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VAT could lead litigation between builder and buyer
November, 09th 2012

With the high court recently dismissing petitions seeking to stay the state government's order to levy Value Added Tax (VAT) on under-construction properties, builders are now planning to send their customers notices to cough up the extra amount.

The tax is now applicable from 2006, but in many cases the properties were sold without VAT being charged. Now as the builders have to meet their liability towards the taxman, they will be knocking their buyers' doors to raise the amount. VAT, being an indirect tax, will be passed on to the consumer.

Most of the transactions were done without passing on the VAT liability to the buyer but now the amount will have to be recovered from them. "The builders are also apprehensive that buyers may be reluctant to shell out the amount. It could lead to litigations," said Sunil Duddalwar, the president of the Nagpur branch of Confederation of Real Estate Developers of India.

VAT is applicable to all types of properties but those having brought homes may especially find it difficult to now shell out the tax amount. "Buyers in this class mainly depend on loans often stretching their means to the optimum limit," said Tejinder Singh Renu, secretary of the Vidarbha Taxpayers Association and also a builder.

The average ticket size of the flats in West Nagpur ranges from Rs 50 lakh to Rs 1 crore. "With the average rate of VAT estimated at 3%, a buyer will have to shell out another Rs 1.5 lakh to Rs 3 lakh for the property purchased after June 2006 from when the tax has been made applicable," added Renu.

The mid-priced flats coming up in the outskirts range from Rs 20 to 45 for which VAT comes to around Rs 60,000 to Rs 1.3 lakh. "The amount is considerable indeed for the class of buyers going for homes in these areas," said Renu.

It is a peculiar situation as the order to levy VAT issued on 2006 is itself being heard in the Supreme Court after being challenged, and governments of Maharashtra and Karnataka are respondents. The state government in 2010 came up with an order to collect the tax which would be repaid with interest if the case was lost in apex court. "This order too was challenged through various petitions in the high court, which have been now turned down," said Renu.

There are chances that buyers may deny paying the tax citing the grounds that the case is still pending in the Supreme Court.

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