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VAT on builders to further come down in Maha budget session
June, 04th 2014

The upcoming monsoon session – budget session of the state government may further bring down the flat rate of 1% VAT as a relief for the builders after the long contentious court battle on the issue of taxation of buildings under construction between 2006-2010.

According to sources close to the development, while the taxation of under construction buildings between 2006-2010 as finalized under rule 58 of MVAT in complying with the Supreme Court guidelines cannot tempered with, flat rate of VAT may be reduced as a relief to the builders community as a whole.

Besides, the Maharashtra government proposes to bring an ordinance to extend the assessment period for all builders to September 2015 which otherwise got time barred or closed on March 2014. The assessment of such accounts got delayed due to stay granted by Bombay High court prior to the resolution of the taxation of under construction buildings between 2006-2010.

Following the Supreme Court order, the Maharashtra State government came up with stage wise taxation of buildings under construction as works contract, thus facilitating recovery of around RS 5,000-6,000 crore from builders from all constructions between 2006 and 2010.

The Maharashtra sales tax department has made a comprehensive amendment to rule 58 of MAVT rules putting at rest the confusion over taxation of under construction flats and dwelling units.

Sources said, such amendments are resulting in more refunds than collection as under the previous law, tax was deducted on overall construction whereas the new rule has a stage wise structure. Thus many builders have paid more and now claiming refunds, they added.

These amendments have made deduction claimed against value of land higher than the value as per the state ready reckoner to be allowed only if the builder can prove it so. Secondly the works contract value on which VAT ( value added tax ) is applicable will be worked out in the third stage of the total taxation schedule.

As per the amendment in the first state, the land value for which deduction is claimed will be arrived followed by the standard deduction allowed under rule 58 provisos. Officials clarified that the standard deduction of 30% will be applicable on the remaining taxable amount after deduction of the land value. Thereafter, on the remaining value, VAT will be applicable by treating the item as works contract where the builder enters into agreement with the purchaser of the dwelling unit.

In 2006, the Maharashtra government had imposed 5% VAT on apartments following an order of the Supreme Court in the case of K Raheja versus the government of Karnataka.

Thereby, on all constructions, where agreement was signed between 2006-2010, VAT of five% was to be imposed. The matter then was referred to Bombay high court, which upheld the decision of the Maharashtra state government, upon which the grieved sought relief of the Supreme Court.

In the interim, the state government worked out an option for the builders and developers to switch to a mode of composite tax payment of one% VAT. This also applied to those builders and developers who had moved the Court for relief. However, some opted for rule 58 and preferred to wait for the court decision.

Recently, the Supreme Court upheld the decision of the state government to impose five% VAT and directed amendment to rule 581-A. According to the SC order, if the suitable amendment is not done and intimated to the SC, then it will be ultra vires or declared null and void.

Post 2010, the state has adopted a composite value of added tax of 1% of the total value.

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