The Rahejas had an agreement with owners of land in Karnataka for the construction of residential and commercial developments. The issue before the Supreme Court was whether Raheja was liable to pay work contracts tax, which translates into paying VAT, according to a senior partner in Ernst & Young.
The Maharashtra circular is based on its interpretation of the Supreme Court judgement that pre-launches are included under works contract.
Quoting the judgement, the circular stated that works contract includes "...any agreement for carrying out, either for cash or for deferred payment or for any other valuable consideration, the building and construction of any moveable or immovable property."
In layman terms this means that in cases where buyers purchase houses before completion of construction, builders would be levied works contract tax on the building material.
Buyers will have to begin shelling out more as they have to bear the tax burden. Customarily, there is an understanding between the buyer and the real estate developer that until the buyer takes possession of the development, any impact of changes in taxation would be borne by the developer.
"So far, builders were paying VAT on the actual cost of the construction by the contractor. Now they have to pay tax on the material as on the last sale price to the buyer. A part of the builder's profit will be added back to the value of the material. It necessarily means more tax to be paid. Authorities are now likely to attribute more to the cost of construction," said Satya Poddar, partner, Ernst &Young.
"Developers and contractors already pay VAT when we purchase our raw materials like steel, cement, electrical goods, timber etc. Now the government will start charging VAT for utilising these raw materials as well. Developers will have no choice but to pass on the additional cost to the user and that will further escalate property prices," said Ramani Sastri, president, Confederation of Real Estate Developers' Association of India.
if developer or builders entered into an agreement for sale of flat, being an immovable property not liable to pay tax based on the following judgements
2007-TIOL-297-HC-ALL-CT IN THE HIGH COURT OF ALLAHABAD ASSOTECH REALTY PVT LTD Vs STATE OF UP AND ANOTHER [Raheja's case has been distinugished]
2008-TIOL-321-HC-GUW-ST IN THE HIGH COURT OF GAUHATI Writ Petition (C) No. 2615 of 2006. MAGUS CONSTRUCTION PVT LTD Vs UNION OF INDIA
based on the princples that, builder, promoter or developer undertakes construction activity for its own self, then there is no transfer of property in goods from one person to another. It is only a case of transfer of proeprty in falt an immovable property.
Morever The Supreme Court in the case of Larsen and Toubro Limited and Another vs State of Karnataka [2008 VIL-29-SC] has stated that the case of Raheja Development needs re consideration by the larger bench
Therefore in my view the builders and develpers who entered an agreement with sale of flat not laible for vat