildings under construction from April 2010, builders had the option of paying VAT of only 1% of the total agreement’s value as against 12.5% on cost of components used towards VAT.