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VAT on realty deals to be levied post agreement: CREDAI
October, 10th 2013

This year's festive season may not be a cheerful one for the real estate sector. Property prices are expected to go up after a 3-member bench of the Supreme Court ruled VAT may be levied on real estate transactions in addition to stamp duty. Also Read: All launched projects sold; see sales pick-up in Q3: DLF The apex court upheld a judgement of the Bombay high court that directed builders to pay a 5 percent VAT to Maharashtra government on under-construction houses sold during 2006-2010.

This means more state governments may now choose to levy VAT in addition to stamp duty, adding a new burden for all you buyers and further damage the real estate industry. This bench of the Supreme Court affirmed the judgement in the K Raheja Developers case of 2005, that had said an agreement entered into by a builder with a buyer before a project is completed is in effect a work contract and therefore VAT is applicable. Work contract refers to any contract where one of the parties is liable to provide construction work. VAT will not be payable if a fully constructed flat is sold to a buyer. In 2005, the Supreme Court upheld the decision of the Karnataka High Court, in a case filed by Raheja Builders, which allowed the Karnataka state government to levy VAT on builders.

Lalit Kumar Jain, president of the real estate developers' body, CREDAI, says as per the SC order, VAT will have to be paid only post agreement, which means it will be levied on work that is done after the agreement. He says Maharashtra government has also given undertaking that they will come out with a revised circular based on the interpretation of the court and that means the liability will be substantially reduced.

Below is the verbatim transcript of Lalit Kumar Jain's interview on CNBC-TV18 Q: How will the Supreme Court order affect developers and builders? A: The court order has gone against developers and consumers. Court has said that VAT will have to be paid, however they have qualified. What they have said is VAT will be leviable only post agreement. So work which is done after the agreement, only on that component. Also, Maharashtra government has given undertaking that they will come out with a revised circular based on the interpretation of the court and that means the liability will be substantially reduced.

Now each case will differ in competition and it is going to be a herculean task to really define it correctly and there is a lot of scope for litigation. What we are expecting is that the state government will come out with a circular and an amnesty scheme where they will try to simplify it. Post-2010, there is 1 percent VAT applicable on sale value of the transaction. Similarly if the state government wants to avoid litigation and a lot of revenue loss they will have to come out with this flat kind of system where they may say 0.5, 0.75 or 1 because in most of the cases VAT will come below 1 percent and those cases where land cost is negligible up to 2 percent. So it is definitely not 5 percent. The land cost has to be deducted.

There is a small scope for interpretation. Whether value addition on material used or value addition by deducting land cost. So I hope this ambiguity will be eliminated by initiative of state government and that will give a lot of relief in terms of understanding of the amount of tax payable so that there is no dispute between developer and customers. Q: Do you think there will be a cascading impact on prices? A: As this is retrospective and it does not affect the current transaction, so there is no question of property prices going up because of this particular judgement, because these are the transactions between 2006-2010 and therefore these transactions which have already happened, if there is any new transaction which is also under construction then there is a clean 1 percent VAT which is levied by the state government. So these are the transactions which have already occurred and there is ambiguity as to the amount of VAT payable. Of course we challenge the constitutionality, so now under Article 366 the Supreme Court has clarified that state government has very wide jurisdiction to levy such taxes. So now that matter is settled and the state government can levy such taxes.

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