MUMBAI: Two days before the deadline for developers to pay value-added tax (VAT) on October 31, the Bombay high court will take up a couple of petitions challenging the levy. Leading the charge is the Maharashtra Chamber of Housing Industry-Confederation of Real Estate Developers Association of India (MCHI-Credai), the representative body of builders in the state, and the Pune-based Marathi Bandkam. Their petition backs up a PIL moved by Grahak Hitawardhini, a consumer organization in Pune.
MCHI-Credai and Marathi Bandkam have argued that the government has ignored the fact that they constructed and sold flats under the Maharashtra Owners of Flats Act. "The building is constructed at our cost and without buyers having control over any activities of purchasing land to getting development permissions. The sale, thus, does not constitute a works contract and, hence, VAT cannot be levied,'' the petition said.
The developers also argued that they pay VAT for goods purchased during construction. "The moment the goods are used in construction, they lose their status as goods and automatically convert into immovable property. Now, since developers execute agreement on flats, which are immovable property, VAT is not applicable on them and, therefore, it is not necessary for developers to get themselves registered," the petition to be heard on Monday said.
The developers, like consumer organizations, pointed out that since stamp duty and registration fee are paid to the government on the sale of flat, VAT cannot be levied. They further pointed out that the government's move will create havoc and give rise to litigations between developer from buyers who have already received the possession long back.
The developers' fears are not unjustified. Many buyers who have purchased flats in projects constructed by developers like Ekta, Lodha, Lakhani Kalpataru have either refused or are protesting the levy of VAT. In the New Haven project by Tata Housing at Boisar, the buyers have refused to pay VAT. ``We are not going to accept this VAT demand by Tata. How can Tata charge this tax levy on us when they have already collected upto 80% of the flat cost and the project is delayed by two years?'' flat buyers have written in a letter to Tata Housing.
Notwithstanding the flat buyers protests, a four-member committee set up by MCHI-Credai have decided to charge 2.5% to 4.5% value-added tax (VAT) instead of 0.5% to 3% as computed by the sales tax department. ``We had no option but to arrive at this percentage due to high construction costs we incur,'' said a leading developer.
Main arguments in the Public Interest Litigation filed by consumer organisation
- Levy is against article 14 of the constitution as owners are charged VAT at different rates although all of them have booked flats during under-construction.
- Once the buyer pays the stamp fee for the transaction of the immovable property, VAT cannot be recovered by the builder from him/her.
- Agreement to Sale, of the flat under construction, does not constitute SALE. It does not give the possession of the flat. It does not give the title to the property purchased. It only assures the sale of the property on certain future date and on completion of the construction of the flat.
- The instalments paid under the agreement, are not "deferred payment of price" but are "advance payment of agreed price". The payment creates a charge on the property of the builder, which is not a sale, as defined under MVAT Act.
- Though legal, electricity maintaince, deposits towards club house and other taxes are collected by the builder, they do not constitute cost of the flat. Though the developer gives final account of these deposits under MoFA after completing the project, the sales tax department is charging VAT on the incurring expenses on the above items.
- The VAT levy of 5 per cent and 1 per cent for flats purchased from 2006 to 2010 and post 2010 is against the law as it includes the cost of land, an immovable property
Composition Scheme |
Section 42(3) of MVAT (preferred option of city builders)
VAT payable where a builder subcontracts construction of a building of 20 flats Sale price | 25L each paid by 20 flat owners
Total | 5Cr Less land value | 3Cr
Less amount paid to subcontractor | 1.5Cr
Less 30% on balance 50L owing to services such as labour, profit & architects fee | 15L
Balance liable to tax | 35 lakh
Total tax payable on goods purchased at 12.5% | 3.8L
For each flat, the tax payable at 5% of Rs 3.8 lakh | 19,444
PROPERTY HASSLE HOW TO SEEK YOUR TAX DETAILS
- Ask the developer for a breakup of how the 5% VAT amount was arrived at.
- Ask to see the developer's records or returns filed with the sales tax department Use the Right to Information (RTI) Act to find out whether a developer—who as per rules is deemed a dealer—has registered with the sales tax department.
- Use RTI to access records of the VAT computed and paid by the developer against your building and flat
- If the developer has collected excess amount, then ask to refund the excess with interest for the period it is lying with them.
What Government Rules say?:
Deadline for developers to make the payment: October 31
Who has to pay: Those who have purchased under-construction properties between 2006 to 2010.