Dispute Over Denial of Transitional Credit to Real Estate Developers by West Bengal State GST Authorities
West Bengal State GST Authorities are currently denying transitional credit to real estate developers, citing the Supreme Court judgment in M/s L&T & Anr vs State of Karnataka & Anr. (2014) 1 SCC 708. This judgment upheld a previous ruling in M/s K. Raheja Development vs. State of Karnataka, which determined that the element of a “works contract” in transactions between developers/promoters and prospective purchasers of flats, when agreements are made before construction is completed, was subject to Value Added Tax (VAT). It is alleged that although the assessees were liable to pay tax under the WBVAT Act, 2003 per the Supreme Court judgment, they did not register under the WBVAT Act, 2003 and, therefore, are not entitled to transitional credit.
In my opinion, the department’s demands can be contested on the following grounds:
A. Following the Supreme Court’s judgment in K. Raheja Development Corporation v. State of Karnataka, the Directorate of Commercial Taxes, Government of West Bengal, issued Circular No. 3/2006 dated May 3, 2006. This circular clarified that the principle of law enunciated by the Hon’ble Apex Court had become the final interpretation of the law and was binding on everyone.
B. However, Circular No. 5/2006, Memo No: 742/(225) CT/PRO., dated June 20, 2006, was issued in response to representations by certain trade bodies, which put Circular No. 3/2006 dated May 3, 2006, in abeyance. The rationale provided was that the sale of flats or other immovable properties by promoters or developers necessitates the payment of stamp duty.
C. Therefore, Circular No. 5/2006, Memo No: 742/(225) CT/PRO., dated June 20, 2006, effectively exempted the taxability of the sale of flats or other immovable properties by promoters or developers and exonerated them from the requirements of registration.
D. Section 140(3) of the WBGST Act entitles an assessee who was not liable to be registered under the WBVAT Act, 2003, to take transitional credit of the VAT on stock. It can be argued that a real estate developer is entitled to transitional credit for the VAT on stock as they were not liable to be registered under the WBVAT Act, 2003 in terms of Circular No. 5/2006, Memo No: 742/(225) CT/PRO., dated June 20, 2006.
E. In this context, it is relevant to refer to the judgment of the Hon’ble Supreme Court in JK Lakshmi Cement Pvt. Ltd. v. Commercial Tax Officer, (2016) 16 SCC 213, wherein it was held, in paragraph 31, that circulars issued under tax enactments can tone down the rigour of the law, as an authority wielding power for its own advantage has the right to forego that advantage when necessary.
Conclusion
Real estate developers in West Bengal are entitled to transitional VAT credit on their stock. While they were legally obligated to pay VAT, they were not required to register and pay it due to a state government circular that put the VAT payment obligation on hold until the GST law came into force.
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