According to a recent verdict by the Supreme Court, the sale of a property that is under construction would be liable to value-added tax (VAT).

The ruling could have far-reaching ramifications for the real estate industry as well as property buyers. In the case of L&T versus State of Karnataka, the apex court held that the pre-construction agreements for sale of immovable property would qualify as 'works contract' and, therefore, VAT would be payable on the transaction.

It is likely that the judgement will push the states' VAT authorities to tax all transactions for properties that are under construction. This could also include the real estate transactions concluded in the past few years.

The judgement was pronounced by a larger bench of the Supreme Court, so the verdict shall be considered the law of the land until it is overruled by a constitutional bench of the apex court.

Though the case related to real estate operations in the southern and western parts of the country, the principles enunciated in this judgement are likely to impact the real estate industry throughout the country, which, in turn, would result in higher prices of property.

It is pertinent to note that this judge ment is merely an interpretation of an existing law. So, its applicability is likely to be with retrospective effect. The state VAT authorities may cash in on this opportunity and demand tax dues on past transactions from real estate players by invoking the extended period of limitation. While it is not possible to quantify the exact impact of judgement on the real estate industry, if implemented with retrospective effect, the demand for tax and interest is likely to run into thousands of crores of rupees.

Supreme Court ruling on the applicability of VAT to push up property prices Buy constructed property

What this also means is that buyers may be better off purchasing fully constructed property compared with the one under construction.

Till now, constructed property has attracted only stamp duty, while the one under construction has also invited service tax. Now, the latter will also be subject to VAT.