How to bell the VAT?

Anshumali Ruparel,Anshumali Ruparel Posted: Sep 08, 2012 at 0049 hrs
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.

The developers challenged this ruling at the Supreme Court through a special leave petition.

The apex court gave interim relief by granting extension till October 31, 2012 without any penalty or interest. However, there was no reduction in the VAT amount. The next date for the hearing is yet not announced by the court but sources in the sector say that it would probably be after October 31.

Method of calculation

The sales tax department has offered a couple of options for developers to pay the tax.

According to the rules, the developer is considered a dealer in the under-construction project as he buys material from a supplier and after using them in process, sells his goods i.e. the flat to the buyer. With tax payable on the material bought, the developer can claim set-off for the tax already paid while making the purchase. This would help reducing the VAT amount to lower than 5 per cent. This means, the tax payable would depend entirely on credits earned by the developer on tax payments for various expenses.

The VAT could be as less as 0. 5 per cent and could go up to 3 per cent depending on the set-offs. If the final verdict of the apex court is in favour of the developers, then the ST department will refund the excess amount to the developers with interest as specified by the court.

Implication for buyers

The buyers, who have started getting notices from their developer for the payment have many doubts on the amount payable or already paid.

“We are not aware of the tax calculations. Besides, we may never be able to know or verify the calculation by the developer and will surely be in the dark about the exact amount paid for our flat. Hence we suspect that developers may collect more from us but will pay less to the department,” said Sandesh Parab (name changed) who has booked a flat in in 2008.

Buyers who have already paid 5 per cent tax on the agreement value years ago are worried about the refund, as they fear manipulation by the developer. “First, we were not to pay on the agreement value, secondly, the VAT should be much less than 5 per cent and lastly, the ST department is to pay interest also on the refund. But we are sceptical about the refund, forget the interest,” says Rita Patel (name changed) who purchased a flat in in 2007.

Finally, buyers who have booked the flat but not yet received possession are the most vulnerable lot. The developer can bully or even blackmail them to pay up.

Impact on developers

The developers are facing difficulties on two fronts: calculation and collection. First, VAT is to be calculated on each flat and not on each building. There could be thousands of flats sold by a developer from 2006 to 2010. Besides, the agreement value could be different for different flats in the same building.

Secondly, VAT is usually presented on monthly, quarterly or semiannual basis while the instalments might not have been received in the same fashion. Accountants are finding it difficult to break the total tax for the flat — which might have taken 2 to 6 years to complete — in monthly or quarterly formats.

Further, the problem is compounded for developers planning to pay minimum VAT as the income tax returns were filed years ago and it would be difficult to modify the accounts retrospectively.

Developers who end up on the higher side of the tax levy would have to pay up first and then collect it from the buyer as the latter may pay in instalments or may not agree to shell out more as payment. Many cash-starved developers are feeling the pinch especially when the sector is very sluggish. Some are afraid that once they pay VAT then the buyers may not pay their share if the issue gets stuck in fresh litigation.

“Most developers who have collected the tax have put that amount in the separate or escrow accounts since the case was pending. Earlier, as interest and penalty was to be included in the payment, the rate was considered as high as 5 per cent. However, since the Supreme Court has directed the state not to levy anything if paid by the extended date, the rate may come down to as low as 0.5 per cent,” said Anand Gupta, honorary general secretary of the Builders Association of India and a developer himself.

“As far as refund is concerned, the buyers need not worry as all decent and reputed developers will neither ask or nor hold excess amount. Besides one may always get the detail of the tax paid from the ST department,” added Gupta.

This potentially chaotic situation is expected to prevail until the apex court delivers its verdict.

— anshumali.ruparel@expressindia.com