Following Supreme Court upholding the Bombay High Court verdict directing builders to pay five per cent value-added-tax (VAT) on properties sold ahead of completion, developers will now have to remit the tax.

The judgement applies to all under-construction properties transacted for sale between 2006 and 2010.

Developers from Mumbai and Karnataka had approached the Supreme Court against VAT imposition by the states, besides questioning the validity of the state levying it.

In 2010, the Maharashtra Government revised the rate to one per cent, while stating that the levy of five per cent on the under construction properties sold between 2006 and 2010 stayed.

Following the State Government’s VAT levy in 2006, developers obtained a stay from the Bombay High Court in 2007.

Why buyers?

The High Court then directed them to deposit the money in an escrow account, pending the outcome of the dispute, in cases where they had collected the tax.

Subsequently, they appealed to the Supreme Court when the Bombay High Court ruled in favour of the state.

Some developers had collected post-dated cheques and indemnity bonds from buyers to ensure that if the ruling went against their interest, the buyers would pay up.

However, there have been many cases where developers had not obtained the buyers’ commitment to pay the tax as also the buyers selling their properties.

This apart, there have been questions as to why buyers should pay, when the tax claim was on the builders.

Explaining the Supreme Court’s interim order on petitions from Maharashtra and Karnataka challenging levy of VAT on sale transaction, Lalit Kumar Jain, Chairman, Confederation of Real Estate Developers’ Association of India, said the realty body had fought for customers as the taxes are to be paid by them.

Jain said the apex court has said the states right to levy VAT can be only on value addition of goods and that charged from the date of agreement with the buyers.

The judgment also said an agreement entered into by a developer/builder with the purchaser is a composite contract involving a contact for work and labour and contract for sale and the same comes within the meaning of ‘works contract.’

The court has also clarified that activity of construction undertaken by a developer would be deemed as works contract only from the stage the developer enters into a contract with the flat purchaser. The tax chargeable is only on the value addition made to the goods transferred after the agreement was entered into with a flat purchaser.

The apex court also stated that VAT is not payable if a fully constructed flat is sold to buyer as it would not amount to a ‘works contract, he said.

> shanker.s@thehindu.co.in

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