FREQUENTLY ASKED QUESTIONS [FAQs] ON TAXATION OF DEVELOPERS
1. Admitting while not accepting that the State of Maharashtra can levy tax on such a transaction, will our members get the credit of input tax paid while effecting purchases of materials like cement, iron 86 steel etc. required to be used in the Construction project. The members would pay the tax under the MVAT Act as the applicable rate of 4% or 12.5% depending on the material required to be used?
Ans: Yes, they will get input tax credit, if they paid the taxes u/r 58 or u/s 42 (3).
2. In our life of industry, the practice is that an Agreement to Sell is prepared much in advance at the time when a prospective buyer book the accommodation in a building under construction and the developer concerned undertake to give possession of the accommodation so booked after obtaining completion certificate with the promised Position, we would like to know as to at what point of time the VAT under the amended law would be payable?
Ans: Taxability arises on agreement. Tax is levied as and when the installments become due and payable or are received, whichever is earlier.
3.Whether the levy of VAT on agreement for under construction flats/ shops etc. is covered with in the amended definition of Works Contract? Is there any scope for escaping this levy?
Ans: Yes. It is covered. No Scope for escapement.
4.What is the rate of tax under VAT Act applicable for agreement to sell under construction flats?Ans: Tax rates would be those which apply to the goods in which property is transferred.
5. What is the effective date from which the VAT will be applicable? –
Ans: The date of amendment i.e. 20 June, 2006.
6.The agreement to sell the flat was executed before 20.06.2006 and the building was under construction and possession is given after 20.06.2006. Whether the VAT will apply in Such case because the agreements were executed prior to 20.06.2006? If yes how the sale value will be determined for calculation of VAT? Whether the amount received prior to 20.06.2006 will be exempt from VAT? .
Ans: Yes. VAT will apply. It will be levied on value received or receivable after 20th June, 2006.
7. Many times mere advances are received and agreement is executed much later. What will be the point of liability whether at the time of receiving the advances or at the time of execution of the agreement or thereafter on possession?
Ans: Tax will be levied from the date of the agreement. The amount of advance, as and when it is adjusted towards the agreement amount, will be taxed.
8.The builders receive non-refundable deposits and other charges under the agreement such as electricity deposit, water charges, legal charges, development charges etc. Whether such receipts will also form part of sale price for VAT?
Ans: The amounts which are received as deposits will be a deduction to the extent such amounts are actually paid to other authorities.
9. In the under construction flats the amounts are received in installments. How the sale price will be determined? Whether the actual receipts will be taken as sales or the whole of the agreement value will be taken as sale at the time of execution of the agreement, even though the amount is yet to be received?
Ans: Received or receivable. Receivable means due and payable.
10.Can the VAT applicable in above cases be collected by raising a debit note or the same should be mentioned in the agreement itself? Whether VAT should be collected on each installment or at one go upon execution of the agreement?
Ans: Yes. It can be collected by raising a debit note. Specific mention in the agreement is a choice of the contracting parties. It should be collected as and when the instalment becomes due.
11.What will be the amount of set off available in such cases i.e. full set off of VAT paid on purchases or part of that?
Ans: Purchases made on or after 20th June, 2006, will be eligible for set off subject to rules.
12. Whether any interest or penalty will be attracted for non registration with sales tax authorities under VAT and no submission of VAT returns for the transactions executed for sale of flats/ shops under construction between intervening period i.e. 20.06.2006 to 07.02.2007?
13.What will be VAT the implications where mere advances are received from buyers and agreement for sale is not executed with the buyer?
Ans: There is no tax liability.
14. If composition scheme is not opted then what is the rate of tax and how the sales price will be determined? What are the deductions permissible like labour charges, profit margin etc. In such cases how the set off will be worked out?
Ans: As per rule 58. Set off is related to purchases and not sales.
15. A Builder may construct more than one project, in such case, whether different calculation method for different project can be applied?
Ans: Yes, he may adopt different method for each project, but he is not allowed to change the method till the completion of that project.
16. What are the various options available to the developers for disclosing tax liability?
Ans: Developers can discharge their tax liability by any of the following option:-
From 20.06.2006 to 31.03.2010
1. Composition Scheme U/s 42 (3)- Under this scheme developer has to pay 5% tax on the agreement value. Land deduction is not available. Input tax credit is available subject to the reduction of 4 per cent.
2. Actual Expense Method U/r 58- Under rule 58, the deduction of Labour 86 service charges is available on actual basis. Land deduction is also available. Set-off will be calculated subject to the condition u/r 53 and 54.
3. Standard Deduction Method U/r 58- Under rule 58, the deduction of land cost will be allowed. Thereafter 30% standard deduction from remaining amount will be available as per proviso to sub-rule 1. Set-off will be calculated subject to the condition u/r 53 and 54.
The developers can opt for fourth option also, under this option u/s 42 (3A), developer has to pay 1% tax on agreement value. No land deduction and input tax credit is available.
Needless to mention that, the developers will be required to make the payment of interest according to the provisions of law.