Real estate: Supreme Court order to hike home prices

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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.

to cough up is indeed the right one. Buyers are in no position to evaluate the developer’s expenses and there is every possibility that higher amounts may be collected from them.

The second method is that the developer at the commencement of the year chooses to opt for a compositions scheme. Every state has a compositions scheme, in most cases, a value to the contract is ascribed to a building, and certain permissible deductions are made towards, value of the immovable property, amount towards services and labour etc. The balance amount is taxable as amount of goods involved in transfer of works contract.

“Therefore, now with the judgment in the L&T case, in case the right, title and interest in the immovable property is transferred along with a works contract, the value ascribed towards the immovable property shall also be deducted. The Supreme Court has categorically made it clear that the state does not have right to deduct value added tax on the immovable property. However, the state does have right to collect stamp duty on its transfer,” said Tiwari.

A key issue was whether VAT that was charged on under-construction property was applicable to completed apartments and those on the resale market. The Maharashtra order, for example, did not clarify this aspect. “Conversely, the position that no VAT is payable if flats are sold after construction is complete has also been upheld,” said Jaising.

OTHER ISSUES

In a conference call with media, Prashanth Bhat, Director-Indirect Tax, BMR Advisors said that while most developers in the southern states have been paying VAT on sale of flats under construction and may not be impacted much, the impact will be most in the northern and eastern states (Rajasthan, Delhi, Uttar Pradesh West Bengal, etc), where the developers were still taking a “no VAT” position.

Developers in Maharashtra are likely to be impacted for the period prior to April 2010, as most of them were not paying tax until then and only started paying VAT under the 1 per cent composition scheme since April 2010.

Buyers who are liable to be charged additional sum towards this tax, should now be prepared to ask some critical questions to their developer.

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