Builders will have to pay Value Added Tax now: SC

in Featured, Legal Update

Ipsita Mishra

Builders will have to pay Value Added Tax now according to the decison given by the Supreme Court. The Supreme Court had clubbed all 26 appeals on this issue. The three judge bench comprised Justice RM Lodha, Justice J Chelameswar and Justice Madan B Lokur, upheld the decision given by the High Court. The state’s decision has been challenged by the builders on the grounds that it discriminated between buildings built prior to 2010 and after that. According to the State’s Composition Scheme, buildings developers under construction from 2006 to 2010 should pay VAT at 5 per cent but for buildings under construction from April 2010, builders have to pay VAT of only 1 per cent of the total agreement value.  Under section 42(3) of MVAT, imposing 5 per cent VAT on flat purchasers from June 20, 2006 to Mar 2010 would impact consumers who bought flats during this period, because the apartments under construction have been handed to the customers. It will be extremely difficult for builders to recover the VAT amount from the customers. There are two alternate valuation rules available under Rule 58 of MVAT. The buyers will have to pay the tax on sale transactions. The taxes are to be paid by customers under agreement and hence CREDAI is fighting for the same. The Supreme Court has clarified that the state has right to levy VAT on such sale agreements. It can be only on value addition of goods and can only be charged from the date of agreement. The same comes within the meaning of ‘works contract’ and the provisions of Article 366(29-A)(b) are applicable. The Supreme Court dismissed the challenge to the Constitutional Validity of section 2(24) of the MVAT Act. The Supreme Court has clarified that the construction activity undertaken by a developer would be deemed as works contract only from the stage the Developer enters into a contract with the flat purchaser. The element of profit cannot be included in the calculation of the value of goods. The Supreme Court has directed the State Government to bring clarity into Rule 58(1-A).The Supreme Court has held that the law laid down in the case of K Raheja’s case is correct. The implementation of Rule 58(1-A ) (of Maharashtra VAT) shall not result in double taxation.

Some developers had collected indemnity bonds and post-dated cheques from buyers to ensure that if the ruling went against their interest, the buyers would pay up. There have been questions as to why buyers should pay, when the tax claim was on the builders.

Further Reading