READY RECKNOR RATES UP AGAIN

What are the Ready Reckoner (RR) rates? To be precise, it is an annual statement of rates on which the Stamps and Registration Department collects stamp duty from property purchasers. These rates have been increased across Maharashtra by an average 25 per cent, in an annual revision by the State Government.

In a wake of earning more and more revenues from the Developers, the Maharashtra government's decision is used as a tool to maximize revenue to increase Ready Reckoner Rates in Mumbai is now expected to render sales volumes which are already at low. This is totally unwarranted as the market is sluggish and there have been no major transactions registered.

The Government’s new Ready Reckoner Rate has thrown up a major anomaly. As per the law, the Government has made the sales mandatory on carpet area basis whereas, the Ready Reckoner Rates are based on built-up area. It is feared that Real Estate Development will be badly impacted as premiums for staircase exemption, Fungible FSI, open space deficiency and development charges payable to the BMC will be considerably increased as the rates of premium are charged as per Ready Reckoner Rates.

The Developers are worried that the hike will result in higher transaction cost for investors, while for end users the government itself has further broadened the existing gap between affordability and market rates.

It is imperceptibly argued that the move of the Government is also expected to reduce the black money component that forms a significant part in realty transactions. Ready Reckoner Rate represents market value of the property. However, the recent hike is not in line with current market scenario at all.

With sales volume steadily declining since last few months due to weighty interest rates and unaffordable property prices, Developers in Mumbai had started offering direct and indirect discounts to attract the buyers.

It is surreptitiously visualized that the increase in Ready Reckoner Rates will increase the scope of correction in a way that if Developers were offering 10% to 15% reduction in cost of property, will now have to offer more to accommodate this hike and boost sentiment.

It is high time that the Stamp Duty Slab of 5% now needs to be brought down. Sensing the possibility of further decline in sales volume in existing weak sales, the Developers are opposing the decision. The Government has admitted that the stamp duty collection had fallen more than 30% last year due to the least property sales.

It is reported that as per the revised government rates, Andheri has a price tag of Rs.13,420/- per sqft as the sales were reported quite high last year while Bandra has now become cheaper at Rs11,350/- per sqft. With the new rates coming into effect, the property prices in city and suburbs, particularly western suburbs, will go up by 5-30% higher than the old ones.

The Ready Recknor Rates are determined by sales, proximity to schools, markets, colleges, hospitals and transport facilities in various areas of the city and suburbs. Last year, the government had earned Rs14,000 crore revenue through stamp duty and has set a target of earning at least 10% more revenue each successive year.

The general opinion of the buyers is that the Developers should not make a hue and cry since the market prices of properties are still higher by 30-50% of the revised Ready Recknor Rate.

The Ready Recknor Rate revision shall provide a relief to the extent of almost 10-20% decrease in stamp duty charges in buildings without lifts and other facilities. Now with Ready Recknor Rates going up, the premiums that the Developers have to pay an increased premium to the BMC for Fungible FSI, leading to an increase in the construction cost of projects. This is because the Developers are not ready to cut corners in their profits As the Government has amended the Development Control Rules to charge for the Fungible FSI such as balcony, flower beds, etc. Earlier, these areas were free of FSI. The ultimate burden of cost shall be passed on to the buyers.

The experts of the realty sector feel that the State Government, while revising Ready Recknor Rate to earn more revenue for itself has resorted by applying artificial methodology which would culminate to further the cost of properties.

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VAT, A RIDDLE TO GENERATE MORE RIDDLES

“God Save the King / Buyers of Flats”  The State government’s decision to stick to its stand on the Value Added Tax (VAT) on residential properties in the State sold during the period between 20^th June 2006 to 31^st March 2010 will undoubtedly lead to multiple legal cases and cause  antagonism between the Builders and home buyers.

After the Bombay High Court declined to interfere with the State’s discretion to decide the Tax Rate on October 30 and the State declined to change the Tax Rate it had declared earlier and forced the Builders across the State had to pay VAT on October 31. However, though some couldn’t remit their entire dues before the deadline, the process of paying the VAT is on and the Sales Tax Authorities have been requested to condone the delay as their own system could not accept the rush of remittances which kept coming through the night of October 31, 2012.

Simultaneously, the Builders have started to recover the VAT which they paid on behalf of the Flat Buyers. It is feared that the assessment of the VAT returns, which the Builders have filed, and the recovery of the VAT from buyers are likely to lead to prolonged litigation. Rule 58 of the Sales Tax Rules recommends three methods to determine the base value of a flat for calculation of VAT but the Sales Tax Officers may demand the same based on the method that gives the highest amount. This will certainly be subject of appeals and Court Cases which will take years to reach a solution.

On the other hand, the buyers are apparently in no mood to pay anything as VAT dues compelling the Builders to resort to legal remedies such as Civil Suits for recovering the VAT. However, the Supreme Court has upheld the State’s approach to the issue and the flat buyers will have to ultimately cough up the dues.

The complexity of calculations necessary to arrive at the VAT amount for each flat shall cause periodical deadlocks as the State has over 10,000 Builders who have to file 26 quarterly returns to fulfil their obligation to pay VAT. This works out to 2,60,000 returns for the Sales Tax Officials to scrutinize. Also, as each flat is sold at different points of time and at different stages of construction, the base value for working out VAT will be different to arrive at for every flat.

It is pleaded with the Bombay high court that the State should be directed to modify the Rate of Tax to a flat 1% on the agreement value, which is being charged on transactions done on or after April 1, 2010. The Bombay High Court asked the State’s counsel if this was acceptable and when the State declined the suggestion, dismissed the Builders’ case.

Builders across Maharashtra who have paid VAT to the Sales Tax Department have warned the buyers to pay or face legal action. Buyers yet to pay have been issued reminder notices asking to pay the principal amount first failing which, the Builders will move legally against them as most Builders have reportedly paid the VAT before the deadline of 31^st October, 2012. Buyers on the other hand argue that they have spent all the savings to buy the flat and are ignoring calls from Builders to pay VAT.

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DEEMED CONVEYANCE - READY TO TAKE OFF

In an enthusiastic move, the State Government has launched a special drive to issue Deemed Conveyance Deeds to eligible Co-operative Housing Societies. All the Departments concerned and Stake Holders are now ready to clear the long awaited issue. District Collectors across the State will launch an intensive campaign from December 15 onwards.

The meaning of Conveyance of a property is transferring the Interest, Right, Title and Ownership of the property from the seller to the purchaser. In case of a Co-operative Housing Society formed by the Flat Purchasers / Owners under the Provisions of Maharashtra Co-operative Societies Act 1960, the Conveyance implies transferring the Interest, Right, Title and Ownership of the Land and Building from the Land Owner / Property Developer to the Co-operative Housing Society.

After the Land and Building is conveyed in favour of Co-operative Housing Society and the Title of the property is fully and finally recorded in the Property Card and other Revenue Records then only the property becomes completely free and marketable.

As per the provisions under Section 11 of Maharashtra Ownership Flat Act 1963, the Conveyance of land is the Right of the Co-operative Housing Society and the Duty of the Property Developer / Promoter to be executed within 4 months from the date of Registration of the Co-operative Society.

It was observed by the State that majority of Co-operative Housing Societies did not have the Conveyance of the building and land in their favour. When a provision for Deemed Conveyance was first introduced in 2008, it was considered to be a landmark decision to protect the interest of flat buyers. But four years later, barely 1,200 out of the 88,000 housing societies have applied for it. Worst, the land has been conveyed to housing societies in only 700 cases.

Nearly two years after the State Government has now approved the scheme as there have been only a handful of cases where the land has been conveyed from the builders / original land-owners to a Housing Societies. There are over 50,000 Housing Societies who do not have ownership of land on which their buildings stand.

The Revenue Department has issued a notification informing that the change in land records would be carried out without holding an additional hearing once the Competent Authority has given its decision in favour of Deemed Conveyance.

To ensure the transparent process, a Committee comprising the Collector, District Deputy Registrar, Assistant Registrar, Land Record Officer, Municipal Commissioner or his Deputy is set up. The Housing Department will oversee the entire process for Deemed Conveyance. The Committee so appointed shall meet once a month and take a review of all the cases that comes up for hearing. This drive is slated up to June 2013.

As per the previous system, all the concerned parties had to go through multiple hearings with three Departments i.e. Land Records, Registrar of Stamps and the Co-operation Department. The Department of Housing is keen to bring down the number to one or two general hearings where all the issues related to issuing Deemed Conveyance are planned to be sorted out.

The State will be holding the drive until June 30, 2013 during which hearings of most Housing Societies is expected to be completed. The fact remains that there are 88,000 Housing Societies in the State of which about 20,000 Housing Societies have received their Conveyance Deeds.

The first step for this Committee is to prepare a district-wise detailed database of Housing Societies, Plots and Bungalows. The status of every Society seeking Conveyance Deed will be checked with all Departments concerned, which would give an idea about the number of Societies, how soon Deemed Conveyance can be issued and also the procedure.

All the queries of other Departments will be answered and a final decision will be taken during one hearing before the Registrar from the Co-operation Department. Orders have already been issued to conduct a detailed survey of the Societies in the Mumbai as a preparation for the drive to know the exact number of Societies waiting for their Conveyance Deed.

The necessity to implement this drive is that the builders have an eye on extra Floor Space Index (FSI), Transfer of Development Rights (TDR) and redevelopment of old buildings and hence delay the procedure of issuing Conveyance Deed. If a Co-operative Housing Society gets additional FSI or TDR, it can be utilized as per the Society’s requirements; but if a Housing Society is not formed, the benefits directly go to the builder concerned.

It is a good move on part of the State Government since it will speed up the lengthy process and many Societies waiting for their Conveyance Deeds will get the desired results. However, it is for the Societies to come forward to take the benefit of the Scheme and participate in the drive and secure Deemed Conveyance Deeds.

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KNOW ALL ABOUT VAT ON PROPERTIES PURCHASED

A Value Added Tax (VAT) is a modern and progressive form of sales tax. It is charged and collected by dealers on the price paid by the customer. VAT paid by dealers on their purchases is usually available for set-off against the VAT collected on sales.

Before 2006, no VAT was levied on property sale. The state introduced it in 2006 after the Supreme Court passed an order in 2005, putting Builders and Contractors in the same bracket.

On August 6, 2012 the State Sales Tax Department issued a circular to Developers to pay VAT with retrospective effect on flats, shops and bungalows sold by them between June 20, 2006 and March 31, 2010.

The Sales Tax Department stated that the onus to pay the tax liability is on the Builder and not the property buyer. It further said that Builders' tax liability will be adjusted against the installments paid by them so far. Although Builders claim the VAT is 5% of the value of a flat, the Sales Tax Department said it will work out to less than 3%.

The local Builders started sending mails to flat owners demanding immediate payment of the VAT amount, ranging from 0.66% to five per cent over the total agreement cost to be paid before October 31 for their Flats purchased between between June 20, 2006 and March 31, 2010. However, the October 31 deadline is for the builders to pay VAT to the Government and not for the Flat purchasers.

As per a recent Supreme Court order, the Maharashtra Sales Tax Department has directed the Builders to pay the VAT on or before October 31, 2012 for the flats sold between June 20, 2006 and March 31, 2010 to avoid levying of interest and penalty.

The Government has given options as per the Maharashtra Value Added Tax, 2005, rule 58 and 42 (3).  There is a provision in VAT for claiming Set Off against the VAT paid just like service tax. Under Maharashtra Value Added Tax 2002, a registered vendor or dealer can claim the Set Off of tax paid. Hence Builders or Contractor paid VAT on building materials like cement, tiles, steel, paints, glass and almost 3000 number of items used for construction including elevators and gadgets would have been unclaimed if the end users were given the relief.

The Builders will collect the VAT or collected VAT kept in escrow account will be utilized to set off VAT already paid through construction material bills. The onus is on the flat or property buyers to pay the VAT. Builders or Contractors will get input tax credit, if they paid the taxes u/r 58 or u/s 42 (3). State of Maharashtra had merged Works Contract Tax with VAT and hence VAT is applicable to the Real Estate.

1. Composition Scheme U/s 42 (3) - Under this scheme the Builder has to pay 5% tax on the Agreement Value. Land deduction is not available. Input tax credit is available subject to the reduction of 4%.

2. Actual Expense Method U/r 58 - Under Rule 58, the deduction of Labour, service charges is available on actual basis. Land deduction is also available. Set-off will be calculated subject to the condition u/r 53 and 54.

3. Standard Deduction Method U/r 58 - Under Rule 58, the deduction of land cost will be allowed. Thereafter 30% standard deduction from remaining amount will be available as per proviso to sub-rule 1. Set-off will be calculated subject to the condition u/r 53 and 54.

4. After 01.04.2010, the Builder can opt for fourth option also, under this option u/s 42 (3A), Builder has to pay 1% tax on agreement value. No land deduction and input tax credit is available.

The Tax Experts opine that the VAT has to be applicable on sale / resale of goods under the sale of goods act. Builders will have to declare and explain the cost of material that has been used before working out any formula of collection of VAT from buyers. If a Builder decides to do so, the minimum amount of VAT can be brought down to 0.3%. Most of the Builders have kept the collected VAT money in an escrow or a separate account. If they have collected 5% VAT, they should refund buyers the remaining amount after paying the required to the Government.  

The Builder will be required to make the payment of interest according to the provisions of law. However, all the VAT is collected from the flat purchaser will be retained by the builders and set off will be claimed. Hence neither Government nor flat purchasers will benefit from paying VAT.

It is reported that Flat owners are arm twisted and harassed by Builders for no mistake of their flat buyers. It is the responsibility of the Builder to maintain its account and charge VAT and deposit it to the State Government. The flat owners should carefully read their Agreements with the Builder and pay the taxes if the liability is put on them

The flat buyers should ask for a VAT invoice with complete break-up from the Builder that would give the exact amount of tax each buyer is supposed to pay. It will help them understand the method used by the Builder to charge VAT as the VAT is not applicable on the land purchase, labour cost and raw material for which the Builder has already paid the tax.

According to the rules, the Builder is considered a dealer in the under-construction project as he buys material from a supplier and after using them in process, sells his goods i.e. the flat to the buyer. With tax payable on the material bought, the Builder can claim set-off for the tax already paid while making the purchase. This would help reducing the VAT amount to lower than 5 per cent. This means, the tax payable would depend entirely on credits earned by the developer on tax payments for various expenses.

Buyers who have already paid 5 per cent tax on the agreement value years ago are worried about the refund, as they fear manipulation by the Builder. They are of the view that first, they were not to pay on the agreement value, secondly, the VAT should have to be much less than 5 per cent and lastly, the Sales Tax Department is to pay interest also on the refund and that they are sceptical about the refund, forget the interest.

The Builders are facing difficulties on two fronts: calculation and collection. First, VAT is to be calculated on each flat and not on each building. There could be thousands of flats sold by a developer from 2006 to 2010. Besides, the agreement value could be different for different flats in the same building.

The president, CREDAI, has appealed the Builders not trying to make money on a back-dated problem which has arisen due to Government Policy should maintain the highest degree of transparency in collecting and submission of the VAT. The builders' have already approached the Bombay High Court seeking a uniform formula for calculation of VAT.

CFBP’s vice-president has declared that the Government’s decision to levy VAT on those who bought property between June 20, 2006 and March 31, 2010, itself, is unfair and that since the Government has now clarified the VAT amount, Builders must not ask for 5%. Buyers can complain to CFBP to resolve the issue.

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