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Builder-buyer tussle on VAT intensifies
October, 07th 2013

With the Supreme Court upholding the Bombay High Court verdict asking builders in Maharashtra to pay six per cent Value Added Tax (VAT) on the sale of under construction flats between the years 2006 and 2010, the tussle regarding who is responsible for the payment is getting intense.

While builders are claiming that they will pass this on to buyers and have also sent them notices, many are saying that there needs to be more clarity on who is responsible and what if the builder has already charged them. According to industry experts, buyers had been asked to pay the additional money to builders at the time of property purchase, either by way of bank guarantees or keeping aside extra funds in an escrow account.

Extra funds provided as bank guarantees have been encashed by the builders already, leaving buyers with no options. Though these buyers can sue the builder for the same, property lawyer Vinod Sampat says, they need to decide if they want to spend another six per cent of the flat cost to fight a case or not.

What should the others do? Should they simply pay up? Sunil Mantri, vice-president of National Real Estate Developers Council says, “The law does not say that a builder cannot recover VAT from the home buyers. Hence, this tax will be passed to the home buyers.” But Sampat advises against paying up. “If you have already got possession of the house, you don't need to worry.” He warns that though the VAT is being charged only on under construction properties, many developers are passing on VAT cost to even those buyers who had bought ready properties. “Such buyers don't have to pay VAT,” he adds.

Agrees lawyer Sandhya Sondhi. “I would advise such home buyers to wait and not pay up immediately. There are issues with calculation of VAT. It is suppose to be calculated only on the construction cost. But, many builders are calculating it on construction plus land purchase cost.” She advises buyers to say that since they do not know the construction cost, they can't pay VAT. The reason being that many builders are charging extra to buyers but paying the government only what is required of them. Thus, they are making money at the cost of the buyer.

Only those who still have not got possession of the flat are the ones who have guns to their heads. To be able to pass-on the VAT cost to buyers, builders had put a clause to the home purchase agreement saying that the buyer will have to bear any incremental cost including taxes. Bheru Choudhary, Partner, IC Legal Advocates & Solicitors says, if it is mentioned in the agreement, then the individual will have to pay. If not, the developer can file a case against the home buyer for recovery of the money. Or, he can terminate the agreement.”

Sondhi says that terminating a home purchase agreement is not easy. “A builder cannot cancel an agreement. This will mean additional cost to the builder for registration and stamp duty for the property in his name. No builder will ever do that.” The developer may try to bring the property under litigations. This will dispute the title of the property. This can pose a problem at the time of selling the property.

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