Blow for buyers? Bombay HC dismisses plea against VAT levy

In a major setback to Mumbai-based developers, the Bombay High Court on Tuesday dismissed a bunch of petitions challenging the state government’s decision to charge builders a 5% value added tax on buildings that were under construction from June 20, 2006 to March 31, 2010.

The ruling came a day before the October 31 deadline to pay the tax.

Builders have been told to pay VAT to the state government by Wednesday for under-construction flats and not those that were ready with Occupation Certificates when they were sold, failing which their properties will be confiscated. A sales tax department official was quoted by the DNA as saying, “If we don’t receive VAT by the end of Wednesday, we will initiate action from November 1. We will then charge VAT, penalty and interest as well. If required, properties of those developers who haven’t paid will be confiscated.”

[caption id=“attachment_509016” align=“alignleft” width=“380”]  The ruling came a day before the October 31 deadline to pay the tax.[/caption]

This essentially means that builders will now have to pay the 5 percent VAT for houses sold during 2006-10, which includes only the cost of construction and excludes the land value, amount paid to sub-contractor, service charges, etc.

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Since the move would impact the cash flow for developers, a majority of whom are already dependent on investors to fund their business and are facing pressure on their books, there’s no doubt that buyers will ultimately bear the brunt of this. Clearly, the builders always use the buyers for their convenience while dealing with the government.

Buyers who purchased flats that were under construction from 2006 to 2010 are already seeing builders pass on the costs to them. _Firstpost_had earlier reported that the builders are taking an unfair advantage from the new government directive by charging the 5 percent VAT on total value of the flat, while builders need to pay the tax only on the cost of construction.

This helps them pocket a neat profit astotal agreement value of a flat cost will be definitely way higher than the cost of construction, which justincludes the cost of cement, grills, tiles, etc.

Many builders have already asked buyers to pay up VAT on the total value of the house. It is therefore essential for buyers who have bought flats between 2006 to 2010 to ask their developers about the VAT break-up so that they do not end up paying lakhs as VAT. Secondly, if the developer does not register the VAT amount collected from buyers with the sales tax department, the former will be penalised and the amount collected by him can be forfeited.

According to a Consumer group, Flat Owners’ Rights Protection Action Committee of Maharashtra (FORAM), this Value Added Tax on sale of flats amounts to double taxation, as taxes are already paid for when buying material for construction.

Even though the tax department has made it clear that the burden of the tax dues lies squarely on the realtors, the latter have argued that they have very clear provisions which state that additional costs will have to be borne by the buyers.

Reacting to the judgement, MCHI-Credai Secretary Boman Irani said that the tax burden is likely to be borne by buyers. “It would be an additional burden for buyers who anyway have to pay 11 per cent as their last mile to buy a house.”

MCHI - Credai had earlier filed a petition challenging the levy of VAT and computation of rate of taxation. Maharashtra’s sales tax department had sent out a circular in August demanding the VAT arrears - ranging between Rs 800 and Rs 1,000 crore - from the developers by Aug 31 but the deadline was extended by the Supreme Court to 31 October. The petition said that the government has ignored the fact that they constructed and sold flats under the Maharashtra Owners of Flats Act.

“The building is constructed at our cost and without buyers having control over any activities of purchasing land to getting development permissions. The sale, thus, does not constitute a works contract and, hence, VAT cannot be levied,” the petition said.

The developers also argued that they pay VAT for goods purchased during construction.

The Bombay High Court observed that it was not in a position to consider the extension of the deadline as it had been very clearly stipulated by the Supreme Court. However, it did provide some relief to the realtors; it stated that this ruling will not come in the way of realtors approaching the state government for addressing this matter.

Meanwhile, A PIL demanding that flat-owners should not be burdened with 5 percent VAT is pending before the high court.