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Total Number of Subscribers: 1626 |
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Date:15th September 2010 |
Compiled by: M Sathya Kumar |
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In the budget for 2010 both the Central and
State Governments have made certain amendments to levy tax on sale of
immovable property under construction, to enhance their revenue and to
overcome certain judicial pronouncements. An attempt is made to discuss the
implications of the above amendments on the real estate transactions. This
article does not discuss the legal validity of the amendments brought about
by the Central and State Governments, but explains the same assuming that the
amendments are constitutionally valid. Service tax : By the Finance Act, 2010 the Government has
amended the definition of Commercial or Industrial Construction Service [S.
65 (25b) read with S. 65 (105) (zzq)] and construction of Residential Complex
[S. 65 (30a) read with S. 65 (zzzh)]. The scope of these categories is
expanded to cover sale of flats/units under construction. Builders/developers are now
liable to service tax if any payment towards sale consideration is received
before the grant of completion certificate by the competent authorities for
such flats/units. This amendment overrides the Gauhati High Court’s decision
in the case of Magus Construction Private Limited v. UOI, (2008 11 STR
225). Therefore, if a builder/developer receives the
entire sale consideration for flats/units after the issue of completion
certificate, the same is not liable to service tax. There is an abetement of 75% of the sale value.
Thus, tax will be levied on 25% of the sale value of flat at the rate of
10.3%. For example, if the agreement value of a flat sold under construction
is Rs.50,00,000, then service tax @ 10.3% is payable on Rs.12,50,000, which
works out to 1,28,750. Thus, there will be an additional burden of 2.6% on
the agreement value of the flat. The amendment will be effective from the
date to be notified by theCentral Government. Vat : The Maharashtra Government in the State budget
has also introduced a new composition scheme on sale of under construction
property along with land or interest in land @ 1% of the agreement value. The
scheme is effective from 1st April, 2010 but the Notification in respect of
the same about the manner in which the tax is to collected by the
builder/developer has not yet come. There is no setoff for inputs. It may be noted that already a composition
scheme @ 5% is in operation, which is effective from 20th June, 2006 i.e.,
the date on which the transfer of property under construction was brought
within the ambit of VAT. It may further be noted that the levy of tax on
property under construction itself is challenged by the Maharashtra Chamber
of Housing Industry (MCHI), an association of builders by a writ petition in
the Bombay High Court (being Tax writ petition No. 2022 of 2007). The main issue involved in the writ petition is the
competency of the State Legislature to enact the definition of Works Contract
in the manner which suggests its applicability to the builders/developers, in
addition to the contractors. The definition talks about transfer
of property in goods in the execution of works contract including the building,
construction, . . . . . The Government is competent to levy tax on
construction (sale of goods involved in construction). Article 366 read with
Article 246 (2) of the Constitution has authorised it to do so. But power to
levy tax on building; i.e., sale of flats is unimaginable. It appears
that prima facie the High Court is convinced about this position and
ordered interim relief for the members of the Association. The High Court has
directed that the members of the MCHI should not be treated as ‘dealers’
liable to tax under the MVAT Act, 2002 in respect of sale of flats on
ownership basis under the Maharashtra Ownership Flats Act, 1963 (MOFA Act),
provided such members of MCHI submit the data and documents as mentioned in
the Court order. Thus, such members of MCHI have been absolved from
registration and also from assessments till the disposal of the petition.
However, the developers who are not members of the Association are not
protected by the Court order. It seems that to divert the attention of the
public from the Court matter, the Government has introduced a new composition
scheme @ 1% on the agreement value of the transfer of flat/unit under
construction without providing any deduction for land, etc. There is an impression in the mind
of people that this is a new amendment and only under construction
flats/units sold after 1st April, 2010 are chargeable to VAT @ 1%. This is
not so, the amendment regarding tax on flat/unit under construction is
effective from 20th June, 2006. In this budget the Government has come out with
a new composition scheme of 1% of agreement value without any deduction for
land against earlier composition scheme of 5%. Though the new composition scheme is effective
for the flat/units registered on or after 1st April, 2010, the Notification
in respect of the same has not been issued. In the absence of the
Notification the builders are in a dilemma as to how and in what manner the
tax is to be collected as the full sale price is not collected at the time of
executing agreement for flat/unit which is under construction. Thus in the hands of purchaser the overall cost
of the flat/unit may increase by about 3.6% of the agreement value by way of
service tax and VAT. In the given example of Rs.50,00,000 value of flat, the
additional cost by way of service tax will be Rs.1,28,750 and by way of VAT
will be Rs. 50,000 making it a total of Rs.1,78,750. It is pertinent to note that the above cost can be avoided if a ready flat is
purchased after the builder obtains completion certificate. Article
by Kantilal K. Jain Chartered Accountant. Article was earlier published in one of the reputed website. |
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