The foundation of building named “Tax Complex” constructed by the Honorable Commissioner of Sales Tax of Maharashtra State for the builders and developers located in Maharashtra State is shaking. The builders and developers are trapped in the “Tax house” of the Maharashtra State and have to go to the door step of Honorable Supreme Court to escape from it. Let’s see when the builders get the order to escape or order to reside in “Tax house”.
The builders and developers are facing taxation issues under MVAT Act, 2002 due to the decision given by Mumbai High Court in case of Maharashtra Chamber of Housing Industries and other builders’ petitions V/s State of Maharashtra. Let’s start with this to know the taxation of builders and developers under MVAT Act.
There are several Floors to the ‘Tax House”, let’s start with 1st Floor:
Judgment of MCHI and its impact analysis.
Maharashtra Chamber of Housing Industries and other builders petitions V/s State of Maharashtra.
WRIT PETETION NO 2022 of 2007 IN THE HIGH COURT OF JUDICATURE AT BOMBAY
Includes various writ petition filed, by different bodies of builders associations on the same subject. Judgment given by Mumbai High Court on the Constitutional validity of the Section 2(24)(b)(ii) w.e.f. 20-6-2006.
Lets Analyzed the Judgment form available updates..,
What is the Issue/dispute?
After the Judgment of K.Raheja of Karnataka High Court, Builders and developers were brought in tax net w.e.f. 20-6-2006 via amendment in section 2(24)(b)(Iii) and rule 58 (1A).
MCHI has challenged the imposition of MVAT on transfer of immovable property, being they are not under ambit of VAT laws and State Legislature cannot tax it. Further “Sale” under MVAT Act, do not include sales of Immovable Property. Hence the amendment in definition of “Sale” u/s 2(24)(b)(ii) is invalid.
Sales Tax Departments contention was “Sale’ includes “Works Contract” hence the sub provision (b)(ii) of 2(24) is correct and builders and developers “Under Construction transactions” are covered as works contracts.
What are facts of Judgment?
MCHI is the association of builders and developers in Maharashtra State. All the members are in the business of the Builders and Developers. They are carrying on activity of building or developing of immovable properties and sale/lease of them, in Maharashtra State.
Generally an agreement is entered with the prospective buyer for the sale of immovable property. No separate cost of land is shown in the agreement and immovable properties are sold on Sq.ft basis or unit basis as the case may be.
The intention of the agreement is to sale the immovable property to the buyer. There is no contract for construction of immovable property with the buyer. Hence there is no works contract in case of builders and developers alike the works contractors.
What is Law?
Definition of sales : 2 (24) “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; and the words “sell”, “buy” and “purchase”, with all their grammatical variations and cognate expressions, shall be construed accordingly;
Explanation.— For the purposes of this clause,-
(b)(i) the transfer of property in any goods, otherwise than in pursuance of a contract, for cash, deferred payment or other valuable consideration;
(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, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;]
*These words were substituted for the words “works contract” by Mah. Act No. XXXII of 2006, dt. 5.8.2006 w.e.f. 20.6.2006.
What are the Imp findings/ references of the Judgment?
Section 4(1) of Maharashtra Ownership of Flats Act (MOFA), says that promoter has to enter into registered agreement before accepting any advance payment or deposit form the buyer.
Section 4(1A)(b) requires to attach the copies of title certificate, property card, 7/12 extracts, etc. showing the nature of the title of the promoter to the land on which the flats are constructed or to be constructed and also the plans and specifications of the flats as approved by the concerned local authority along with the agreement.
What is the Conclusion of the Judgment?
Referring to the provisions of the Maharashtra Ownership of Flats Act (MOFA), the judges said the agreement for sale executed under the act was a conveyance, as it conveys right, title and interest in the flat to the purchaser. Therefore it was not possible to accept that the contract involving sale of a flat under MOFA was not a works contract.
A division bench of justice DY Chandrachud and justice SK Sankalecha dismissed a petition filed by the Maharashtra Chamber of Housing Industries (MCHI) and a bunch of petitions filed by various builders.
Difference is made between “Agreement to Sale” and “Sale Deed” which are the triggering point of taxation.
“Agreement to Sale” is a agreement which will attract “Works Contract” being construction is not complete.
Receipts of advance payments, deposit before complication of immovable property and entering into “Sale Deed” will also attract “Works Contract” when adjusted against the sale value.
Direct “Sale Deed” after compilation of immovable property will not attract works contract.
MCHI to challenge the judgment in Supreme Court. But no stay is granted , hence tax need to paid now till Oct 2012
Further K.Raheja judgment is to be tested again in the L&T judgment pending in Supreme Court.
Builders and Developers may face action of recovery of tax w.e.f. 20-6-2006. Tax would be payable as contractor as per deductions u/r 58 or 58(1A).
Better to start paying under composition scheme of 1% w.e.f 1-4-2010 at least, as buyers are paying it and many builders are collecting it also.
To apply for Administrative relief for URD period before 31st OCT 2012.
Types of transaction of builders and developers:
1) A builder develops its own or of others property:
- Sells constructed property - ?
- Sells in construction phase – ?
2) A builder develops own or others property and sub contract the construction or some part of construction:
- Taxation on the Contractor.
- on Builder ?
3) A Construction Contract awarded for labour only?.
4) A Construction Contract awarded for Material and labour – ?
Lets see this first, “the taxation on contractor” as “ultimately builder is a contractor” under MVAT Act, 2002...,
Works Contract- Relevant Section and rules under MVAT:
No separate definition of builders and developers under MVAT Act, they are treated at par with works contractor. Hence the sections and rules applicable to works contractors are applicable to builder and developers.
Sec 2(24); Definition of Sale for Explanation on Works Contract;
Sec 3: Liable to tax as VAT dealer or RD.
Sec 16: Registration Obligation.
Sec 42: Composition Scheme for Contractors and Builders separately, Definition of Construction contract, etc..
Sec 45(4): Contractor of Sub-Contractor jointly and severally liable.
Sec 48: Contractor and Contractee eligible for claim of Set off.
Sec 86: Eligible to issue Tax Invoice.
Rule 53 and 54: Setoff.
Rule: 58: Value of goods transferred. & Deduction from such value.
RULE 58 (1A): Who to determine the value of land from the contract value.
(THE MAIN RULE AND STARTING POINT OF TAXATION FOR BUILDERS AND DEVELOPERS).
Basic of taxation of developers and builders:
The Cost of Land is to be determined first, from the total contract value u/s rule 58 (1A).
Rule 58 (1A) specify the who to determine the value of Land involved in contract i.e.., ‘The Stamp duty value as on 1st Jan of the year in which the agreement to sell the property is registered”. Subject to cap of 70% of the agreement value.
Notification No.1512/CR-84,taxation 1 dt: 30th July 2012, uploaded on 16th Aug 2012 deleted the 70% cap of deduction of land cost proviso under rule 58(1A). Retrospective w.e.f 20th June 2006.
Once the cost of land is deducted from the total contract value, the other deductions as per rule 58 will be applicable.
Accordingly the tax needs to be calculated on the value of goods involved in the total contract.
Value of Land?
The actual cost of land is not to be considered, the stamp duty value of land as on the 1st Jan of year in which agreement is registered, needs to be considered u/r 58 (1A). Even if, the cost of land is more than stamp duty value. Charges of registry, site development, NA charges, etc. are not to be considered in cost of land u/r 58 (1A).
It will be beneficial to calculate the cost of land per sq.ft and apply the same on total saleable area of contract. Once the ratio is determined, than same can be applied on the installment received time to time.
It will be more beneficial to pay at once at the time of agreement to sale the whole tax u/r 58 (1A).
But under 1% Composition Scheme w.e.f 1st April 2010 cost of land is not deductible from the contract value.
Issues arises when the developers takes property on development and no cost of land is directly shown in the development agreement? In such cases the Stamp duty value of development agreement needs to be taken. “The words “Interest in land” is imp in the rule 58 (1A).
Works Contract Taxation –Some Peculiarities:
Under MVAT Act, taxation of Works contract, following Options are available:
Option 1: Normal Taxation after Deduction as per books from Contract Value.
Option 2: Normal Taxation after % wise deduction from Contract Value.
Option 3: Composition Scheme.
All Options available Contract wise or lump sum basis.
Turnover of sales of goods involved in contract value shall be determined after deduction as mentioned in rule 58.
IMPACT: The balance amount shall be considered for calculating the turnover for applicability of MVAT audit.
Determination of sale price in case of works contracts as per Rule 58.
(WITHIN MAHARASHTRA STATE)
(Option 1-Deduction as per books)
Determination of sale price and of purchase price in respect of sale by transfer of property in goods (whether as good or in some other form) involved in the execution of a works contract:-
(1)The value of the goods at the time of the transfer of property in the goods(whether as goods or in some other form) involved in the execution of a works contract may be determined by effecting the following deductions from the value of the entire contract, in so far as the amounts relating to the deduction pertain to the said works contract:
Under rule 58(1) :
Option One: Purchase cost of goods involved in works contract plus Gross profit is sales price. Pay tax accordingly but there is issue of applicability of option one to developers?
Option Two: Deduction of labour cost from total contract is material cost. In turn is sale price. Pay tax accordingly.
Determination of sale price in case of works contracts as per Rule 58.
(a) labour and service charges for the execution of the works.
(b) amounts paid by way of price for sub-contract, if any, to sub-contractors;
(c) charges for planning, designing and architects fees;
(d) charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;
(e) cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract;
(f) cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services;
(g) other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property;
(h) profit earned by the contractor to the extent it is relatable to the supply of said labour and services.
Some issues under option 1:
Whether deduction of Depreciation on Plant and Machinery, Tools, used in execution of works contract is allowable deduction?
Whether salary of Partner- having technical knowledge and supervising contract is a allowable deduction?
Whether Petrol or diesel used in the execution of works contacts is a allowable deduction?
Whether “C” Form can be issued on goods used for execution of works contract? Like JCB, tools, etc..
Determination of sale price in case of works contracts as per proviso to Rule 58 – (Option 2)
Where the contractor has not maintained accounts which enable proper evaluation of different deductions as below or where the Commr. finds that the accounts are not sufficiently clear or intelligible, then the Contractor or Commr. may in lieu of deductions as below, deduct a Lump sum deduction as provided in the Table u/r 58, to determine the SP of goods involved in WC.
Deduction of the Stamp duty value of Land as per rule 58 (1A).
The Sub-Contract Value shall be deducted from the Total Contract Value and Thereafter the lump sum Deduction allowable as per Table shall be made to arrive at the SP of goods involved in WC.
The value of goods so arrived at shall be the SP or PP relating to the transfer of property in goods involved in execution of WC, for the purposes of levy of tax@ 0 / 1% /5% / 12.5%, as applicable. RD can collect the tax separately, to the extent payable, on any sale of goods [Sec. 60(2)]
Where RD has not collected the tax separately, the tax element can be reduced from the `Sale Price’ for the levy of tax [Rule 57(1)]
Under Option 1 & 2: Rate of Tax. Set off on Goods used in WC
& General conditions to Produce `Tax invoice’ & Books of Accounts, etc. Set off on Local RD purchases of any goods, effected from 1-4-2005 shall be allowable after reductions as provided for under rule 53 and 54. Set off on goods used for works contract is available full and the General conditions & Negative list w.r.t. set off shall apply for P&L and Capital goods.
Main contractors & Sub contractors - Relationship shall be deemed to be that of the Principal & Agent [Sec 45(4)].
Their liability to pay tax shall be joint & several. Deductions will be given to either, based on producing prescribed certificates.
Payment made by Main Contractor – issue Form 406 & 409 to Sub-Contractor
Payment made by Sub-Contractor – issue Form 407 & 408 to Main Contractor
OPTION 3: Scheme of Composition from 20th June 2006
Lump sum or Contract Wise or Portion of individual Contract wise taxation:
New Explanation--whether in respect of the entire turnover of sales effected by way of works contract or in respect of any portion of the turnover corresponding to individual works contract, pay lump-sum by way of composition :
Two Type of Contracts: 1) Construction Contract and 2) Non-Construction Contract.
Definition of Construction Contract not yet defined.
For Construction Contract rate of Composition is 5%. Setoff available with retention of 4%.
For other than Construction Contract rate of Composition is 8%. Setoff available with retention of 36% of tax.
Deduction of land cost is not allowed under this composition scheme.
Deduction of tax paid by sub-contractor even under composition allowed:
“ the amount payable towards sub-contract involving goods ” means the aggregate value of the goods on which tax is paid and the quantum of said tax paid by the sub-contractor or the sub-contract value on which tax by way of composition is paid by the sub-contractor, as the case may be.
If the contractor- sub-contracts the work – No set-off can be calculated on the purchases made by sub-contractor.
If the sub-contractor charged 5% or 8% composition to main contractor, Set-off of composition paid would be allowed to main contractor.
Purchasing party is eligible for setoff of Composition Tax paid, subject to rule 53 or 54.
Whether Service tax amount is to be included under Composition Scheme?
Refer Imagic Creative (P) Ltd v Commissioner of Commercial Taxes- were it is noted that, a contract involving both the providing of a service and a transfer of goods, must be regarded as a composite contract and VAT could be levied on the element of the contract transferring goods only.
TDS UNDER VAT – [ Sec. 31 / Rule 40]
1. TDS provisions applicable to payments made for Works Contracts, or other purchases, as notified.-Notification dt.1/4/05 TDS @ 2% if contractor is RD, else @ 4% - TDS if total contract value is of Rs. 5 lakhs or more, in a year, per contractor.
2. No TDS on Sub-Contracts between principal and sub contractor.
3. Advance payments liable to TDS only when it is adjusted against the amount payable.
4. This will be a major issue for URD period, Admin relief should be granted of this also.
Leasing Transaction- taxation under MVAT Act:
Section 2(24) Definition of Sale Price:
(iv) the transfer of the right to use any goods or any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; Value Added Tax leviable on Right to use of goods; Ex: Rent, Lease, Hire Purchase, etc..
VAT to be calculated on goods used in transaction. Like, Rate of Generator in case or Rent of Generator, etc.. Set off available on local purchases as per rules 51 to 55.
Lets see the 1% composition scheme for developers and builders:
Refer Notification No. 1510/CR-65/TAXATION-1 Dt: 9th July 2010.
Conditions of 1 % Composition Scheme:
Applicable to Registered Dealers only.
Notification came on 9th July w.e.f. 1st April 2010, How to take retrospective benefit in case of unregistered dealers?
Unregistered dealers has to comply rule 58(1A). i.e.., up to 70% of land value deduction from sale/registered value.
Scheme is optional and applicable to each contract or as the case may be.
Conditions of Composition Scheme:
Type of Activity:
“The construction of flats, dwellings or buildings or premises and transfer them in pursuance of an agreement along with land or interest underlying the land”.
Construction is first activity. Then Transfer along with Land or Interest in land. Through registered agreement only. All three activity are obligation for coverage under composition scheme. Agreement registered on or after 1st April 2010 are covered.
Taxable amount; “Aggregate amount of specified in the agreement or value specified for the purpose of stamp duty in respect of said agreement under Bombay Stamp Act,1958 whichever is higher”.
Stamp duty value is not recorded in books of accounts, hence taxable turnover will have to reconcile with books i.e.., consideration or sale value. On date of registry the tax amount is due. U/r 58(1A) 1st Jan Stamp value of land, in the year of registry is to be taken for deduction were as under composition scheme its at the time of registry of agreement.
Rate of composition: 1%.
U/r 58(1A) rate of tax levied in the ratio of goods transferred after deduction of land value i.e., Cement 12.5%, Steel 5%, etc.. Like works contractor taxation. It seems that composition scheme is beneficial as compare to 58(1A).
“The claimant dealer shall make e-payment of the amount of composition for the return period in which the agreement is registered and include such agreement value as turnover of sales in the said return.”
No need of such condition of e-payment as its mandatory now.In case of stamp duty value higher then agreement value? What should be shown in return?
“The claimant dealer opting to pay composition under this scheme shall not be eligible to claim set-off of taxes paid in respect of the purchases.”
No setoff on any goods, even in case of P&L and capital items.
No purchases on “C” Forms.
OMS purchases without “C” Forms allowed.
Otherwise Scheme will not be applicable, it’s a contravention.
“The Claimant dealer shall not issue declaration in Form 409 to Sub-contractor in respect of the works contract for which composition is opted”.
One of Imp & special condition and applicable in case of principal and Sub contractor case.
Its to avoid the benefit to sub contractor. He has to pay tax on his own, not like a case in works contracts, where principal contractor if, under composition then sub contractor is also under composition for setoff calculations.
“The claimant dealer shall not be entitled to change the method of computation of tax liability in respect of contract for which he has opted for this composition”.
Effect on big schemes were numbers of flats are more and period is longer. Hence planning has to be done in advance, as no change allowed later on. No intimation required to Dept of applicability of Scheme.
“The claimant dealer shall not issue Tax Invoice”.
No Major impact, as builders and developers generally never issues invoices to customers.
Whether tax can be collected separately by builder? Yes, no such restriction , a receipt or debit note can be issued.
Taxation of Works Contract – Important points to remember:
Once its known that its– Works Contract– Find out weather Construction Contract or Non Construction Contract.
Taxation for the Period from 20th June 2006 to 31st March 2010:
If books of accounts are appropriately maintained by dealer- go for Actual basis i.e.., Option 1st. If Actual basis is not possible then for Option 2 (i.e., % basis) or
5% Composition Scheme. (May be beneficial).
(Need of J1 and J2 Annexures in Audit Report).
From 1st April 2010 onwards:
Go for 1% Composition Scheme. (No need to give J1 and J2 Annexure in Audit report)
Types of transaction and taxation
1) A builder develops its own or of others property:
- Sells constructed property - No, VAT.
- Sells in construction phase – Yes, VAT.
Option to Pay tax
1) Under rule 58 1A- land value deduction
2) Composition Scheme from 1-4-2010.
2) A builder develops own or others property and sub contract the construction or some part of construction:
- VAT liability on the Builder as well as on the Contractor.
- Builder to deducted WCT TDS of Contractor.
Highlights of Administrative relief to builders and developers:
Registration before 16th Aug 2012 (now 15th Oct 2012) mandatory. URD period covered from 20th June 2006 till the date of registration.
Failure to apply for registration before 16th Aug 2012 (now 15th Oct 2012) will attract penalty u/s 29 (2A).
Registration shall be granted on priority without pre visit to the dealer place.
Application for administrative relief shall be made before 31st August 2012 (Now 31st Oct 2012) along with proof of filing of all returns and payment of tax and interest for the URD period.
Rs.5000 compounding fee need to be paid along with application for admin relief. Failure to apply for registration and admin relief, will attract addition compounding of 0.5% of the gross sales tax liability, arising during URD period, for each month of delay.
Order of Admin relief will be granted without hearing within two days.
Returns of URD period to filed on quarterly basis.
All ready Registered dealer can apply for admin relief for the period before 1st April 2010.
Audit report of all URD period shall be filed on or before 30th Nov 2012.
FAQ on Taxation of builders and developers:
Taxability arises on Agreement. i.e., registration of agreement to sales or sale deed which ever is earlier as the case may be.
Tax is payable on receipt of Installment or advances after registration of agreement to sale.
No tax payable on installment or advances received before agreement to sale, but tax due on such advances when adjusted against the whole contract, as soon as agreement to sale is registered.
Agreement entered before 20th June 2006, installment received after it, tax is livable on installment received only after 20th June 2006.
Amount received towards the Electricity, society registration, etc.. will be allowed as deduction on actual payment to the concerned authorities. Extra amount will be taxed.
Builder first make registered agreement to sale and received the advance amount up to 20%/30% of the agreement value, possession of unit and sale deed is pending. Yes, composition tax payable? But if tax is collected full, better to pay at the time of agreement to sale. Or pay on advances as and when received or receivable.
Builders received full amount of the contract, agreement to sale is registered but possession & registered sale deed is pending. Tax due on agreement to sale.
Builder do registered agreement to sale, received all the amount and gives possession of the property but registered sale deed is not done. Yes, composition tax payable.
Builder received full amount, registered sale deed is made, possession is given. Yes, composition tax payable.
A builder has taken completion certificate from competent authority in June 12. He has sold certain units in July 12 without taking any advance before completion certificate from the customer. Whether Builder needs to pay Vat @1% (as per composition scheme) on such completed units assuming that Builder is a Registered Dealer. What if the Builder is Unregistered Dealer? No VAT tax, as there is no prior agreement to contract .Immovable property after completion is sold, which no under preview of this dispute of works contract?
To get registered before 16th Aug (now 15th Oct) for the benefit of Admin relief and apply before 31st Aug 2012 (now 31st Oct ).
URD period contains:
1st Year 20th June 2006 to 31st March 2007. (5% composition scheme beneficial)
2nd Year 1st April 2007 to 31st March 2008. (5% composition scheme beneficial)
3rd Year 1st April 2008 to 31st March 2009. (5% composition scheme beneficial)
4th Year 1st April 2009 to 31st March 2010. (5% composition scheme beneficial)
5th Year 1st April 2010 to 31st March 2011. (1% composition scheme beneficial)
6th Year 1st April 2011 to 31st March 2012. (1% composition scheme beneficial)
7th Year 1st April 2012 to 16th Aug 2012. (1% composition scheme beneficial)
Allocation of Cost of land and its issues in other option of actual and % basis u/r 58.
Issues of applicability of option one (Purchase cost plus GP) to developers?
Beneficial to pay whole tax on date of agreement to sale. Take care of advances. But also check the tax collection date as some builders have collected tax.
WCT deduction issues.
Profession Tax deduction issues.
Issues under Income tax act, for allow ability of deduction of payment of previous year taxes.
Issues of payment of Late Fees of Rs.5000/- per return on quarterly basis.
Take registration under protest, as the matter is still pending at Apex court.
Audit Reports for all years and its Annexures Issues before 30th NOV 2012.
Please climb the Floor of ‘Tax House’ cautiously as the tax authorities are watching thought the CCTV installed at each floor. Calculate the tax liability correctly as the customers who have purchased the flats form the builders and developers will ultimately have to pay the tax.
Further it is also recommended to wait until the 15th Oct for the decision of Supreme Court in this matter and thereafter pay the tax.
By: CA Umesh Sharma