This article is the concluding part out of the two part series on this subject. This has been presented from the developer’s perspective. Part 1 of the Article was presented from the customer’s perspective. Which can accessed at the following link – VAT (What) is the confusion all about in real estate- Part I . The views expressed in this series of articles are personal.
It need not be said that taxation of works contract has always been a vexatious issue.
As if controversy pertaining to Works contract wasn’t enough, the government in a clever move to bolster revenue, brought within its purview transactions relating to sale of under-construction properties w.e.f. 20th June, 2006, as discussed in previous article.
This amendment derived force from the decision of Supreme Court (‘SC’) in the case of K. Raheja Dev. Corp. It was held that that levy of works contract tax cannot be stretched to levy tax on a contract wherein the contractual relationship had come into existence after the contract was completely executed. However, so long as the contract is entered into before the completion of contract (i.e. in this case before completion of construction), the levy of works contract would not be ultravires.
Such contracts having been deemed to be Works Contract, calculation of tax on works contract is a complex task since composition scheme of 1% was not available in pre-April, 2010 period. This is posing a number of difficulties and confusion to realtors which we have tried to address as below:
1. What is the date on which VAT was due? Is the entire VAT due on date of agreement?
Opinion: In case of all methods other than the 1% composition method, VAT was due on the 21st of the month following the month in which installment towards the flat (i.e. demand letter) was sent to the customer. However, for agreements entitled to the benefit of 1% scheme, the entire amount of VAT was to be paid by 21st of the month following the month in which agreement was registered.
It is also pertinent to note that, simple advance received without execution of agreement shall not be taxable. The same shall be taxed when it is adjusted towards agreement.
2. Can different methods of computation be adopted for different construction sites?
Opinion: Yes, different methods can be adopted for different projects. Infact literally speaking (although not practically possible) a different method can be followed for each and every flat/ property.
3. The above being the case, can composition scheme of 1% be availed for flats sold after 1st April, 2010 in cases where project was commenced before that date?
Opinion: Yes, 1% scheme can be availed. However, if set-off is being availed, proportionate reversal of set-off shall need to be made which might be a little complicated.
4. Will the benefit of set-off of VAT paid on purchases be applicable?
Opinion: As mentioned in Part-I, benefit of set-off will be available for purchases made on or after 20 June, 2006. However, a cause of concern may be that realtors may have charged to Profit and Loss as expense the VAT paid on purchases. In such cases, it would be difficult to claim set-off.
5. If land is purchased before June, 2006; will it be allowed to be deducted?
Opinion: Yes, deduction in respect of land purchased after June, 2006 shall be available in respect of projects executed after June, 2006.
6. If extra FSI for construction is obtained by way of TDR, shall it be also allowed as a deduction, it being in the nature of immovable property?
Opinion: Yes, cost of TDR shall be allowed as a deduction
7. As per the provisions of MVAT, excess set-off as on 31st March cannot be carried forward to subsequent period and has to be claimed as refund? In such a scenario, if there is excess VAT set-off available for a particular year, can it be carried forward to the next year and adjusted against properties sold in that year?
Opinion: Although it is true that excess set-off on 31st March has to be claimed as refund, in the case of builders/ developers, the government has made an exception and they can carry forward the excess balance of set-off for adjustment against subsequent year’s liability.
8. If the builder/ developer has sold very few flats while the construction was on and most of them have been sold later resulting in low VAT liability, would excess set-off on 31st March, paid on purchases be available for refund at the end of the project?
Opinion: Such set-off shall be treated as having been used towards exempted sales and shall be available as refund unless it can be justified that it is arising only out of those flats which have been sold as under-construction properties.
9. Can value of initial installments charged from the customer be adjusted towards land cost ?
Opinion: Yes, the value of initial installments can be adjusted towards land cost and other deductions like amounts paid to sub-contractor, etc. In this way MVAT liability can legitimately be deferred.
However, it is pertinent to mention over here that it is not easy to apportion the land cost and the same could be apportioned in the ratio of carpet area or built up area of the flat.
10. What is administrative relief all about? Will interest and penalty be payable even after applying for administrative relief?
Opinion: Administrative relief is granted where a person required to obtain registration under MVAT has not obtained the same. Such a person may make an application for relief by paying all taxes due alongwith fee for compounding the offence.
Thus realtors who have not obtained registration or have obtained belated registration should apply for administrative relief. This shall protect them from penalty for non registration.
As for interest, although SC has stayed the recovery of interest, it is highly likely that the same shall have to be paid if the case is adjudicated against MCHI.
11. If a project based J.V. or partnership firm was formed (say in 2007) during the intervening period which has been dissolved ever since the completion of project (say in 2009), would it still require to get registered under VAT and pay tax?
Opinion: Yes, in such cases also the dissolved entity would now need to get registered and discharge its liability.
12. What shall be the tax liability in cases where the developer agrees to give constructed flats/ shops in return of land to the landowner (esp. seen in case of tripartite agreements)?
Opinion: VAT shall be levied only when money is received against sale of flats/ shops. Hence there shall be no tax when land is received against sale of flats.
The department has also clarified that subsequent sale of flats/ shops by the land owner shall also be exempted from tax as he does not fit the definition of a ‘dealer’.
13. It is also a common practice in the industry to borrow against flats wherein the agreement says that the lender shall get flats if loan is not discharged. Shall such a transaction also be taxable?
Opinion: There shall be no tax at the time of entering into the loan agreement. However, if flat is eventually allotted to the lender there could be VAT implications.
14. What shall be the position if a developer has collected excess VAT?
Opinion: Excess VAT unless refunded to the customer, shall be liable for forfeiture by the department.
The latest status of the case is that realtors who have still not obtained registration have been granted time until 15th October to obtain registration and pay tax alongwith application for administrative relief by 31st October. Further, Marathi Bhandhkam Vyawsayik Association has filed an appeal with the High court not challenging the Constitutional validity but the applicability of VAT on Composite Agreement for sale of flat on ownership basis.
It has been a well established law and practice, essential goods and services are burdened with no/ minimal taxes. Housing is amongst the three basic necessities of an individual. Levying tax on such a commodity is in our opinion, unjust. However, contrary to expectations this sector has always bore the brunt and been loaded with taxes, policies and red-tapism.
This is indeed one of the most unregulated and high-risk sector inspite of so many organized players operating it. This is not only from a customer’s stand-point but also from that of a realtor. When he starts a project, he is completely unaware of the hurdles he may have to face and the time in which his investments would reap fruits. The long legal battles of title clearances to file clearances is a challenge which only a developer realizes.
This is probably because each single person/ body has considered it to be the “golden egg laying hen”. But no one has payed attention to its plight and come out with measures to boost and streamline the sector by way of transparent and definite policies. Instead of the long sought demand of a single window clearances, the number of authorities becoming stakeholders only seems to be increasing.
Caught in the conflict are realtors and customers!
(The author is a Chartered Accountant and is a Partner at A V Kedia & Associates, Mumbai. He can be reached at firstname.lastname@example.org)