Real estate: Supreme Court order to hike home prices

Oct 05 2013, 08:58 IST
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Construction means there is a works contract being executed and that is taxable under the VAT rules. Construction means there is a works contract being executed and that is taxable under the VAT rules.
SummaryIn a recent judgement, the Supreme Court has upheld VAT for property under construction.

incorporation is crucial. “In other words, it would either depend upon the builder to provide date of incorporation of goods into the works or in case states take initiative they would have to come out with appropriate rules to incorporate these principles into their rules,” said Tiwari.

THE IMPACT

According to BMR Advisors, state governments would now aggressively pursue developers to recover VAT. “Many states may not even be required to make retrospective amendments to levy VAT since the definition of works contract in state legislations typically include any agreement for carrying out for cash, deferred payment or other valuable consideration, the building / construction of any immovable property” the note from BMR said.

For completed projects developers may not, however, be able to recover VAT from purchasers. So the ability to avail past VAT credits or deductions made by sub-contractors should be examined.

But Harishanker Subramaniam, Partner & National Leader – Indirect Tax, EY, was convinced that since the judgement is merely an interpretation of an already existing law, “It is likely to have a retrospective effect. It will be interesting to see how the developers will commercially recover the additional burden of tax from the flat buyer.”

“Needless to say, being an indirect tax, the VAT payable may be passed on to the buyers resulting in a net increase ranging between 2-6 per cent in the net price payable for flats under construction, depending on the applicable rate of state VAT and stage at which buyer enters into an agreement to buy an apartment,” said Mahesh Jaising, partner, BMR Advisors

REASONS FOR CONFUSION

The confusion over how taxes are calculated is due to the two methods that states follow.

In the first method, the developer could provide details of materials separately that are used as raw materials into a building and get itself assessed on that basis.

This process led to complications as different goods may have different rates of taxation and for some goods it would be difficult to determine exactly how much of it was used and when.

“Say for example there are nails, bolts, cement, electrical wires etc. This would mean that not only developer has to keep detailed record in respect of the material used to erect the building but also has to correctly state the date of transfer of material into the works,” said Tiwari.

Buyers too have suspicions on whether the tax amount the developer asks them

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