Sunita Nair is worried that her family’s finances may go through another stress, if they have to pay Rs 4 lakh as value-added tax (VAT) by August 31. And her fears may come true.
According to a sales tax notification last week, buyers of under-construction property in Maharashtra, between 2006 and 2010, should gear up to pay five per cent VAT on their flat.
That’s not all. There could be additional burden due to interest and penalty charges which could increase the liability by another two per cent.
Sunita and her sister bought flats in 2009 in Chembur. But, her sister will escape the tax burden as she bought a ready-for-possession flat. Sunita, on the other hand, had bought an under-construction property and has to pay the VAT now.
Over 500,000 property buyers are expected to take the hit in Mumbai alone. This norm is applicable for shops and bungalows also. VAT will not be applicable in case of resale.
According to Pujit Aggarwal, managing director & chief executive officer of Orbit Corporation, even if the construction of a flat had started before June 2006 but it was delivered anytime between 2006 and 2010, the customer will have to pay VAT.
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If the first sale of flat is cancelled then the subsequent sale of the same flat by the developer is taxable. The tax paid on first sale can be adjusted towards subsequent sale. This levy will be applicable to redeveloped plots also, says Amit Geonka, National Director - Investments at Knight Frank.
As a property buyer, the first thing you should do is check the property agreement. In many cases, the builder has already charged the buyer. Some builders have even submitted the money with the Court.
Also, if you are someone who gave your land to the builder for construction, you will not be liable to pay this tax.
In addition, the sales department has pegged the incremental burden at three per cent because the developer will get benefits under several heads such as labour and land costs. So check the actual numbers before paying.
The builders, on their part, are obviously against this order. VAT, as the name suggests, should be levied on any additional value. They argue that in some cities like Hyderabad, there are two agreements – land value and construction cost. In Maharashtra, there is only one agreement. So, it is not possible to separate the two.
Say, you had booked an under-construction property before June 2006 and had started paying for the same in instalments or via bank loan. You will not be charged VAT on the money paid before 2006. But, you will have to pay extra five per cent on the portion paid after that. “It will be levied on the value received or receivable after June 20, 2006,” says the sales tax department’s FAQ.
This is a hard blow to all property buyers. But, like Deoji many feel there should be an upper limit on high value properties. Unfortunately, there isn’t any clause stating VAT levied will be five per cent of agreement value or Rs X, whichever is lower.
VAT is supposed to be paid by the developer to the government. But it is passed on to consumers. And the likes of Sunil Mantri, chairman of Sunil Mantri Realty argue, “All agreements write that taxes are to be borne by consumers over the property price. But, VAT can be submitted to the government only by registered VAT dealers, which consumers aren’t. So, they submit it through the developers.”
| SNAPSHOT OF VAT IMPLEMENTATION |
| What is the effective date from which the VAT will be applicable for sale of under constructed flat? The VAT is payable from the date of amendment i.e. 20 June, 2006. On what type of contracts is VAT payable? |
Is VAT payable on the sale of completed flat?
VAT is not payable if a completed flat is sold by the developer.
How is VAT calculated? Is it on under-construction or ready flats?
It is on under-construction flats and not on ready flats.
Who has to pay VAT: Flat buyer or the developer?
The liability to pay VAT is on developer.
Who has to pay VAT if a developer has not told the buyer of VAT to be paid when he purchased flat after 2006?
The developer has to pay the VAT.
What is the rate of tax under VAT Act applicable for agreement to sell for under-construction flats?
Tax rates would be those which apply to the goods in which property is transferred.
The agreement to sell the flat was executed before 20.06.2006 and the building was under-construction and possession was given after 20.06.2006. Will VAT apply in such a case because the agreements were executed prior to 20.06.2006? If yes, how will the sale value be determined for calculation of VAT? Whether the amount received prior to 20.06.2006 will be exempt from VAT?
Yes. VAT will apply. It will be levied on value received or receivable after 20th June, 2006.
Is the levy of VAT on agreement for under-construction flats/shops etc. covered with in the amended definition of Works Contract? When is it not leviable?
Yes. It is covered. If the sale is after completion, there is no levy of VAT.
The builders receive non-refundable deposits and other charges under the agreement such as electricity deposit, water charges, legal charges, development charges, etc. Will such receipts also form part of sale price for VAT?
The amounts which are received as deposits will be a deduction to the extent such amounts are actually paid to other authorities.
In under-construction flats, the amount is received in installments. How will the sale price be determined? Will the actual receipts be taken as sales or the whole of the agreement value will be taken as sale at the time of execution of the agreement, even though the amount is yet to be received?
Received or receivable. Receivable means due and payable.
Can such cases be dealt with administratively? In addition to taxes, will there be burden of interest for these old periods?
Developer will not be entitled for set-off on purchase effected prior to 20.06.2006. Interest will be payable in addition to taxes paid.
A buyer has purchased ready flat in April 2006 when no VAT was in place. Building society got formed in 2008-2009. Can the developer ask for VAT from such buyers?
Since it is a completed flat, no VAT is payable.
If the buyer refuses to pay VAT at more than 5% as per govt's order, does the developer have any right to demand more VAT?
The liability to pay VAT is on developer. It is not contingent on collection by developer. However, whatever option the developer chooses to discharge the tax liability, the net burden will be less than 5%.
Source: Sales Tax Department website