Builders in Uttar Pradesh may soon have to pay value added tax (VAT) on the sale of under-construction projects, a move that may push up property prices.

The state government is considering a proposal under which builders will have to pay VAT on under-construction projects such as flats and houses for which they have entered into an agreement with a buyer, promising handover when complete.

However, fully constructed projects sold by a builder will not be eligible for the surcharge.

The government sources said that the proposal sent by the commercial tax department sought to levy 1% VAT on the total cost of the project, excluding the cost of land. “If the proposal is approved, it will fetch a good amount of additional revenue every year,” a senior official told HT.

“Going by the most conservative estimate, imposition of 1% VAT on under-construction projects is likely to bring at least `100 crore additional revenue,” sources claimed.

The move comes after a recent Supreme Court judgment that upheld a Bombay High Court verdict asking builders to pay 5% VAT on the sale of under-construction projects.

The verdict that came early this month means builders will be liable to pay VAT, which only includes the cost of construction and excludes the land value, amount paid to the sub-contractor and service charges, among others.

“A larger bench of the SC, affirming the judgment in the K Raheja Development Case in 2005, said that an agreement formalised by a builder with a buyer before a project is completed is in effect a work contract and hence a VAT can be levied,” a senior commercial tax department official said.

The move may, however, raise some eyebrows among builders in the state like the case in Maharashtra where they took to litigation. But ultimately, it is the buyers who will face the heat because the builders are bound to pass on the tax burden to them by hiking property prices, real estate analysts said.

builders opposed

Realtors have opposed the proposal, saying the move will increase the cost of property and affect their business. The new tax regime is likely to affect thousands of home buyers aspiring to get accommodation in Noida, Ghaziabad and other NCR towns. About six lakh under-construction flats are up for sale in Noida and Greater Noida alone.

“A buyer will have to pay 2-3 per cent value added tax (VAT) on a flat or plotted house cost. It will put extra burden on a buyer. But only the Centre and state can provide some relief with a fresh policy on it,” said RK Arora, CMD of Supertech Group.The Confederation of Real Estate Developers Association of India (CREDAI) has asked the government to invoke VAT only on the construction cost of a flat.

“UP should replicate the Maharashtra government model and charge only 1% VAT only on construction cost of a flat of plotted house,” said Amarpali Group CMD Anil Sharma who is also president of CREDAI, Delhi-NCR chapter.