Property VAT: Aam admi caught in the midst of builder-govt tussle

Buyers who bought under-construction flatsbetween 20 June 2006, and 31 March 2010 in Maharashtra are now being forced to shell out additional cash as developers attempt to pass on the burden of Value Added Tax which they will have to pay with retrospective effect.

The Sales Tax Department has served notices on builders and developers to pay VAT from June 2006 to March 2010 after the Bombay High court shot down real estate developers’ appeal against the tax.

Builders, in turn, have issued notices to flat buyers, asking them to pay the tax amount even though the department has clearly stated that the onus to pay the tax liability is on the developer and not the property buyer.

More from Economy

Inflation likely to be a big focus area for budget 2024, say sources Explained: Will the Bank of Japan break tradition and raise interest rates?

Flat owners pay the price

The government decision, which may hit property owners and the realty industry hard, will help mop up Rs 800 crore. But the burden would be passed on to the consumers who will be required to shell out five percent of the value of the property bought during that period.

[caption id=“attachment_432211” align=“alignleft” width=“380”]  Flat owners are furious, lamenting that they were not informed by the builders that they were required to pay VAT when they purchased their properties between 2006 and 2008. Reuters[/caption]

Even though the fight is between the government and the developers, it is the end user who is suffering as the developers are creating a perception that the buyer has to pay the tax by saying it will add burden. The builders association in Maharashtra, Credai, has claimed that each flat buyer in Maharashtra would have to pay up-to five percent additional tax.

For instance, a buyer who paid Rs1 crore for a flat or shop or bungalow anywhere in the state will be liable to shell out Rs 500,000.

Flat owners are furious, lamenting that they were not informed by the builders that they were required to pay VAT when they purchased their properties between 2006 and 2008. Rahil Biliker, who bought his flat in 2006 in Pune has already received a call from his builder to pay Rs 8.5 lakh as interest and liability. At the time of purchase, the developer did not inform him that he is liable to pay VAT if he purchased the flat post-2006.

“In India realty is not organised. Neither is it regulated by any constitutional body. Every state comes out with different rule position for a specific period and its not transparent. The clauses are so confusing thereby enabling the builders to fleece innocent customers,” complains another Juhu-based flat owner, who bought three properties in Khar-Danda district between 2006 and 2009.

According to Dilip Shah, Senior Counselor and Analyst for Redevelopment of Housing Societies, the terms of agreement between the flat owner and the builder plays a key role. " If the developer has clearly stated in the agreement that any future tax implemented by the government has to be paid by the buyer, the flat owner is liable to this entire tax. However, if the agreement does not contain the clause, the onus is solely on the builder."

The builder cartel strangle-hold

To pass on the burden to end owners underlines the strong builder cartel in the state, which is more than evident from the astronomical property prices they charge by artificially inflating the rates despite more than 35,000 ready flats lying vacant in Mumbai.

“On the scrutiny of the books of accounts of certain developers after the passing of the judgment of the Bombay High Court, it is learnt that many developers have collected taxes from their customers but have failed to discharge their tax liability by depositing the collected tax into the Government Treasury,” the sales department said in a statement.

This comes despite the builders knowing about this tax and even after they took money from flat buyers for the same, but used the proceeds for investing, Maharashtra Finance minister and deputy chief minister Ajit Pawar had said on Sunday.

“The additional VAT will finally have to be borne by the customers. I strongly advocate the government takes a second look at this ruling and take a decision which is equitable and fair to home buyers,” said Kishor Pate, CMD - Amit Enterprises Housing Ltd & Hon. Secretary, Credai in a statement today.

Another real estate analyst, who did not want to be named, said if buyers refuse to bear this additional burden, developers will once again use their muscle power and harass buyers till they pay up. “A letter to the owner is just the beginning,” he said. He added that any such ruling which is retrospective in nature has terrible consequences not only for the industry, but especially for the end users. “This is why the government should always implement forward-looking policies rather than taxing retrospective cases to fill up its coffers,” he said.

The fineprint fight

Some builders have warned that although VAT is 5%, the effective tax works out to be 7% to 8% as it includes annual interest and penalty charges.

However, according to the department of sales tax for Government of Maharashtra website, builders’ tax liability will be adjusted against the installments paid by them so far. Although builders claim the VAT is 5 percent of the value of a flat, the sales tax department said it will work out to less than 3 percent as it has offered deductions under several heads like labour and land costs to developers. But the developers are also required to pay interest for late payment of taxes.

However, a report in the Economic Times, quoting Maharashtra’s finance minister Ajit Pawar, has said VAT will be charged only on the cost of building material and not on the cost incurred on labour, engineering, architecture and construction services. It added that the government will also provide a waiver on 15 percent interest as penalty on value-added tax (VAT) levied on property transactions between 2006 and 2010.

Before 2006, no VAT was levied on property sale. The state introduced it in 2006 after the Supreme Court passed an order in 2005, putting developers and contractors in the same bracket.

What next

Since the builder’s body has moved the SC, it is not mandatory for builders to pay the VAT till the court passes its judgement.

Challenging the constitutional validity of the government’s move to term developers as contractors and levy vat, the Maharashtra Chamber of Housing Industry (MCHI)-Confederation of Real Estate Developer’s Association of India CREDAI has gone in for a fresh round of court battle and moved the apex court. The Supreme Court will hear the case on 28 August. Credai wants the VAT to be scrapped, or at least the state to introduce an amnesty scheme which will reduce the tax load.

Says, Anirudh Wahal, Director at property consulting firm DTZ, “In real estate, like any other products all taxes are costs to seller’s business and eventually will be borne by the consumer. If the builder has not already charged the customer for VAT, he can do so now but he shouldn’t double charge him either, as that would be unfair.”

Wahal, rightly pointed out that the ruling will result in some degree of litigation.

In an attempt to fight this injustice, a consumer group called FORAM - Flat Owners’ Rights protection Action committee in Maharashtra - has been formed with consumer interest groups coming together to mobilise public opinion against the VAT on flats sold between 2006 and 2010.

Atul Puranik, convener of the new platform, told Firstpost that they have currently organised various consumer forums across Maharashtra to ensure that buyers are not forced to make any payments before the Supreme Court verdict. " We are spreading awareness among masses and also aim to get political support for our movement," he said.