SC verdict on property VAT will only increase builder-buyer litigations

The Supreme Court on Thursday upheld the Bombay High Court’s verdict that asked builders to pay 5 percent value added tax for sale of under construction projects between 2006 and 2010.

The verdict means builders will be liable to pay tax, which includes only the cost of construction and excludes the land value, amount paid to sub-contractor and service charges etc, unless the building was issued an occupancy certificate before the sale agreement.

The Supreme Court has also said VAT is not payable if a fully constructed flat is sold to the flat purchaser as it would not amount to a works contract.

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In other words, the ta liability isvalid only from date of agreement and on flats under construction.

This is a major setback for builders in Maharashtra who wanted 1% tax instead of 5% imposed by the state government in 2006 and has once again brought to shore the aam aadmi-builder tussle over who will actually bear this burden.

In the past too,many state builders were found exerting pressure on property buyers to pay the VAT, when the obligation rests on themselves. Moreover, builders would unjustly ask buyers to pay VAT on the total value of the house rather than just the construction cost.

Developers apex body CREDAI Chairman Lalit Kumar Jain said: " The judgment clearly lays down that an agreement entered into by a Developer/Builder with the purchaser is a composite contract involving a contact for work and labour and contract for sale and the same comes within the meaning of “works contract” and the provisions of Article 366(29-A)(b) are applicable. The Supreme Court has consequently dismissed the challenge to the Constitutional Validity of section 2(24) of the MVAT Act.

However, in paragraph 115 of the judgment, the Supreme Court has clarified that activity of construction undertaken by a developer would be deemed as works contract only from the stage the Developer enters into a contract with the flat purchaser."

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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 to decide who ultimately has to bear the tax burden . “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.” He also said that more often than not, builders have to explain the various rebate, discounts etc available to the buyer if he is liable to pay the tax. “Very few builders do that which means the builder himself has to pay the tax liability,” he added.

According to a Consumer group, Flat Owners’ Rights Protection Action Committee of Maharashtra (FORAM), VAT on sale of flats amounts to double taxation, as taxes are already paid for when buying material for construction. And even though the tax department has made it clear that the burden of the tax dues lies squarely on the realtors, they have argued that they have very clear provisions which state additional costs will have to be borne by the buyers.

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 such retrospective proposals will only lead to more litigation.”

“Thetaxes imposed by the government have always been passed on to the buyer. We will not pay from our pocket,” said Sunil Mantri, vice-president Naredco, CMD Mantri Realty, adding that the SC verdict is likely to lead to more litigation between builders and buyers.

Housing societies too hadurged the court to take a humanitarian view. “It is not the builders but the consumer who has to bear the burden of taxes. The best solution is to start an amnesty scheme to give relief to flat owners,” Ramesh Prabhu, chairman, Maharashtra Societies Welfare Association (MSWA) had said last year.

The sales tax department had in 2006 imposed 5 percent value added tax, which was challenged by builders in the Bombay HC.Following the dismissal of builders’ petition by the Bombay High Court, developers across Maharashtra had approached the Supreme Court.