Buyers will now pay tax on sale transactions under builder's VAT

With the Supreme Court upholding the State Governments' right to levy Value Added Tax (VAT) on real estate, buyers will now have to pay the tax on sale transactions.

In Maharashtra, the VAT subject dispute is for period between 2006-2010.

Explaining the legal position on the apex court's interim order on petitions from Maharashtra and Karnataka challenging levy of VAT on sale transaction, developers apex body CREDAI Chairman Mr Lalit Kumar Jain said, 'We at CREDAI fought for customers as the taxes are to be paid by customers under agreements.'

However, the Supreme Court has clarified that the state has right to levy VAT on such sale agreements and said it can be only on value addition of goods and can only be charged from the date of agreement.

Mr Jain, CMD of Mumbai-Pune developer Kumar Urban development Ltd (KUL) said,' the judgement 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 judgement, 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.

The apex Court has also clarified that the tax is chargeable by the state government only on the value addition made to the goods transferred after the agreement is entered into with the flat purchaser, he said.

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.

'The Supreme Court while upholding the validity of Rule 58(1-A) has held that taxing the sale of goods element in a works contract is permissible even after incorporation of goods, provided tax is directed to the value of goods at the time of their incorporation in the works even though the property in goods passes later,' Mr Jain said.

'This finding has to be read along with our submission recorded in paragraph 29 of the judgement. Thus, the element of profit cannot be included in the calculation of the value of goods for the purposes of imposing VAT.

The Supreme Court has directed the State Government to bring clarity into Rule 58(1-A) in terms of what is indicated here in above.

Addressing the reference made to it, the Supreme Court has held that the law laid down in the case of K Raheja's case is correct and has remanded developers' matter back to the Regular Bench for final disposal.

As CREDAI matter has not been disposed off by the judgement of the Supreme Court and the interim order passed in our matter will continue to operate till our matter is finally disposed off by the Regular Bench (two Judge bench) of the Supreme Court,' Mr Jain said. UNI