In a recent judgement, the Supreme Court has upheld VAT for property under construction. While developers gear up to pay, buyers should be prepared for the additional bill and be ready to ask critical questions.
This week the Supreme Court held that state governments can levy a value added tax (VAT) on the cost of building a flat when property developers sell it to buyers.
The decision has rocked developers, given enough reasons for tax firms to hold con calls like the way they did for the Vodafone retrospective tax judgement case and made the price of a flat just that much more costly for buyers. The issue is again retrospective impact but this time it is the courts that have held that past purchases can be re-opened too.
The Court went by a clear logic. When developers construct a flat and eventually sell it with a fraction of land, such transaction involves construction activity too. In other words only if a flat is constructed can it be sold. Construction means there is a works contract being executed and that is taxable under the VAT rules. So even if the ultimate transaction between the parties may be sale of flat, it cannot be said that the characteristics of works contract are not involved in the transaction.
Currently, very few states have VAT in place for property. In 2006, Maharashtra government decided to charge a 5 per cent VAT on properties under construction. This had led to much confusion and the decision was contested in the Bombay High Court, which upheld the decision in a judgement delivered in July 2012. A petition was filed in the Supreme Court, which while ruling in the Larsen & Toubro case has upheld the Maharashtra decision.
This judgment should act as a sign of relief for the developers and for the buyers. In many states there is an ambiguity with respect to determination of measure of tax. This judgement amply makes it clear that the value that would be taxed would be the sum that can be ascribed to the goods that are incorporated in the works, said Aditya Tiwari, Partner, Prudentius Legal Advocates.
The judgement has also made it clear that although the flat or the building would be transferred on a date after the incorporation of goods in the works, it would not impact the tax levied. For the purpose of levy of VAT, the date of