Article Series – New found Taxability of Builders / Developers
– Well, works contract is a topic which has now got a new meaning and definition. Recently Honourable Apex court in a recent judgement in the case of L&T has held that the construction of residential complex by developers is a works contract.
– The constitutional amendment of 1982 got a new meaning in a way that the words “in some other form” from the phrase – transfer of property (as goods or in some other form) could even be in the form of an immovable property. Not only that the court has held that point of transfer of property in goods need not necessarily be by way of accretion but after some time in the form of an immovable property.
– Thus trying to close out all ways in which the builders could have escaped from calling themselves as contractors. Interestingly since the court has termed them as contractors, those who are doing the actual construction on their behalf have become sub-contractors. And thus despite the fact that the VAT pill may be tough to digest for the builder community, they are left with very less options but to plan the future transactions. Some may even try and avail the C Form benefit, now that the end product has been held to be taxable under VAT.
– The problem now is that the rational builders may now try to fully comply with the new law (which is applicable retrospectively), but the past would continue to haunt them. Hence any new compliances may have to be done by creating a new entity.
– Some ways in which the future transactions could be structured are as below :-
- Sell of the lands to a new entity and engage in proper compliances in the new entity. Although this mode would entail additional costs in terms of stamp duty payable on transfer of land.
- Enter into a Joint Development Agreement with a contractor and thus all future construction would be undertaken by this contractor.
- Create a back to back entity and offload the complete contracting work to the new entity including purchase of materials and labour.
- Sell the lands to the prospective customers and let them appoint the contractor on their own. This could require them to get their plans passed independently.
– Each of these options has its own merits and demerits and the implications arising out of each option needs to be studied carefully not only from a tax point of view, but also control and legal point of view.
– The analysis should take into account the complete impact of taxation including stamp duty, Income Tax, VAT and Service Tax. It should also take into account the fact that there are various schemes under indirect taxes under which the tax liability may be discharged by the real estate developer as well as the contractors working under him. Thus theoretically there could be several models which would emerge out of this.
– We would thus advice that proper professional help should be taken before making any decision in this regard.