Haryana Government vide Notification No. No 19/ST-1/ H.A. 6/2003/S.59A/2016 dated 12th September, 2016 launched much awaited Amensty Scheme for Developers- Haryana Alternative Tax Compliance Scheme for Contractors, 2016 (hereinafter referred to as ‘Amnesty Scheme’). The potentially trade smoothening scheme provides Developers/Builders with an option to discharge their Value Added Tax (VAT) obligation at flat rate of 1.05% (VAT + Sur-charge) of the entire aggregate amount received/receivable for the business carried out during the year for the period prior to 31.03.2014. What constitutes ‘aggregate amount’ is a Pandora box in itself which we shall discuss in this article later on.

At the outset it is a step in positive direction by the state government to smoothen the open matters.

Note that, The Haryana Government introduced the Composition Scheme for developers in August 2014. Before the issuance for final Notification, a draft notification (Notification No. Web 6/H.A.6/2003/S.60/2014 dated 05/07/014) was issued and the draft copy of Composition Scheme was put in public domain for suggestions from industry and other stakeholders. Incidentally, this time around no such initiation like this has been taken before issuing the, what can be construed as most important scheme in recent years for developers, Amnesty Scheme.

Further, No deduction of any kind has been provided for by the scheme except the tax already paid by the developer for that Assessment Year. Builders are not allowed deduction towards tax already paid by sub-contractors. No benefit of Input Tax Credit is available.

Some highlights of the scheme are:

  • Flat Rate of 1.05% pay-off of VAT liability of aggregate amount received / receivable
  • No interest, penalty or charges, if scheme is opted for
  • Benefit of amount already paid as VAT, Interest or Penalty
  • Excess amount paid can only be adjusted in subsequent years. Note that the term is ‘subsequent years’ hence cannot be used for the previous periods.
  • Scheme is to be opted within 90 Days from 12/09/2016 by filing online Form TC-1
  • Scheme also available to contractors who have opted for Composition Scheme under Rule 49 of the HVAT Rules, 2003.
  • Scheme can be opted irrespective of the fact that assessments are pending or have attained finality or assessment orders are pending before any authority under the Act or any court of law.
  • Scheme if opted for any assessment year will result in automatically deemed to be opted for that year as well as for period upto 31st March, 2014
  • Each Financial Year treated as different assessment year – Note that no block assessment is allowed despite nature of industry being in the nature of projects and running blocks
  • Scheme is available to all builders, whether registered under Haryana VAT or not

While this long-awaited scheme is a welcome step for the builders and was market’s hope on providing some clarity on this jargon of taxability of Haryana VAT on Builders / Contractors, the scheme is still silent on number of issues which will constitute our later discussion. Let’s take a look at the questions that are still unanswered after implementation of this scheme.

A) Initial Year of the Scheme not prescribed

This scheme, if opted for, for any particular year will deemed to have been opted for period upto 31st March, 2014. That means if a builder opts for Amnesty Scheme for Financial Year 2010-11 then he shall have to pay tax under this scheme only upto Financial Year 2013-14. Ending period of this scheme has been mentioned therein but the initial year from which this scheme can be opted for has not been provided for. This creates an ambiguity as to from what period can builders pay off their liability at this lump sum rate.

B) Recovery of Tax from Flat Buyers – Allowed or Not?

The scheme fails to answer the question that comes first to every builder’s mind – Can this tax be recovered from Buyers?

The period covered by this scheme is long over and most of the projects have been completed and handed over to their respective buyers. The scheme is completely silent on whether burden of tax can be passed on to the buyers or not. If collection is not allowed, then the tax liability shall burn a hole in builder’s pocket in a market that is already in a slump over the last few years.

In our view, since there is no specific debar to collection of taxes (as in case of Rule 49A) the developer may collect taxes subject to terms of Apartment Buyer Agreement or Agreement to sell between Developer and Buyer.

C) Effective Rate of Tax – 1.05% or 1.00%?

The scheme provides for a tax rate of One Percent (1%) and surcharge of Five Percent (5%). Effective of tax comes at 1.05%.

The Hon’ble Punjab & Haryana High Court in case of M/s Mahashiv Promoters Pvt Ltd v. The State of Haryana and another (2016-VIL-519- P&H) vide order dated 08.09.2016 has held that levy of additional tax under Section 7A of Haryana Value Added Tax Act, 2003 shall not be leviable on lump sum paying dealers of Haryana. Surcharge under the Haryana VAT Act is governed by Section 7A for levy of additional tax on taxable turnover. Hence, in case the tax is levied on amount other than ‘taxable turnover’ the applicability of Surcharge under Section 7A cannot be sustained. Court further held that in the case of lump sum dealers there is no determination of taxable turnover for example in case of works contractors the amount of lump sum tax is calculated on the total valuable consideration receivable for the execution of the contract on the transfer of property. Thus, the Court held that in case of lump sum dealer including works contractors one of the important components on taxation for the levy of additional tax under Section 7A being missing namely taxable turnover, the levy of additional tax thereon cannot be sustained.

Present Amnesty Scheme is governed by Section 59A of the HVAT Act. Liability under the scheme is to be paid on ‘aggregate amount, received/receivable’ and not on the ‘taxable turnover’ of the developer. Hence, in light of this recent judgment applicability of surcharge under this scheme again might face litigation. For the time being the rate remains to be 1.05% already.

D) Buyers who have deposited actual VAT to Developers would be hurt

Without prejudice to above point, the effective rate of tax under the scheme is 1.05% (1% lump sum rate + 5% Sur-Charge). As per the Scheme, In case the contractor has charged and collected VAT from the buyers and the said amount exceeds the amount to be paid under this scheme, then the contractor shall deposit the amount so charged and collected as VAT with the department.

Case I:-  For eg ABC builders have charged VAT @ 4.2% from their buyers during the period 2010-11 to 2013-14. If they opt for this scheme under Rule 49 then they shall have to deposit full 5.25% VAT under the scheme and not the prescribed rate of 1.05%. No refund or carried forward is allowed in this case.

The above example is the practical and real scenario for developers / builders who have opted for Composition Scheme under Rule 49 of the Act. Developers opted for the scheme u/r 49 of the HVAT Act and collected & deposited the same with the department the amount of tax @ 4.2% on the total valuable consideration receivable for the execution of the contract. The builders paid VAT on base amount inclusive of Land component also.

If they opt for this scheme now, the builders will have no benefit of this scheme as they shall not get refund or any benefit of additional tax already paid.

The long awaited scheme is not an optable option for the builders / developers registered under Rule 49 who have charged and collected VAT from Buyers. Moreover the Buyers would be compromised in this case.

Case II:- Due to the ambiguity surrounding the modus of VAT applicability on Real Estate, the builders, as a general practice, started taking deposits as security against VAT. The idea was to indemnify themselves against the unknown liability on account of VAT. Now, when these builders will opt for this scheme they shall be able to pay off their liability using that deposit for any year. For eg. XYZ Builders did not charge VAT from their customers but instead they asked for deposits @ 5.25% from their customers and developer obtained lien on such deposits. XYZ Builders have now opted for Amnesty Scheme from Financial Year 2010-11. Hence, they shall be able to pay their liability for 4 Years (2010-11 to 2013-14) using this deposit and be able to refund back the 1.05% excess charged to their customers.

Now, these two cases mentioned above are two different scenarios of same situation. In Case I, the builder has obeyed the law, charged VAT at rate interpreted best by him and deposited the same. In Case II, the builder has just indemnified himself and not collected VAT. In such case, in our view, the differential amount shall be refundable by Developer to Buyer, since it cannot be deemed to collection.

E) Vague wording of modus of calculation of VAT – Double Taxation Implication

A para from the Scheme is reproduced below:

“A contractor opting under this Scheme shall pay year wise, in lieu of tax, interest or penalty arising from his business, by way of one time settlement, a lump sum amount at the rate of one percent of the entire aggregate amount, received/receivable for the business carried out during the year, without deduction of any kind. Further, a surcharge at the rate of five percent shall be charged on the amount so payable:”

Lump Sum rate of tax is 1.05% of the aggregate amount. ‘Aggregate Amount’ has been defined under the scheme as:

“revenue recognized as per audited financial statements of the relevant financial year or valuable consideration, whichever is higher, in relation to business”

The definition uses two different terms:

a. Revenue recognized as per the audited financial statements of the relevant financial year:

Revenue in the books of a developer is recognized in pursuance to the Accounting Standard – 7 (“AS-7”) issued by the Institute of Chartered Accountants of India (“ICAI”). The revenue is recognized on percentage unit completion method i.e. no revenue is recognized upto 25% of work & cost completion. Revenue of 25% is recognized when more than 25% of the cost is incurred. The recognition of revenue is dependent on cost incurrence and work completion. There is no direct dependence on actual consideration received or receivable. Further, Revenue recognized under AS-7 is not on state-to-state basis but is computed as a whole and reflected in Financial Statements.

b. Valuable Consideration:

The term ‘valuable consideration’ is not defined and is open to interpretations. Whether it excludes EDC/IDC etc. also remain open.   

An analysis of these definitions gives a view that, builder shall have to pay tax on Revenue as per the AS-7 (issued by ICAI) or consideration received / receivable (Demand / Receipts during the year), whichever is higher, for each Financial Year for which this scheme is opted for. Developer shall have to do this exercise of comparing revenue (AS – 7 vis-à-vis Demand / Receipt) on year-on-year basis and calculate his liability, on higher amount, under the Scheme.

Also, Revenue as per AS-7 is not recognized from each state but rather as a whole. If a builder has project in Haryana, Delhi, UP & Maharashtra, then the revenue recognized in the books of accounts and financial statements shall be combined revenue of all the states and not on state-to-state basis. The scheme does not provide for any modus on how to bifurcate and calculate revenue specifically for the state of Haryana for computation of tax liability. This Provision might require CA Certificate and will make the whole computation open to interpretation and litigation.

In a practical situation, the developers receive receipts in early days of the project and no revenue is recognized during this period. As the project goes on and develops, the advances start to reduce and due to increase in incurrence of cost the revenue is recognized as per AS – 7. This situation creates a loss-loss situation for builders as they have to pay tax on higher of AS – 7 and Amount received / receivable.

This issue can be best interpreted with an example. The example and chart below is reproduced in support.

ABC started a project in 2010-11 with estimated revenue of Rs. 600 Crs. This is how the revenue stream shall work:

Modus 2010-11 2011-12 2012-13 2013-14 TOTAL
AS-7 0 250 200 150 600
Consideration received / receivable 250 150 100 100 600
Higher of the above 250 250 200 150 850 (Double Taxation)
VAT under Amnesty 250*1.05%

= 2.625

250*1.05%

= 2.625

200*1.05%

= 2.1

150*1.05%

= 1.575

8.925

At a total project revenue of Rs. 600 Cr. the builder will have to pay tax on Rs. 850 Cr. (250 + 250 + 200 + 150), resulting in additional tax payment of Rs. 2.625 Crores. The definition of the term ‘aggregate amount’ shall have a significant impact on the industry. As the scheme does not allow for block assessment but different assessment for different years the builders will become liable to double taxation. This anomaly shall make it difficult for builders to collect VAT from Buyers with reasonable explanation.

The Sales Tax Authorities have had trouble defining the base revenue on which tax is to be computed. The Haryana Government vide Notification No. S.O.88/H.A. 6/2003/S. 60/2014 dated 12/08/2014 came up with a composition scheme for Builders / Developers with effect from 1st April, 2014 under Rule 49A of the HVAT Act. Pursuant to this composition scheme tax shall be payable @ 1% of entire aggregate amount specified in the agreement or value specified for the purpose of Stamp Duty, whichever is higher. Here the base revenue for calculating tax is the amount specified in agreement (Consideration receivable) or value for the purpose of Stamp Duty.

As the base revenue had already been defined in the Composition Scheme, in our view, there was no fresh requirement for government to come up with a different definition. This deviation causes a rift between two schemes of somewhat same nature and creates difficulty for builders for computation of VAT, since the projects are in running nature even as on 31.03.2014.

Eg. ABC Builders have opted for Composition Scheme under Rule 49A with effect from 01/04/2014. They now also opt for the Amnesty Scheme from FY 2010-11. Now the builders will have to compute taxes on different basis for different time period:

A. For 2010-11to 2013-14:- Tax to be paid on Revenue as per AS-7 or Valuable Consideration, whichever is higher.

B. For 2014-15 & above: Tax to be paid on aggregate amount specified in the agreement or value specified for the purpose of Stamp Duty, whichever is higher.

These differences in definition will create rumpus for the builders during the transition period which will again lead to double taxation.

Before Parting…

A chronological order of event is compiled below for easy understanding of matter.

S. No. Particulars Remarks Date
1. Circular No. 952/ST-1 issued (in conformity with K. Raheja Law) This circular clarified the assessment mechanism and various other issues as relevant for taxing such transactions related to agreements by developers/builders with prospective buyers. 07/05/2013
Hon’ble Supreme Court in L&T Limited v. State of Karnataka [Civil Appeal No.8672 of 2013 Accepts in principle the law laid down in earlier judgement in case of K. Raheja case (2005) 5 SCC 162

Any agreement entered into by the builder / promoter before the completion of construction tantamount to works contract and hence, liable to Value Added Tax (VAT)/ sales tax.

26/09/2013
Circular No. 1166/ST-1 Clarified the limitation aspects in regard to both the registered dealers and unregistered dealers under Section 15 and 16 of HVAT, 2003 respectively. Further the reassessment under Section 17 and revision of original order under Section 34 were detailed. 04/06/2013
Circular No. 41/ST-1 Clarified that the Levy of additional tax @ 5% (i.e. surcharge) is applicable on all the composition rates except that of the retailers 14/01/2014
Circular No. 259/ST-1 Takes a stand exactly opposite to circular No. 952/ST-1 in regard to valuation of taxable consideration under composition scheme. This circular amends the earlier circular to include even the value of land in the value of taxable consideration. 10/02/2014
Notification No. Web 6/H.A.6/2003/S.60/2014 Draft notification for Composition scheme and Amnesty Scheme – Suggestions Invited 05/07/2014
Notification No. S.O.88/H.A. 6/2003/S. 60/2014 Issued the Composition for Builders under Rule 49A of the Act. Effective date of Composition Scheme – 01/04/2014

Amnesty still not operational yet.

12/08/2014
During the above period Petitioners represented by a total of 65 Civil Writ Petitions filed writs to Hon’ble Punjab & Haryana High Court

Main representative in petition – CHD Developers Limited

Issues:

·   Whether the developers and builders are works contractors and the agreement b/w the developer/builder/promoter and the prospective purchase to construct a flat and thereafter sell the same with portion of land, authorizes the state to impose VAT thereon?

·   If the answer to the first issues is in the affirmative, whether the method of valuation of VAT on such agreements, can directly or indirectly, include the value of land by following the method of calculation of the taxable turnover in the manner expressed by the Commissioner vide circulars dated 5.2013, 4.6.2013 and 10.2.2014 and also in terms of Explanation (i) to Section 2(1)(zg) of the Act and Rule 25(2) of the Rules?

·   Whether the provisions of Section 42 of the Act and also Section 9 of the Act read with Rule 49 of the Rules would qualify to be legal and valid?

 

P&H High Court passes order in the case of CHD Developers Limited & Others 1.  Defined Works Contract

2.  Whether Builders are Works Contractor

3.  Valuation of Taxable Turnover – to exclude value of land

4.  No legal validity of Circular No. 952/ST-1 & Circular No. 1166/ST-1

5.  Upheld validity of ‘Sale’ definition

6.  Prescribed Deductive Method

7.  Section 9 & Rule 42 for lumpsum scheme upheld

22/04/2015
Notification No. No.19/ST-1/H.A.6/2003/S.60/2015. Amended Rule 25 of the Act. Issued modus of assessment for Deductive Method of VAT Computation 23/07/2015
Notification No. No.23/H.A.6/2003/S.60/2015 Amended Composition Scheme under Rule 49A issued in August 2014 24/09/2015
Notification No. No 19/ST-1/ H.A. 6/2003/S.59A/2016 Amnesty Scheme notified for Builders 12/09/2016

F) Other Modalities of Scheme

Apart from these above-mentioned issues, there are other issues in the details. These are mentioned below:

1. In case the amount of VAT has already been charged and collected but not deposited and is higher than the amount computed under this scheme then liability of for that year shall be the amount so collected. It is to be noted that in this case no carried forward is allowed.

2. In case the amount of VAT has already been deposited with the government then the excess payment (excess over the liability computed under this scheme) shall be allowed to be carried over upto FY 2013-14. Carry Forward in case of excess deposition is allowed. Excess amount cannot be carried from FY 2013-14, this amount shall neither be adjusted further nor forfeited.

3. If the builder has already paid any tax, interest or penalty during the year covered under this scheme then he shall get benefit of the same against his liability under this scheme.

4. It is noteworthy that, in case there is any default in payment of installments whole amount of tax paid under this scheme shall be forfeited. In our view the amount that will be forfeited shall be the NET AMOUNT paid under this scheme. i.e. Total Liability under the Scheme – Amount already paid for the year before the scheme.

5. Once all the installments are paid all the liabilities under the scheme for that year shall be deemed to be discharged.

6. Order shall be passed by Deputy Excise Taxation Commissioner (ST) (“DETC”) within one month (extendable) of receiving report from committee consisting of Two ETOs (other than concerned assessing authority-cum-ETO). Once the application is accepted by DETC ST, the same shall be conveyed to applicant. This acceptance is further subjected to withdrawal of all the pending cases.

7. In case, the application is accepted then the builder, within 15 days, shall file an application for withdrawal of all appeals, writ/petitions and/or cases pending before any Authority or Court of Law.

8. Where the builder does not withdraw its cases as per the point above, then the application shall be deemed to be rejected and amount paid under this scheme shall be forfeited (Net Amount).

9. It can be construed that there are three stages of cancellation of Application TC-1:

a. Failure to pay installments, as prescribed

b. Failure to justify incomplete or incorrect filing of application to DETC ST.

c. Failure to Withdraw all pending cases within prescribed limit

This Amnesty Scheme is a milestone in the recent years after all the litigation and ambiguity and would ease everything wrong with the industry right now. But a reasonable explanation to some issues above mentioned would do ‘Icing on the Cake’.

About the Author:

CA Ankit Gulgulia

Author is Practicing Chartered Accountant in New Delhi/NCR and specialising in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at ankitgulgulia@gmail.com or at +91-9811653975

DISCLAIMER: This paper is provided purely for your information only and you should check other information sources before taking any action based on any of the content in this paper. Neither the authors nor website hosting the paper make any warranty as to the quality or currency of the information contained in any of the site’s articles. This paper is meant for informational purpose only and does not purport to be advice or opinion, legal or otherwise, whatsoever. Author does not intend to advertise its services through this update. Author or its associates are not responsible for any error or omission in this update or for any action taken based on its contents.

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2 responses to “HVAT Amnesty Scheme for Builders – In depth analysis”

  1. Inder Mohan Malhotra says:

    Thanks for very useful information.
    Please clarify that when service tax is being charged by builder, then VAT should not be applicable.

  2. Inder Kumar Kamra says:

    Thanks Dear Mr Ankit Gulgulia

    Very Good study and analysis of HVAT Amnesty for builders

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