VAT on Builders/Developers - Maharashtra

Recent Developments & Methods of computing VAT Liabilty 

Although the above topic is very vast & comprises of various complication & ambiguity but this peculiar subject has been burning topic in the State of Maharashtra. This issue has spread like a rapid fire after the issuance of Trade Circular 14T of 2012 dated 06/08/2012 by the Commissioner of Sales Tax, Maharashtra & due to the Bombay High Court’s Judgment in MCHI’s case in April 2012. The following are some essential & important aspects & as well as possible issues which could arise while computing VAT Liability of Builders / Developers in Maharashtra.

Chronology of events

Upto 19^th June 2006:

No VAT levied on Builders/Developers & supported by DDQ in case of

M/s Rehab Housing Pvt Ltd.. & Larsen & Toubro Ltd.(JV) (WC-2003/DDQ-11/Adm-12/B-276 dtd 28.06.2004) :

“The Commissioner of Sales Tax Maharashtra State has held that the transaction is composite one i.e. providing land with constructed tenements & hence ii is not covered by Sales Tax Provision Including Works Contract Act.”

20^th June 2006:

VAT was levied on Builders for the FIRST TIME as per :

K. Raheja’s Development corporation (141 STC 298) Supreme Court Judgment, on the facts of the case that there were two agreements with separate consideration viz. for sale of proportionate undivided share in the land & other for the cost of construction & due to peculiar definition of “Works Contract” under Karnataka Sales Tax Act,

11^th Sep 2006 & 7^th February 2007:

Issue of Circular by Commissioner of Sales Tax, Maharashtra, Trade Circular no. 23T of 2006 & 12T of 2007 clarifying that the S.C decision in K. Raheja Development Corporation now applicable to proceedings under MVAT Act & clarifying certain important aspects and Mah XXV of 2007 known as Maharashtra Tax Laws (Levy, Amendment and Validation) Act 2007 amended definition of works contract w.e.f. 20^th June 2006 & was aligned with Karnataka Sales Tax Act definition of works contract.       

7^th December 2007:

Read with rectified order dated 8^th February 2008 Bombay High Court granted interim relief to members of MCHI , subject to fulfillment of certain conditions.

On 9^th July 2010:

Notification of 1% composition scheme was issued (for all agreements registered after 1^st April 2010) .(The new scheme of composition is not a new levy section but one more method of discharging tax liability by builders or developers)

In April 2012:

Bombay High Courts decision in MCHI’s case, decided against the Builders/ Developers. 

Brief summary - The Hon’ble High Court is mainly swayed by the rights obtained by the purchaser under Maharashtra Flat Ownership Act on the registration of the agreement. As per MOFA the purchaser gets certain rights like non change of plan with out consent of buyer etc. Therefore the court considered that between the date of Agreement AND till the possession is given, certain rights accrue to the purchaser in respect of purchased property. Therefore there can be said to be transfer or property in goods between two dates & hence liable to works contract.

On 6^th August 2012:

Issued trade circular 14 T of 2012 along with FAQ’s further clarifying certain matters on taxability event, amount & rate on which VAT is payable, Input tax credit, etc.

VAT ON BUILDERS/DEVELOPERS IN MAHARASHTRA

At present , Honourable Supreme Court has admitted the appeal of the Builder’s Association but till date there is no Stay Order on the same & hence on the basis of Bombay High Court Decision’s in MCHI’s case , VAT on Builders/Developers is enforced in the State of Maharashtra.

Method’s of computing VAT Liability in case of builders/ Developers :

1) Calculation as per Sec 42(3)

a. Output VAT 5% on Total Contract Value of works contract in case of construction contracts.

b. No Deduction of Land

c. Take Input Tax Credit after Retention of 4%

2) Calculation as per Sec 42(3A)

a. VAT 1% on Agreement Value OR Stamp Duty Value (Whichever is Higher)

b. NO Deduction of Land

c. NO Input Tax Credit

d. NO Purchase Against C Form

e. Dealer cannot issue Form 409 to Sub-Contractor

f. This Section is Inserted by The Maharashtra Tax Laws ( Levy & Amendments ) Act, 2010, w.e.f 01/05/2010

3) Calculation as per Rule 58(1) & 58(1A)

(1) Actual Deduction Method

Sale/Agreement Value/Contract Value = XXX

(Less:) Proportionate Cost of Land (As per guidelines

appended to the Annual Statement Of

Rates prepared under the provisions of the = (XXX)

Bombay Stamp(Determination of True Market Value Of the Property) Rule,1995 as applicable on

1^st Jan of the Year in which agreement to sell is Registered)

(Less:) Proportionate Actual Cost Deduction for

Labour, Sub-Contract, Hire charges, =  (XXX)

Planning etc & as give in this Rule 58     

Value of Material Transferred in Execution of  W.C. to =  XXX

Be Taxed at Applicable Rate  

(Less:) Input Tax Credit u/r 52 & 55 = (XXX)

(Subject to Rule 53 & 54)

Vat Payable = XXX

Add: Interest u/s 30(2) =  XXX

Total Payable =  XXX

(2) Standard Deduction

Sale/Agreement Value/Contract Value = XXX

(Less:) Proportionate Cost of Land (As per guidelines

appended to the Annual Statement Of

Rates prepared under the provisions of the =  (XXX)

Bombay Stamp(Determination of True Market Value

Of the Property) Rule ,1995 as applicable on

1^st Jan of the Year in which agreement to sell is Registered)

(Less:)  Lump sum Deduction for Labour

Sub-Contract, Planning, Hire Charges = (30%)

(Sr. No. 5 of Table u/r 58)

 Value of Material Transferred in Execution of  W.C. to =  XXX

Be Taxed at Applicable Rate  

(Less:) Input Tax Credit u/r 52 & 55 = (XXX)

(Subject to rule 53 & 54)

Vat Payable = XXX

Add: Interest u/s 30(2) =  XXX

Total Payable=  XXX

Important points as specified in trade circular 14T of 2012 issued on 06.08.2012

a. VAT Tax by Builders/Developers payable w.e.f 20.06.2006

b. Registration to be done before 16/08/2012 & payment of Tax, Interest, Late Fee ( Rs 1.2 Lacs for 6Years) & Compounding Fee of Rs 5000/- for All Unregistered period  & application for ADM Relief to be done before 31/08/2012

c. Form 233 to be filled Quarterly

d. Tax liability triggers on Agreement date though Advances are received earlier, Tax is to be levied from Agreement Date & NOT when agreement is registered.

e. If not done  before 31/08/2012, than as per Trade Circular Compounding fee would be desirably not less than 5000 + 0.5 % of Gross Sales Tax Liability for each month of Delay

f. Vat Audit report for all pending years to be completed & filed before 30/11/2012 to avoid late filling penalty of VAT Audit Report  

g. Purchases of Material like cement, iron & steel etc required to be used in the Construction Project will be eligible to Input Tax Credit

h. Non-refundable deposits & other charges under the agreement such as electricity deposit , water charges, legal charges, development charges etc will be a deduction to the extent such amounts are actually paid to other authorities            

i. Vat Applicable on the agreements can be collected by raising a DEBIT NOTE

j. It may be noted that in a case where a builder sells readymade flat i.e. after the flat is constructed, there is no controversy, it is considered as a sale of immovable property & there is no question of VAT Liability as works contract - as specified & supported by observation in K. Raheja’s Development corporation by Supreme Court & by Trade Circular by 12T of 2007 .

VAT Issues on Development on Barter Basis

Definition of Sale Sec 2(24) of MVAT Act,2002

“Sale” means a sale of goods made within the State for cash or deferred payment or other valuable consideration but does not include a mortgage, hypothecation, charge or pledge, & the words “sell”, “buy” & “purchase”, with all their grammatical variations & cognate expression, shall be construed accordingly”

Sec 2(24)(b)(ii)

 “the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including , an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufactures, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.

Definition of Sale Price Sec 2(25) of MVAT Act,2002

“Sale Price” means the amount of valuable consideration paid or payable to a dealer for any sale made including any sum charged for anything done by the seller in respect of the goods at the time of or before delivery thereof, other than the cost of insurance for transit or of installation, when such cost is separately charged”

In M/s Gannon Dunkerley & Co. (9 STC 353) Supreme Court

Supreme Court observed the ingredient of  “Sale” as under on page 365 of 9 STC :

“Thus, according to the law both of England & of India , in order to constitute a sale it is necessary that there should be an agreement between the parties for the purpose of transferring title of goods , which of course presupposes capacity to contract , that it must be supported by money consideration, and that as result of the transaction property must actually pass in the goods…. So also if the consideration for the transfer was not money, but other valuable consideration, it may then be exchange or barter but not a sale. And if under the contract of sale, title to the goods has not passed, then there is an agreement to sell & not a completed sale.”

In C.I.T. v/s Motors & General Stores (P) Ltd. (66 ITR 692)

In this case Supreme Court has observed as under on page 695/696 of 66 ITR

“Section 54 of the Transfer of Property Act defines ‘sale’ as a transfer of ownership in exchange for a price paid or promised or part paid & part promised.             

There is no definition of the words ‘price’ in this Act. But it is well settled that the word ‘price’ is used in the same sense in this section as in section 4 of the Sales of Goods Act, 1930 (Act III of 1930). Section 4 reads as follows:

A contract of sale of goods is a contract whereby the seller transfers or agrees to transfer the property in goods to the buyer for a price. There may be a contract of sale between one part.

Section 2 (10) of the Sale of Goods Act defines ‘Price: as meaning the money consideration for a sale of goods. The presence of money consideration is therefore an essential element in a transaction of sale .if the consideration is not money but some other valuable consideration it may be an exchange or barter but not sale”.

Thus from the above judgments it is clear that unless the transfer of property by the seller to buyer is against money consideration there cannot be ‘sale’ transaction for the purposes of sale tax laws.

POINTS TO PONDER

Thus if we Exactly can’t determine the value of Applicable VAT rate on Materials transferred in execution of Works Contract after deduction of Labour, Sub Contract, hire charges etc.. & deduction of  Cost of Land from Agreement Value/Sale Value/ contract then can we take on the basis of Proportion of Purchases of 4/5% & 12.5% to the Total Taxable Purchase & apply that proportion to the above?

(See Trade Circular 53T of 2007 – Though issued for retailers & wholesellers)

a. Whether Input Tax Credit for the whole year is to be first added up & then to be averaged out Quarterly or Should be taken in the Quarter of Purchases Bill Date?

b. Say in a Situation, if in 2007-08, if very few agreements are executed & major purchases are there in 07-08 & as per above calculation there is excess of VAT showing, Considering the Fact that in the year 2007-08, there was no provision to carry forward the Excess Vat Set off ? What to do? (Even the time limit to claim refund u/s 51 & to file Form 501 has also Expired)

c. The Trade Circular speaks that Method once Selected should be adopted Project wise, but as per Bombay HC , builders are now Contractors & therefore each agreement can be 1 Contract, therefore can the builder take different methods of Computation for each agreement to Compute VAT Liability ?

d. The rule contemplates to determine the value of the land as per guidelines appended to the annual statement of the rates prepared under provision of Bombay Stamps Rules, 1995, as applicable on 1^st January of the year, in which the agreement to sell the property is registered. This will also create difficulties. The agreement may be entered in one year but may be registered in subsequent year/years. The liability for works contract may arise on entering the agreement. The question is how to decide the value of land cost in the year of agreement itself  (though not registered in that year)?

Disclaimer

The views expressed in this article are the personal views of the author & the opinion expressed in this article should not construed to legal or expert advice, the author would not be responsible for any decisions taken by the readers.

Krunal J. Davda

Chartered Accountant

Email: krunal.davda@gmail.com