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The Maharashtra State government has come up with stage wise taxation of buildings under construction as works contract, thus facilitating recovery of around RS 5,000-6,000 crore from builders from all constructions between 2006 and 2010.
Accordingly, complying with the Supreme Court guidelines, the Maharashtra sales tax department has made a comprehensive amendment to rule 58 of MAVT rules putting at rest the confusion over taxation of under construction flats and dwelling units.
These amendments have made deduction claimed against value of land higher than the value as per the state ready reckoner to be allowed only if the builder can prove it so. Secondly the works contract value on which VAT ( value added tax ) is applicable will be worked out in the third stage of the total taxation schedule. As per the amendment in the first state, the land value for which deduction is claimed will be arrived followed by the standard deduction allowed under rule 58 provisos. Officials clarified that the standard deduction of 30% will be applicable on the remaining taxable amount after deduction of the land value. Thereafter, on the remaining value, VAT will be applicable by treating the item as works contract where the builder enters into agreement with the purchaser of the dwelling unit.
In order to ascertain the value of works contract to apply VAT, five slabs of deduction has been worked out based on the stage at which the developer enters into a contract with the purchaser. While before the issue of the commencement certificate, the entire amount will be treated as taxable amount of the works contract, after issuing the occupancy certificate, taxable amount is nil. In between these two stages, there are three stages based on the before and after completion of the plinth level and completion of RCC framework where amount taxable varies from 95% of the total value of works contract , then 85% and 55% respectively.
In 2006, the Maharashtra government had imposed 5% VAT on apartments following an order of the Supreme Court in the case of K Raheja versus the government of Karnataka. Thereby, on all constructions, where agreement was signed between 2006-2010, VAT of 5% was to be imposed. The matter then was referred to Bombay high court, which upheld the decision of the Maharashtra state government, upon which the grieved sought relief of the Supreme Court.
In the interim, the state government worked out an option for the builders and developers to switch to a mode of composite tax payment of 1% VAT. This also applied to those builders and developers who had moved the Court for relief. However, some opted for rule 58 and preferred to wait for the court decision.
Recently, the Supreme Court upheld the decision of the state government to impose 5% VAT and directed amendment to rule 581-A. According to the SC order, if the suitable amendment is not done and intimated to the SC, then it will be ultra vires or declared null and void.
Post 2010, the state has adopted a composite value of added tax of one% of the total value.
The builders have challenged the contention of the government by stating such agreements as sale of immovable property and hence non taxable. However another contention was how to show cost of construction and land will be shown separately.
