VAT (What) is the confusion all about in real estate- Part I

This article is the first out of the two part series on this subject. This has been presented from the customers
perspective. The second part features the builder/ developers perspective.
The state governments move to generate revenue by taxing the sale of flats and imposing a VAT levy on the same
has stirred up a hornets nest! VAT to many, is seeming like a new entrant to the list of levies on the already heavily
burdened real estate sector and therefore there is a stiff opposition that the government is facing
from consumers and realtors both. But to many, it seems like fighting over a lost cause. This is because much too
often, we have now been used to seeing government have its way in the form of retrospective amendments,
clarifications, etc despite court decisions and public/ industry outcry.
To give a background to those amongst us unfamiliar with the history, The Government of Maharashtra in April, 2005
introduced an old wine in new bottle in the form of MVAT Act in lieu of the sales tax era. The government in 2006
realising the potential of real estate sector to generate revenue and sensing that thee sector is untaxed by Service
tax as well as VAT, cleverly amended the definition of sale under the MVAT on 11th September, 2006 to
retrospectively include w.e.f 20th June, 2006, agreements to carry out for cash or for deferredpayment the building
or construction of any movable or immovable property.
The above amendment, to the amazement of all, shook the founding principles of VAT which was till then considered
to be a tax on sale of movable property. But by the above amendment, the Maharashtra government deemed
contracts for sale of under construction property as a Works contract and not pure sale. Most of us who are familiar
with the history also know that the above amendment was prompted by the decision of the Supreme Court in the
case of K. Raheja Dev. Corp. wherein the Supreme Court opined that there cannot be works contract after
completion of the construction and that the tax cannot be levied to the extent that work is completed before
contractual relationship comes into existence.
The MCHI sensing the draconian effect of the amendment (which would make transactions of sale of immovable
property leviable to VAT @ 5%, being a works contract) moved the High court challenging the constitutional validity
of state to levy VAT on such transactions of sale of immovable property.
Inspite of departmental circulars justifying the move, the then Chief minister Late Shri Vilasrao Deshmukh in
November, 2008 admitted that there should be not VAT on sale of flats and had assured the industry and denizens of
Maharashtra that he would reconsider the decision by speaking to the State Finance Minister. These measures
although didnt provide relief, did hush up discussions about cascading effect of the tax. In wake of the ambiguity,
most builders choose not to pay MVAT but provided clauses in their agreements safeguarding their right to recover
VAT from property buyers. Some also sought deposits/ bank guarantees/ indemnity bonds.
While the flip-flop over the move continued, the government to soothe feelings and to garner revenue slashed the
rate to 1% w.e.f. April, 2010 by way of a composition scheme, a move which was in a way welcomed. It was at this
point in time when most buyers felt the pinch as many builders choose to pay the 1% tax, than face uncertainty.
However to make matters worse, the Honble High court in April, 2012 now, dismissed the bunch of petitions filed by
MCHI and other builders.
The effect of the decision was that all builders and developers became liable to pay VAT for under-construction
properties sold from June, 2006. Further, the tax during the intervening period (20 June, 2006 to 31 March, 2010)
was to be computed in accordance with general provisions of Works contract and the beneficial rate of 1% was not
applicable to such prior sales.
Further, the government sensing opportunity, which it was keen not to loose, hastened to issue a circular on 6th
August, 2012 asking all builders and developers to pay VAT on transactions of sale of under construction property by
31st August, 2012 failing which penalty of 25% would be levied.
Aggrieved by this move and coercive action, MCHI knocked the doors of the Apex court asking for relief by staying
the operation of the circular. The court did oblige by extending the time specified in the circular to 31st October,
2012.
In light of this milieu, let us also examine what the confusion around calculation of rate of tax is all about
In case of such contracts called as Works Contract, the provisions of VAT provide 3 alternatives by which VAT can be
calculated and the payer is free to choose the option he deems best:

Two options as prescribed under Rule 58 of MVAT Rules and the third by Section 42.
1st Option:
Under this, the value on which VAT is payable can be arrived at, inter-alia by effecting the following important
deductions from the total contract value:
- Cost of Land (determined as per Bombay Stamp Rules).
An important point to note over here is that earlier, land cost only to the extent of 70% of sales value could be
deducted. However, the said condition has been deleted retrospectively by notification dtd. 30th July, 2012;
- Charges paid to Sub-contractor
- Labour and Service charges towards services like architects and other professionals fees, machine hire charges,
manpower supply charges, etc., (i.e. service elements provided under the contract);
- Cost of Consumables (like water, electricity, etc.) the property in respect of which is not transferred to the buyer,
cost of establishment and other similar expenses relating to supply of labour and services.
After effecting the above deductions, the resultant taxable portion is to be divided into 0%, 4/5% and 12.5% rate of
goods and tax shall be worked out accordingly.
2nd Option:
This is a simplistic approach to the above procedure: Herein, a flat deduction @ 30% in respect of labour portion of
building construction contracts is given. Thus in lieu of calculating the actual labour and service element in the
contract, a flat deduction of 30% of contract value maybe availed.
It is also relevant to note here that, in both the above options, full credit of VAT paid on purchases shall be available
for set-off against VAT liability of the builder.
3rd Option:
This is a composition scheme, meaning, the law understands the difficulty in splitting such contracts into service and
labour portion thereby treating the entire contract as one. In such cases, an adhoc rate of 5% is provided on the total
contract value without any deductions. In such cases however, set-off shall only be granted on 96% of purchase
price. Please note, the department has in this case also specified, that no deduction in respect of land shall be
available to person following this method.
The above 3 options are further complicated or rather simplified for a 4th option for agreements entered into on or
after 1st April, 2012.
Under this option, a flat VAT @ 1% is payable on the entire agreement value.
Having assimilated the above, it is evident that the last option is least taxing (both monetarily and arithmetically).
Let us now proceed to understand the various contentions and queries put forth by the government, realtors and
public at large:
Is this levy applicable to only residential properties or commercial properties as well?
This levy is applicable to any property (residential or commercial or otherwise) purchased on or after 20th June, 2006
and the construction in respect of which was still on at the time of execution of agreement.
One main contention is that in view of the deductions as mentioned above, effective tax will always work out to
less than 5% (i.e. around 0.5% to 2.5%).
Our Opinion: The above rate has been worked out considering inter-alia following three important deductions:
i) Cost Of Land
ii) Cost of Services which have used in construction of flat, and
iii) Set-off of VAT paid on purchases against VAT payable on sale

Here it is important to note that the builder is not mandated to pass on benefit in respect of set off on purchases.
Also deduction for land/ services is allowed only when full rate of VAT is charged and not when builder has
availed composition rate of 5%.
Even considering the builder passes on the benefit of set-off on purchases to customer, it is highly dubious the rate
would go to as low as 1% 2%.
Hence, the governments contention of a nominal effective rate is merely eyewash.
Builders are fooling buyers by not giving them exact calculations in respect of VAT and charging exorbitant/ adhoc
amounts in the name of VAT
In general parlance, it is not true that builders have not given exact calculations of VAT liability for reason to fool
buyers. As seen above, the calculations above are itself so complex that no builder have them ready off hand and
most would have to approach their accountants to determine the best method and exact liability.
Another case in point is that no businessman (builder/ developer) would prefer to give such intricate calculations, as
it also means giving out a lot of information pertaining to his trade in the open.
However, simplistically the customer to ensure he doesnt pay more to the builder can simplistically calculate VAT
payable as 5% of the agreement value. Also customers can ask the builder for a letter/ debit note with his VAT
registration no. embossed upon it stating the amount collected as VAT.
The builder may have asked customers for adhoc amounts at the time of agreements as they are also going though
the same uncertainty and adopted this practice to safeguard their interest. The customers can ask for refund of any
amount collected over and above that stated in the letter.
Whether there will be any liability if agreement was executed prior to June, 2006 but construction and possession
is given after June, 2006?
Yes, in such cases too there shall be a VAT liability which shall be calculated based on the value of installments paid/
payable to the developer post June, 2006.
The agreement was entered into after 90% of the construction pertaining to building was complete and all
payments were made near to the date of agreement and post it. Will VAT still be levied on the entire amount of
agreement?
Well, the answer to above question is a Yes going by the intention and clarifications issued by the department.
However, if the builder is ready to take an aggressive stand, it may be contended that VAT is payable only on value of
portion pertaining to building completed after execution of agreement. This is because the SC has opined in the case
of K. Raheja Development Corp. that there cannot be works contract after completion of the construction and that
the tax cannot be levied to the extent that work is completed before contractual relationship comes into existence
It has been said that it is the VAT is the obligation of builder/ developer? If that is the case, is the customer liable?
While it is true that builder is the person liable to pay VAT to the department, he certainly has a right to recover the
same from the customer. Thus the customer should, in order to find answer to this query, refer his sale agreement
and check whether there is a clause giving the right to the builder to demand taxes over and above the agreement
price. If the sale price is inclusive of taxes/VAT, the builder cannot demand the amount of VAT from the customer.
What about cases where the builder has taken a deposit. Can he also recover interest over and above VAT from
the customer in such case?
In cases where the builder has taken deposit from the customer, he cannot recover any amount towards interest as
it can be contended that it was his duty to pay the amount under protest to the government. But in cases of
indemnity bonds/ bank guarantees, such argument may not be so feasible.

 The builder has also charged amounts towards maintenance, electricity deposit, society formation charges, water
charges, development charges, etc. Are such amounts also liable to VAT?
The above amounts, to the extent they have actually been incurred by the builder towards various expenses, shall be
allowed as a deduction from the agreement value.
The Supreme court has ordered stay on payment of interest and penalty. Is the customer still liable to pay the
same?
While it is true the court has ordered a stay on payment of interest, it is only effective during the period until
October/ case is being heard. Thus the customer, on the basis of court order may not pay interest to developer as he
is also not obliged to pay the same to the government. However, if the levy of MVAT is upheld by the Supreme court,
customers shall definitely have to pay interest as it is highly unlikely the government would waive its right to demand
interest.
Is the Supreme Court verdict a reason to celebrate
While the verdict is certainly a reason for realtors to heave a sigh of relief as they have been granted time until
October to pay the tax, but for consumers it hardly assumes any significance. This is because the Supreme Court has
granted builders time until October to register and pay VAT to the government but for the consumers, it is them
from whom the tax would be recovered.
It has been mentioned by the court that in case the matter is adjudicated in favour of MCHI-CREDAI, the VAT paid
will have to be claimed as refund.
It has been argued by the government that the levy has been around 6 years and such hue and cry around the
issue now is unjustified
In response to the above, it could be said that the government was also fully aware that such a levy would become
the bone of contention amongst property buyers and builders. Further, bringing in VAT @ 1% w.e.f. April, 2010
(brought in owing to representations made by developer associations for a simple method) and not giving it
retrospective effect is outright discriminatory and unjust.
If the issue has been around for more than 6 years, who is responsible for the delay
Reason for delay is the system of litigation in India. The case against the imposition of levy was filed in 2007. The
Honble High Court could come out with a verdict only in 2012. The inordinate delay in adjudicating cases combined
with lack of political will on the part of government to bring in clarity/ simplicity is the reason for delay and
confusion.
While it is true this note may not have answered all your questions, it is unfortunate that there is no clear answer to
some questions in the absence of clarity from government and other bodies. Going by the current state of affairs, we
only have the option to wait for the Supreme Courts expeditious ruling on the matter. All I can say to conclude is
that the perils on investing in this sector only seem to be increasing by the day.

VAT (What) is the confusion all about on sale of flats Part 2

Posted In GST | Articles, Featured | 6 Comments
Ashish Kedia
This article is the concluding part out of the two part series on this subject. This has been presented from the
developers perspective. Part 1 of the Article was presented from the customers perspective. Which can accessed at
the following link - VAT (What) is the confusion all about in real estate- Part I . The views expressed in this series of
articles are personal.
It need not be said that taxation of works contract has always been a vexatious issue.

As if controversy pertaining to Works contract wasnt enough, the government in a clever move to bolster revenue,
brought within its purview transactions relating to sale of under-construction properties w.e.f. 20th June, 2006,
as discussed in previous article.
This amendment derived force from the decision of Supreme Court (SC) in the case of K. Raheja Dev. Corp. It was
held that that levy of works contract tax cannot be stretched to levy tax on a contract wherein the contractual
relationship had come into existence after the contract was completely executed. However, so long as the contract is
entered into before the completion of contract (i.e. in this case before completion of construction), the levy of works
contract would not be ultravires.
Such contracts having been deemed to be Works Contract, calculation of tax on works contract is a complex task
since composition scheme of 1% was not available in pre-April, 2010 period. This is posing a number
of difficulties and confusion to realtors which we have tried to address as below:
1. What is the date on which VAT was due? Is the entire VAT due on date of agreement?
Opinion: In case of all methods other than the 1% composition method, VAT was due on the 21st of the month
following the month in which installment towards the flat (i.e. demand letter) was sent to the customer. However,
for agreements entitled to the benefit of 1% scheme, the entire amount of VAT was to be paid by 21 st of the month
following the month in which agreement was registered.
It is also pertinent to note that, simple advance received without execution of agreement shall not be taxable. The
same shall be taxed when it is adjusted towards agreement.
2. Can different methods of computation be adopted for different construction sites?
Opinion: Yes, different methods can be adopted for different projects. Infact literally speaking (although not
practically possible) a different method can be followed for each and every flat/ property.
3. The above being the case, can composition scheme of 1% be availed for flats sold after 1st April, 2010 in cases
where project was commenced before that date?
Opinion: Yes, 1% scheme can be availed. However, if set-off is being availed, proportionate reversal of set-off shall
need to be made which might be a little complicated.
4. Will the benefit of set-off of VAT paid on purchases be applicable?
Opinion: As mentioned in Part-I, benefit of set-off will be available for purchases made on or after 20 June, 2006.
However, a cause of concern may be that realtors may have charged to Profit and Loss as expense the VAT paid on
purchases. In such cases, it would be difficult to claim set-off.
5. If land is purchased before June, 2006; will it be allowed to be deducted?
Opinion: Yes, deduction in respect of land purchased after June, 2006 shall be available in respect of projects
executed after June, 2006.
6. If extra FSI for construction is obtained by way of TDR, shall it be also allowed as a deduction, it being in the
nature of immovable property?
Opinion: Yes, cost of TDR shall be allowed as a deduction
7. As per the provisions of MVAT, excess set-off as on 31st March cannot be carried forward to subsequent period
and has to be claimed as refund? In such a scenario, if there is excess VAT set-off available for a particular year,
can it be carried forward to the next year and adjusted against properties sold in that year?
Opinion: Although it is true that excess set-off on 31st March has to be claimed as refund, in the case of builders/
developers, the government has made an exception and they can carry forward the excess balance of set-off for
adjustment against subsequent years liability.
8. If the builder/ developer has sold very few flats while the construction was on and most of them have been sold
later resulting in low VAT liability, would excess set-off on 31st March, paid on purchases be available for refund at
the end of the project?
Opinion: Such set-off shall be treated as having been used towards exempted sales and shall be available as refund
unless it can be justified that it is arising only out of those flats which have been sold as under-construction
properties.
9. Can value of initial installments charged from the customer be adjusted towards land cost ?
Opinion: Yes, the value of initial installments can be adjusted towards land cost and other deductions like amounts
paid to sub-contractor, etc. In this way MVAT liability can legitimately be deferred.

However, it is pertinent to mention over here that it is not easy to apportion the land cost and the same could be
apportioned in the ratio of carpet area or built up area of the flat.
10. What is administrative relief all about? Will interest and penalty be payable even after applying for
administrative relief?
Opinion: Administrative relief is granted where a person required to obtain registration under MVAT has not
obtained the same. Such a person may make an application for relief by paying all taxes due alongwith fee for
compounding the offence.
Thus realtors who have not obtained registration or have obtained belated registration should apply for
administrative relief. This shall protect them from penalty for non registration.
As for interest, although SC has stayed the recovery of interest, it is highly likely that the same shall have to be paid if
the case is adjudicated against MCHI.
11. If a project based J.V. or partnership firm was formed (say in 2007) during the intervening period which has
been dissolved ever since the completion of project (say in 2009), would it still require to get registered under VAT
and pay tax?
Opinion: Yes, in such cases also the dissolved entity would now need to get registered and discharge its liability.
12. What shall be the tax liability in cases where the developer agrees to give constructed flats/ shops in return
of land to the landowner (esp. seen in case of tripartite agreements)?
Opinion: VAT shall be levied only when money is received against sale of flats/ shops. Hence there shall be no tax
when land is received against sale of flats.
The department has also clarified that subsequent sale of flats/ shops by the land owner shall also be exempted from
tax as he does not fit the definition of a dealer.
13. It is also a common practice in the industry to borrow against flats whereinthe agreement says that the lender
shall get flats if loan is not discharged. Shall such a transaction also be taxable?
Opinion: There shall be no tax at the time of entering into the loan agreement. However, if flat is eventually allotted
to the lender there could be VAT implications.
14. What shall be the position if a developer has collected excess VAT?
Opinion: Excess VAT unless refunded to the customer, shall be liable for forfeiture by the department.
The latest status of the case is that realtors who have still not obtained registration have been granted time until
15th October to obtain registration and pay tax alongwith application for administrative relief by 31st October.
Further, Marathi Bhandhkam Vyawsayik Association has filed an appeal with the High court not challenging the
Constitutional validity but the applicability of VAT on Composite Agreement for sale of flat on ownership basis.
It has been a well established law and practice, essential goods and services are burdened with no/ minimal taxes.
Housing is amongst the three basic necessities of an individual. Levying tax on such a commodity is in our opinion,
unjust. However, contrary to expectations this sector has always bore the brunt and been loaded with taxes, policies
and red-tapism.
This is indeed one of the most unregulated and high-risk sector inspite of so many organized players operating it.
This is not only from a customers stand-point but also from that of a realtor. When he starts a project, he is
completely unaware of the hurdles he may have to face and the time in which his investments would reap fruits. The
long legal battles of title clearances to file clearances is a challenge which only a developer realizes.
This is probably because each single person/ body has considered it to be the golden egg laying hen. But no one
has payed attention to its plight and come out with measures to boost and streamline the sector by way of
transparent and definite policies. Instead of the long sought demand of a single window clearances, the number of
authorities becoming stakeholders only seems to be increasing.
Caught in the conflict are realtors and customers!
(The author is a Chartered Accountant and is a Partner at A V Kedia & Associates, Mumbai. He can be reached at
applegreenfinance@gmail.com)