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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.