CA Dr Arpit Haldia

Arpit HaldiaAnalyzing principle for levy of VAT on builders and developers and Extent of their liability to pay VAT between 1st April 2014 to 13th July 2014 in the State of Rajasthan

This article aims to assess the principles based upon which liability has been imposed on builders and developers under VAT in the State of Rajasthan and based upon these principles this article also tries to assess their extent of liability to pay VAT between the period April 1, 2014 to July 13, 2014.

1. Brief history of how the law has evolved and provisions on Builder and Developers in the State of Rajasthan

  • Judgment of Hon’ble Apex Court in the matter of M/S Larsen & Toubro Limited & Anr vs State Of Karnataka & Anr on 26 September, 2013 and M/S K. Raheja Development … vs State Of Karnataka on 5 May, 2005

These two decisions lay down basic principles for levy of VAT on Builders and Developers. The ratio as laid down by Hon’ble Apex Court in the Judgment of M/S K. Raheja Development was referred for consideration to the Larger Bench of Apex Court in the Matter of Larsen and Toubro Limited Vs State of Karnataka. The decision in M/S K. Raheja was upheld by the Larger Bench of the Hon’ble Apex Court.

  • Insertion of Rule 22A(2) to 22A(5) w.e.f. 14th July 2014 only prospectively and not retrospectively and applicability of provisions of Erstwhile Rule 22 between the period 1st April 2014 to 13th July 2014:

The Government of Rajasthan inserted Rule 22A(2) to 22A(5) in Rajasthan Value Added Tax Rules 2006 w.e.f. 14th July 2014. These rules provide method for computation of Tax Liability for Builder and Developer. Prior to insertion of this rule, then prevailing Rule 22 did not provide for specific deduction relating to builders and developers like value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed.

2. Whether Building Contracts entered into by builders and developers with prospective purchaser are works contract and whether definition of works contract provided in Rajasthan Value Added Tax Act is sufficient to cover Building Contracts under its ambit:

To understand the above matter we would have to refer to the issue before Hon’ble Apex Court in the matter of Larsen and Toubro Limited Vs State of Karnataka

“102. The crucial question would now remain: whether the view taken in Raheja Development with reference to definition of works contract in KST Act is legally unjustified? The following definition of works contract was under consideration before this Court in Raheja Development: works contract includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any moveable or immovable property.”

The Hon’ble Apex Court reproduced part of Judgment as pronounced in M/S K. Raheja Development … vs State Of Karnataka on 5 May, 2005 in Para No. 107 of the Judgement as follows:

“(i) The definition of the term works contract in the Act is an inclusive definition.

(ii) It is a wide definition which includes any agreement for carrying out building or construction activity for cash, deferred payment or other valuable consideration.”

The Hon’ble Apex Court then observed in Para 114 of the Judgement that

“114. In Article 366(29-A)(b), the term works contract covers all genre of works contract and it is not limited to one specie of the contract. In Raheja Development, the definition of works contract in KST Act was under consideration. That definition of works contract is inclusive and refers to building contracts and diverse construction activities for monetary consideration viz; for cash, deferred payment or other valuable consideration as works contract.”

The Hon’ble Apex Court then again in Para No. 116 of the judgement observed that

“We are in agreement with the submission of Mr. K.N. Bhat that since Raheja Development in May, 2005 almost all States have modified their laws in line with Raheja Development and there is no justification for change in the position settled after the decision of this Court in Raheja Development.”

The Hon’ble Apex Court finally held in Para No. 118 of the Judgement that

“118. We are clearly of the view that Raheja Development lays down the correct legal position and we approve the same.”

  • Analysis of the Judgement with reference to the definition of Works Contract as provided in Rajasthan Value Added Tax Vis-à-vis Definition of Works Contract in Karnataka Sales Tax Act

The Definition of works contract in the State of Rajasthan as per Section 2(44) of the Rajasthan Value Added Tax Act 2003 as amended by Finance Act 2011 is as follows:

works contract” means a contract for carrying out any work which includes assembling, construction, building, altering, manufacturing, processing, fabricating, erection, installation, fitting out, improvement, repair or commissioning of any movable or immovable property;”

The definition of works contract provided in Karnataka Sales Tax Act and Rajasthan Value Added Tax Act covers almost similar activities and is broadly based on similar principle. Therefore, observation of the Hon’ble Apex Court on the definition of Works Contract under KST Act would be applicable to the definition under Rajasthan Value Added Tax Act.

Further it has also been observed in the judgement that pursuant to the decision of the Hon’ble Apex Court in the matter of K Raheja almost all states modified the definition of works contract in line with the Raheja Judgement.

It would be appropriate to point out here that State of Rajasthan also modified and substituted earlier definition of works contract on similar lines of judgement of K Raheja vide Finance Act 2011.

Therefore as Hon’ble Apex Court has held that the Legislature has the power to levy tax on Builders and developers on the basis of the definition provided under the KST Act, it would also mean that on the basis of broadly similar definition of works contract provided under Rajasthan Value Added Tax Act, legislature in Rajasthan also had the power to levy tax on Builders since the substitution of the definition of works contract in the statute was on similar lines of K Raheja.

3. Exemption to Builders/Developers on the amount of consideration received upto 31st March 2014 with regard to the agreement made by them for construction of flats, dwelling units or buildings and other premises:

The State Government further vide notification No. F.12(59) FD/Tax/Div/2014-83 dated 30th July 2014 exempted from tax payable by builder and developers on the amount of consideration received up to 31.03.2014 with regard to the agreement made by them for construction of flats, dwellings or buildings or other premises.

Although State Government had the power as per the principle laid down by Hon’ble Apex Court in the judgement of Larsen and Toubro to tax the builders and developers but they exempted consideration received by them upto 31st March 2014.

Therefore, for the consideration received upto 31st March 2014, Builders and Developers have been exempted from Tax. Now remains the issue of Taxability between the period 1st April 2014 to 13th July 2014.

4. Constitutional Validity of provisions of Rule 22A(2) of Rajasthan Value Added Tax Rules, 2006:

It would be pertinent here to provide that provisions of Rule 22A(2) have been inserted broadly on similar lines of Rule 58(1A) of Maharashtra Value Added Tax Rules.

That Hon’ble Apex Court in the matter of Larsen and Toubro Limited Vs State of Karnataka also upheld the constitutional validity of Rule 58(1A) of the MVAT Rules.

The entire debate with regard to the intermittent period of 1st April 2014 to 13th July 2014 can be summarized as follows:

  • If government did not intend to collect tax from Builders and Developers for the period between 1st April 2014 to 13th July 2014, then why didn’t they exempted the consideration received upto 13th July 2014 rather than upto 31st March 2014, or
  • If they intend to collect tax from Builders and Developers from 1st April 2014, then why Rule 22A(2) to 22A(5) were not made effective retrospectively from 1st April 2014.

There has been a clear lack of clarity on this front from the law makers.

5. Position in State of Maharashtra with regard to Rule 58(1A) of MVAT Rules vis-à-vis Rule 22A(2) in RVAT Rules 2006

Rule 58(1A) providing for computation of tax liability of builders and developers under MVAT Rules was inserted on 1st June 2009 but was made effective retrospectively from 20th June 2006. The date of 20th June 2006 gains importance as definition of works contract was modified under MVAT Act and tax on builders in the state of Maharashtra was also sought to be levied from 20th June 2006.

Reference is invited with regard to the clarification issued by the Commissioner Sales Tax Maharashtra Mumbai dated 6th August 2012, wherein it was clarified in response to Question No. 6 that the effective date of amendment in VAT is 20th June 2006 and any agreements which have been executed prior to 20th June 2006, in such case only the consideration receivable after 20th June 2006 would be chargeable to tax.

  • Theory regarding Retrospective operation of Law:

It would be appropriate here to refer that maxim “lex prospicit non respicit which provides that law looks forward and not backward.

Decision in the matter of retrospective operation of law of Constitutional Bench of Five Members of the Hon’ble Apex Court in the matter of Commissioner of Income Tax(Central)-I, New Delhi Versus Vatika Township Private Limited (Civil Appeal 8750 of 2014): The Hon’ble Apex Court while referring to the maxim observed as follows:

“Lex prospicit non respicit” : Law looks forward and not backward:

The Constitutional Bench of Hon’ble Apex Court further observed that

“Thus, the rule against retrospective operation is a fundamental rule of law that no statute shall be construed to have a retrospective operation unless such a construction appears very clearly in the terms of the Act, or arises by necessary and distinct implication.”

The Hon’ble Bench also referred to the decision of Apex Court in the matter of Govinddas v. Income-tax Officer (1 SCC 906)

“11. Now it is a well settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute so as to take away or impair an existing right or create a new obligation or impose a new liability otherwise than as regards matters of procedure”.

Analysis of the Judgement: Therefore it can be inferred from the above judgement of Hon’ble Apex Court that where the intention of the law is to have operation of law from a retrospective date, then law should be very clear in this respect and unless there is a clear intention, the law would be deemed to have a prospective effect.

Conclusion: Therefore referring to position in the State of Maharashtra, both the effective date of applicability of rules and statute were same i.e. w.e.f. 20th June 2006 even if the rule was inserted w.e.f. 1st June 2009 but it was clearly provided that the rule would have retrospective effect from 20th June 2006. There was clarity in law.

However, in the State of Rajasthan, levy of Tax on builders has been made effective from 1st April 2014 i.e. exemption notification is valid only upto 31st March 2014 but computational provisions are effective from 14th July 2014 i.e. Rule 22A(2) to 22A(5) are having prospective effective from 14th July 2014.

In the absence of clear provision regarding retrospective operation of the said rule, the provision can only be treated as having prospective effect and during the intermittent period of 1st April 2014 to 13th July 2014, provision of erstwhile Rule 22 would be applicable which did not provide for specific deduction of value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed.

6. Comparability with Haryana Value Added Tax Rules and Judgement of Hon’ble Punjab and Haryana High Court in the matter of CHD Developers Limited vs State Of Haryana And Others on 22 April, 2015 with regard to the absence of specific computational provisions for Builder and Developers in Rule 25(2) of Haryana Value Added Tax Rules

The case in Rajasthan for the period between 1st April 2014 to 13th July 2014 is similar to the situation prevalent in Haryana. In both the states, the relevant law i.e. Rule 22 prior to July 14, 2014 under RVAT and Rule 25(2) under Haryana Value Added Tax Rules, did not provide for deductions relating to value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed.

  • Matter before the Hon’ble Punjab and Haryana High Court in the matter of CHD Developers Limited vs State Of Haryana And Others on 22 April, 2015:

“Notices (Annexure P-3 Colly) for re-assessment for the year 2010-11 under Section 17 of the Act were issued for imposing tax on the transaction of sale of flats, floors and villas amounting to 42,98,90,718/- as being under assessed. The petitioner filed reply (Annexure P-4) to the said notices. However, no response was received in this regard. The developer being engaged in the sale of immovable property where stamp duty was paid and also there being no mechanism provided under the Act for computation of tax, the imposition of tax insisted by the authorities was unconstitutional and beyond the provisions of the Act and Rules. Hence, the present writ petitions.”

Arguments by the Petitioner:

It was argued by the petitioner in their arguments that there were no specific provisions under the Haryana Value Added Rules for computation of tax of builders.

“32. Next, it was claimed by learned counsel for the petitioners that the State of Uttar Pradesh has framed rule 9 of UPVAT Rules, 2005 and Delhi State under Rule 3 of Delhi VAT Rules, 2005 have introduced specific provisions for charging VAT on transaction of the developers etc. whereas there is no such provision in the rules.”

It was further contended by the petitioners as provided in para 33 of the judgement that

“Rule 25(2) of the Rules only provide for deductive method in the event of labour and services but does not reduce the value of immovable property. The legality of both the provisions was put to test by the learned counsel for the petitioners.”

Observations and Judgement of the Hon’ble High Court

The Hon’ble High Court while analyzing the provisions of Rule 25(2) of the Haryana Value Added Tax Rules observed in Para 39 that

“ The ‘deductive method’ thereunder does not provide for any deduction which relate to the value of the immovable property. The legislature has not made any express provision for exclusion of value of immovable property from the works contract and its method of valuation has been left to the discretion of the rule making authority to prescribe.”

Then the Hon’ble High Court referred to the affidavit of the State Government which formed the basis of judgement which was as follows:

“40. The State had filed an affidavit dated 24.4.2014 of Shri B.L. Gupta, Additional Excise and Taxation Commissioner, Haryana, wherein paras 3 to 8 read thus:-

“3. That it is affirmed that the developers/work contractors, being assessed as normal VAT dealers, are entitled to all deductions admissible as per Law/Rules.”

In Para 44 of the Judgement, Hon’ble High Court observed that

“However, the ‘deductive method’ requires all the deductions to be made therefrom to be specifically provided for to ensure that tax is charged only on the value of transfer of property in goods on and after the date of entering into agreement for sale with the buyers.”

In Para 45 of the Judgement, the Hon’ble High Court held that

“In view of the above, essentially, the value of immovable property and any other thing done prior to the date of entering of the agreement of sale is to be excluded from the agreement value. The value of goods in a works contract in the case of a developer etc. on the basis of which VAT is levied would be the value of the goods at the time of incorporation in the works even where property in goods passes later. Further, VAT is to be directed on the value of the goods at the time of incorporation and it should not purport to tax the transfer of immovable property.

Consequently, Rule 25(2) of the Rules is held to be valid by reading it down to the extent indicated hereinbefore and subject to the State Government remaining bound by its affidavit dated 24.4.2014 The State Government shall bring necessary changes in the Rules in consonance with the above observations.”

It can be observed from the concluding paragraph that the Hon’ble High Court has read down the provisions of Rule 25(2) subject to its observations. The entire judgement can be better understood in the context of the observation of the Hon’ble High Court in Para 35 and 37 of judgement as follows:

The Hon’ble High Court observed in Para 35 that

“35. Examining the validity of Explanation (i) to Section 2(1)(zg) of the Act and Rule 25(2) of the Rules, it would be essential to notice that in order to avoid declaration of unconstitutionality, the Courts have adopted such principles of interpretation which would result in sustaining the statute.”

It would be appropriate here to refer to the observation of the Hon’ble High Court in Para 37 of the Judgement wherein Doctrine Of Reading Down has been explained as follows:

“Moreover, the Apex Court in B. R. Enterprises v. State of U.P., (1999) 9 SCC 700, Calcutta Gujarathi Education Society v. Calcutta Municipal Corporation (2003) 10 SCC 533 and M.Nagraj v. Union of India(2006) 8 SCC 212 has interpreted the rule of reading down statutory provisions to mean that a statutory provision is generally read down so as to save the provision from being pronounced to be unconstitutional or ultra vires. The rule of reading down is to construe a provision harmoniously and to straighten crudities or ironing out creases to make a statute workable.”

Analysis of the Judgment: It can observed that the Hon’ble Punjab and Haryana High Court upheld the constitutional validity of computational provisions of Rule 25(2) on certain conditions which are as follows:

Consequently, Rule 25(2) of the Rules is held to be valid

a) by reading it down to the extent indicated hereinbefore and

b) subject to the State Government remaining bound by its affidavit dated 24.4.2014

c) The State Government shall bring necessary changes in the Rules in consonance with the above observations.

The word reading down of provision has already been explained by the Hon’ble High Court in its decision that this doctrine is applied to save provision from being held unconstitutional and to straighten the crudities and ironing out of the creases to make the statute workable.

Hon’ble High Court made the statute workable on the basis of affidavit of the State Government dated 24.04.2014 and on the observation that State Government would bring necessary changes in consonance with the above observations.

7. Theory regarding Presence of Computational Provision and absence of such provision can be fatal to the validity of the statue

Hon’ble Supreme Court in the matter of Govind Saran Ganga Saran vs Commissioner Of Sales Tax And Ors on 26 April, 1985 Equivalent citations: 1985 AIR 1041, 1985 SCR (3) 985 held in para 15 of the Judgement that

“The components which enter into the concept of a tax are well known. The first is the character of the imposition known by its nature which prescribes the taxable event attracting the levy, the second is a clear indication of the person on whom the levy is imposed and who is obliged to pay the tax, the third is the rate at which the tax is imposed, and the fourth is the measure or value to which the rate will be applied for computing the tax liability. If those components are not clearly and definitely ascertainable, it is difficult to say that the levy exists in point of law. Any uncertainty or vagueness ill the legislative scheme defining any of those components of the levy will be fatal to its validity.”

Analysis of the Judgement: Hence as can be observed from above, one of the four key requirements for valid levy of tax is presence of computational provision i.e. measure or value to which rate will be applied for computing the tax liability. Absence of such measure would be fatal to validity of law.

8. Stepwise Analysis of the Legal Situation and Conclusion regarding liability to pay tax between 1st April 2014 to 13th July 2014:

a) Judgement of Hon’ble Apex Court in the matter of Larsen and Toubro and K Raheja: The State Legislature has the power to levy tax on Builders treating them as Works Contractor.

b) Exemption to the Builder and Developers from payment of Tax on Consideration received upto 31st March 2014:

Although State Government had the power to levy tax as enumerated in above paragraph since the definition of works contract was brought in line with the K Raheja Judgement to cover building contracts but they opted for providing exemption in respect of the consideration received upto 31st March 2014 with regard to the agreement made by them for construction of flats, dwellings or buildings or other premises.

c) Whether Rule 22A(2) to 22A(5) inserted from 14th July 2014 can be treated as having a retrospective effect from 1st April 2014 wherein legislature has not clearly mentioned that the law would be having retrospective effect:

It has been clearly held by the Hon’ble Apex Court in the matter of Commissioner of Income Tax(Central)-I, New Delhi Versus Vatika Township Private Limited that where the intention of the law is to have operation of law from a retrospective date, then the law should be very clear and unless there is a clear intention, the law would be deemed to have a prospective effect. Therefore, in the absence of clear mandate of the statute of having a retrospective effect, the law would only be treated to have a prospective effect.

Taking Example of MVAT Rules which had provision of Rule 58(1A) for calculation of tax liability in case of builders, said rule was having retrospective effect from 20th June 2006 although inserted on 1st June 2009.

However, in case of Rajasthan Value Added Tax Rules 2006, similar provision to Rule 58(1A) i.e. Rule 22A(2) was inserted w.e.f. 14th July 2014 prospectively and not retrospectively.

The issue now boils down to the fact that the Rule 22A(2) to 22A(5) inserted w.e.f. 14th July 2014 would be effective only prospectively therefore in the absence of specific computational provision existing in law between 1st April 2014 to 13th July 2014 for builders and developers, whether legislature can collect tax from them.

d) Analyzing validity of levy of Tax w.e.f. 1st April 2014 in terms of Judgement of the Hon’ble Apex Court in the matter of Govind Saran Ganga Saran vs Commissioner Of Sales Tax And Ors that whether in the absence of a clear computational provision, can tax be levied and collected:

It has been clearly held by the Hon’ble Apex Court in the given judgement that one of the four key requirements for valid imposition and levy of tax is the presence of computational provision i.e. measure or value to which rate will be applied for computing the tax liability and absence of a clear computational provision would be fatal to the validity of the provision. There was no specific computational provision for builders and developers existing in law between 1st April 2014 to 13th July 2014. Only provision in law existing at that time was Rule 22 which also did not provide for deductions specific to the builders and developers. Therefore, the collection of tax from builders on this account is not as per the principles laid down by Hon’ble Apex Court.

Similar situation has been analyzed by Hon’ble Punjab and Haryana High Court that when specific provisions for calculation of Tax Liability are not present in the statute whether the statute would be unconstitutional and if not then what’s the probable solution in such situation.

e) Levy of Tax w.e.f. 1st April 2014 whereas specific Computational provision in Rule 22A(2) to 22A(5) inserted w.e.f. 14th July 2014 and position of Erstwhile Rule 22 of RVAT Rules 2006 vis-avis the position of Rule25(2) in Haryana Value Added Tax Rules:

Rule 25(2) under Haryana Value Added Tax Rules did not provide for any deduction in relation to value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed. The position in the State of Rajasthan is similar but only for the period 1st April 2014 to 13th July 2014 when Rule 22A(2) to 22A(5) were not in force in law due to its prospective effect from 14th July 2014. The then Existing Rule 22 in Rajasthan Value Added Tax Rules between 1st April 2014 to 13th July 2014 similar to Rule 25(2) of Haryana Value Added Tax Rule 2003 also did not provide for any deduction with regard to value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed.

Hon’ble Punjab and Haryana High Court in its judgement laid down the guidelines that in the absence of specific provisions in relation to builders and developers in the State, law can only be made workable by reading them down and that State Government would be required to bring necessary changes in consonance with the observations of the Hon’ble High Court.

This in turn would be a similar situation applicable in the State of Rajasthan. There is absence of clear provision in Rule 22 applicable for the period between 1st April 2014 to 13th July 2014 relating to deduction of value of immoveable property and stage of construction at which the agreement with the prospective purchaser was executed.

That such changes have been made by introducing Rule 22A(2) to 22A(5) effective from 14th July 2014 only prospectively and not retrospectively w.e.f. 1st April 2014.

f) Conclusion:

Therefore in the absence of clear provisions for deductions available to builders and developers and computation of tax liability thereon, albeit for a limited period between 1st April 2014 to 13th July 2014, RVAT Rules stands on similar footings similar to Haryana Value Added Tax Rules.

In my opinion, in the present scenario collection of taxes from builders and developers in the State of Rajasthan for the period between 1st April 2014 to 13th July 2014 would not be valid proposition as analyzed on the basis of principles laid down by Hon’ble Apex Court and Punjab and Haryana High Court. Further, applying the above principles as enunciated by Hon’ble Punjab and Haryana High Court, necessary changes would be required to be brought in law relating to builders and developers in the State of Rajasthan for the period between 1st April 2014 to 13th July 2014.

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