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Underconstruction Flats: SC Upholds VAT Levy!

Published on Sat, Sep 28,2013 | 16:12, Updated at Mon, Sep 30 at 08:19Source : 

By: Mahesh Jaising, Partner, & Prashanth Bhat, Director, BMR Advisors

A 3 member bench of the Supreme Court ("SC") has upheld the powers of the State Governments to levy VAT on sale of flats under construction.  The SC has held that irrespective of the mode of contracting, the agreement between the Promoter/ Developer and the apartment purchaser involves the activity of construction as it is only when the flat is constructed that it can be conveyed.  The Developers in this case had taken an argument that such agreements are not for construction but for sale of apartments as immovable property on a future date.

This landmark judgment has laid down a clear position of applicability of VAT on sale of flats by Developers to buyers before completion of construction.  Conversely, the position that no VAT is payable if flats are sold after construction is complete has also been upheld.

The effect of this judgment will be far reaching, in as much as every State Government will now seek to aggressively pursue Developers who have not been paying VAT on sale of flats at the construction stage.  Most of the States may not even have to make any retrospective amendments to levy VAT on such transactions as the definition of the term “works contract” across the State Legislations include any agreement for carrying out for cash, deferred payment or other valuable consideration, the building / construction of any immovable property. 

Geographically speaking, while most of the Developers in the Southern States have been paying VAT on sale of flats under construction and may not be impacted much, the impact will be most in the North and Eastern States (Rajasthan, Delhi, West Bengal, etc), where the Developers were still taking a “no VAT” position.  Developers in Maharashtra are likely to be impacted for the period prior to April 2010, as most of them were not paying tax until then and only started paying VAT under the 1% composition scheme since April 2010. 

The Supreme Court has however held that only value of goods transferred after the agreement is entered into with the flat purchaser can be liable to VAT.  Hence, in States where buyers had paid VAT on the entire value of the apartment in the past, irrespective of the stage of booking, it needs to be examined whether refund can be claimed of VAT paid on value of goods which were already used for construction at the time of entering into the agreement.

It has to be seen if some of these States come out with a scheme for voluntary compliance and payment of arrears (without penalty) as a facilitation measure.

Needless to say, being an indirect tax, the VAT payable may be passed on to the buyers resulting in a net increase ranging between 2% to 6% in the net price payable for flats under construction, depending on the applicable rate of State VAT and stage at which buyer enters into an agreement to buy an apartment.


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