SC ruling on VAT: Housing developers say consumers will have to pay up

Supreme Court has also said VAT is not payable if a fully-constructed flat is sold to the purchaser.
With the Supreme Court upholding levying of value-added tax (VAT) on construction projects in Maharashtra, developers say it would lead to additional burden on buyers as they would be forced to recover the levy from the consumers.
The apex court had yesterday upheld a Bombay High Court verdict which had said that the state could levy 5 per cent VAT on sale of under construction houses between 2006 and 2010 in Maharashtra.”Imposing 5 per cent VAT on the flats constructed during June 2006-March 2010 would impact consumers as most of the apartments under construction during that period were already delivered,” National Real Estate Developers Council Vice-President Sunil Mantri said. In 2006, Maharashtra had issued a circular, which had levied a 5 per cent VAT. However, the Confederation of Real Estate Developers Associations of India (Credai) challenged the government decision in the Bombay HC, which upheld the government view and which in turn was challenged in the apex court.
According to the verdict, an agreement entered into by a developer 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’ and the provisions of Article 366(29-A)(b) are applicable. “The SC has consequently dismissed the petition challenging the constitutional validity of section 2(24) of the Maharashtra VAT Act. “However, in paragraph 115 of the judgement, the SC has 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 buyer,” Credai chairman Lalit Kumar Jain said.
He further said the apex court has also clarified the tax is chargeable by the state only on the value addition made to goods transferred after the agreement is entered into with the buyer. The Supreme Court has also said VAT is not payable if a fully-constructed flat is sold to the purchaser as it would not amount to a works contract, he added. Mantri, who is also the chairman and managing director of Mantri Realty, further said: “It would be difficult for builders to recover the money from customers which will lead into numerous disputes between developers and customers.”