Continuing from my earlier writings on the subject matter of Haryana Vat for developers and builders, it is quite noteworthy that the recently implemented notification of 1% composition scheme as prescribed under new inserted Rule 49A of Haryana Rules faced no changes from the earlier version of draft notification to the extent it was made operational. This despite the fact that the developer community at large, consultants and associations of real estate would have all suggested considerable number of suggestions as seeked by the state of Haryana prior to implementing the notification dated 12th August, 2014.
Major part (excluding the amnesty portion) of the draft notification No Web 6 / H.A. 6 / 2003 / S.60 /2014 dated 5th July, 2014 was implemented by a notification dated 12th August, 2014 as published on the website www.haryanatax.gov.in.
With the implementation, a developer is provided with a period of 30 days from date of this notification to opt for this scheme w.e.f 1st April, 2014. Opting for this scheme may not be a straight forward affair as the scheme itself seems to have a lot many dots unconnected rendering the developers with a shivering confidence.
Few of the several reasons, why this scheme contains hurdles and seas of uncertain territories are as detailed hereunder:-
A. Point of Tax Incidence – Not Defined
As per Rule 49A (1),
“Tax shall be calculated at the compounded lump sum rate of one percent of entire aggregate amount specified in the agreement or value specified for the purpose of stamp duty, whichever is higher, in respect of the said agreement.”
Since when the tax incidence / point of taxation is not defined, the same will create confusion and uncertainty in the trade. On the widest on the interpretations possible (since no boundaries outlaid in the law), department may hold a view that the same is liable to accrue at the time of execution of agreement to sell itself.
B. Developer Definition – Very Broad Ambit
As per Rule 2(mmmm) of HVAT Rules,
`Developer' means a person who is engaged in and undertakes the construction of civil structures, flats, dwelling units, buildings, premises, complexes, commercial or otherwise, whether wholly or partly (either himself or through an authorized person) for sale and transfers them in pursuance of an agreement along with land or interest underlying the land to a buyer, where the value of land or interest underlying the land is included in the total consideration received or receivable;"
There is incidentally no provision to exclude the consideration received by developers in cases where the entire consideration is received after the completion certificate which are contrary to recent rulings of Hon’ble Supreme Court in L&T Limited v. State of Karnataka (2013-TIOL-46-SC-CT-LB) which in principle accepts the law laid down in earlier judgments in case of K. Raheja case. This shall lead to confusion in trade and shall be addressed to for smoother implementation.
It is pertinent to note that even under Composition scheme for Delhi VAT Effectuated vide Notification No. 3(13)/Fin.(Rev-I)/2012-13/dsvi/180 dated 28th February,2013., there is a specific exclusion to this account. It mentions that,
“Contracts where the entire consideration is received after issuance of completion certificate by the competent authority are excluded here”
C. Interstate Additional Purchase Tax (APT) is very harsh and uncalled for.
As per Rule 49A(2)(i),
“The composition developer opting for composition under this scheme, shall not purchase or receive goods from any place outside Haryana to be used in the execution of the contract at any time during the period for which the composition remains in force under this Scheme”
Its proviso says,
“Where the goods are purchased or received in course of interstate trade and commerce or transferred from other states or imported from out of India have been used in the execution of the contract, then the composition developer shall pay the tax on their purchase price (referred as Additional purchase tax – APT in this article) at the rate/s applicable on the sale of such goods in the State along with interest as applicable under the Act and such tax shall not be adjustable towards his composition tax liability;”
This additional APT is very harsh in multiple senses; firstly it is applicable w.e.f. 1.4.2014 even where the developer was unaware about any such provisions. Further, it does not consider whether the selling dealer is registered or not. A Flat APT in all cases of interstate purchases / stock transfers inward.
Say cement is purchased by developer from outside Haryana (C Form benefit is not available) at the rate of 13.125% plus an additional APT of 13.125% making total tax of 26.25%. This shall be making such purchases unviable.
It is to be noted that no APT was imposed by several states releasing such composition scheme for developers including Maharashtra and Andhra Pradesh.
D. No tax can be collected from buyers – Complicates the Story further
As per Rule 49A(2)(iii),
“Composition dealer shall not collect any amount by way of tax under the Act.”
This shall be another hindrance to the developer. It is worth exploring that can the developers even recover the additional tax of 1% even as additional considerations when above provisions are read along with additional tax clauses of the agreements.
E. Amnesty not operational as yet
The amnesty part of the draft notifications has not been operationalised vide the final notification dated 12th August, 2014. This may hint at several clues, one of them might be that the state government is reconsidering the implementing provisions.
Currently as on date, this notification of 1% shall be only applicable for FY 14-15 onward without any option of being opted for w.e.f 1.4.2007 as earlier suggested by draft notification dated 5th July, 2014.
F. No Benefits of Form C, VAT D1 & deductions on account of payment made to sub-contractors
The said scheme does not allow the benefit of concessional rate of tax under central declaration form C etc. Further the explicit allowance of vat form D1 shall also not be allowed. This coupled with no input tax credit, no deduction of sub-contractor payment, no refund and additional APT would make purchasing a costly affair.
G. No Exit Option – Is it really beneficial to the developer
There is no exit option in Rule 49A unlike Rule 49.
As per Rule 49(8),
“A lump sum contractor may at any time by appearing before the appropriate assessing authority himself or through an authorized agent express in writing his intention to opt out of the scheme of payment of lump sum in lieu of tax payable under the Act.”
A lack of such option in Rule 49A can open several new instances of litigation between the dealers and department.
H. No Refunds – Even in genuine cases
As per Rule 49A (2) (vi),
The composition dealer opting for this scheme shall not be entitled for any refund. Say, hypothetically an agreement on which composition tax was duly paid by the developer was cancelled later, the adjusting mechanism is silenced and refund mechanism is not allowed, what a developer can resort to in such cases.
I. Interest to be paid even if opted for within 30 Days w.e.f 1.4.2014.
As per Rule 49A(3),
“The tax period for the composition developer shall be monthly and the payment of lump sum in lieu of tax shall be paid by the composition developer within 15 days of the close of the month.
Provided that if a composition developer fails to make the payment of tax in time under this scheme, then he shall be liable to pay interest as per the provision of sub-section (6) of section 14 of the Act”
As per Rule 49A(5),
“A registered developer who is paying tax or composition tax under the Haryana Value Added Tax Act, 2003 on the date of this notification, may opt this scheme with effect from Ist April, 2014 by filing an application to the appropriate assessing authority within a period of thirty days from the date of publication of the notification”
On plain joint reading of above provisions, even where developer opts for this scheme w.e.f 1.4.2014 by filing application within 30 days, still he would be required to pay interest on tax payments including APT!!
Considering the above factors it shall be a broad exercise for developer community at large to decide on whether it shall opt for composition scheme or get assessed as per normal provisions of the Act. Despite all the reasons discussed, the scheme still has benefits of 1% rate, simplified calculations and ease of records / assessments.
It is noteworthy that the even the assessment of several developers prior to 1.4.2014 (wherever challenged) has been a matter of dispute and litigation in Hon’ble Punjab & Haryana High Court on major grounds of unconstitutionality and lack of legal machinery to tax such contracts of construction involving transfer of land / rights.
The way forward immediately for developers may include addressing to these questions:-
a. Whether incorporating a new entity for purchases in Haryana would be suitable strategy?
b. Records segregation to be in strict priority considering plots and common built up sales as well.
c. Performing a thorough cost comparison under various options available.
d. Any immediate intimation to be filed with the department.
e. Ensuring proper invoice and documentary formats
f. How crucial is to collect taxes from direct buyers.
g. Designing - Central & Local Purchase strategy
About the Author:
CA Ankit Gulgulia (Jain)
Author is Practicing Chartered Accountant in New Delhi/NCR and specializing in Indirect Taxes, Corporate Laws and Transfer Pricing. He can be reached at email@example.com
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