How to bell the VAT?

The confusion created due to the Value Added Tax (VAT) to be charged on property in the state of Maharashtra has thrown up many questions for all the stake holders in the real estate sector with implications across the country.

At present, very few states have VAT in place for property, but the Maharashtra example may set a precedent of sorts. The tax is expected to generate revenue in the range of Rs 1,000 crore to Rs 3,000 crore for the state, but will affect around 7 to 10 lakh buyers. As of now, both developers and buyers here are seeking clarity — developers on tax calculations and buyers on the amount payable.

THE ISSUE

In 2006, the sales tax (ST) department of Maharashtra levied VAT of 5 per cent on under-construction flats being sold back then. Developers moved the Bombay High Court. As the case was stuck, the ST department declared that pending the verdict, developers who have sold flats between June 20, 2006 and March 31, 2010 would have to pay the tax.

However, flats ready for possession and those on the resale market were kept out of this regime. Flats booked after March 31, 2010 would be charged VAT at 1 per cent of the agreement value. To safeguard their interest, developers usually have a clause in the buyer agreements that all taxes —present and levied in future as well as enforced retrospectively — would be payable by the buyer. However, in this case, as an additional precaution, most developers also took either an undertaking or bank guarantee from the buyer to pay the tax as and when levied and demanded. Some developers went a step further and collected 5 per cent VAT on the agreement value from the buyers.

Court ruling

The Bombay High Court in July 2012 upheld the department's order and directed the developers to pay 5 per cent VAT by August 31, 2012 failing which, it would be free to enforce up to 15 per cent interest and up to 25 per cent penalty on the arrears.

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