VAT Applicability on Construction Contracts

By CA Aayush Modi

Scope of Levy Under MVAT

Taxable event for the levy of VAT /Sales Tax is Sale. Section 2(24) of the Maharashtra Value Added Tax, 2002 (MVAT), defines the term sale to mean a sale of goods made within the State for cash or deferred payment or other valuable consideration, but does not include a mortgage, hypothecation, charge or pledge; and the words "sell, "buy" and "purchase", with all their grammatical variations and cognate expressions, shall be construed accordingly.

 Clause (b)(ii) of the Explanation to the above Section, while setting out transactions that would qualify as sale, provides as under: Prior to 20.6.2006: (ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract. W.e.f. 20.6.2006: (ii) the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract including, an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property;

 Owing to the amendment to the definition of the term sale, operative w.e.f. 20.6.2006, the building and construction of an immovable property was brought within the ambit of MVAT.

On 7.02.2007, basis the decision of the Supreme Court on M/s. K. Raheja Development Corporation [141STC 298 (SC)], a Trade Circular was issued by the Commissioner of Sales Tax to clarify that: Any transfer of property after 20.6.2006, irrespective of whether an agreement was signed prior to that date, would be governed by the amended definition of sale. Tri-partite agreements between land-owners, developers and prospective buyers would be covered by the amended definition of sale.

 If the agreement is entered into after the flat or unit is already constructed, then there would be no works contract, but so long as an agreement is entered into before the construction is complete, it would constitute a works contract. On 9.07.2010, the Government of Maharashtra provided for a composition scheme, applicable to registered dealers who undertake construction of flats, dwellings, buildings or premises and transfer them in pursuance of an agreement along with land or interest underlying the land. Composition amount prescribed at 1% of the agreement amount or the value specified for the purpose of Stamp Duty under the Bombay Stamp Act, 1958, whichever is higher.

VAT on Sale of Flats Judicial Precedents

Maharashtra Chamber of Housing Industry and Ors v. State of Maharashtra and Ors [2012-VIL35-BOM]
The constitutional validity of the amended definition of sale, the Trade Circular dated 7.02.2007 and the 1% Composition Scheme introduced w.e.f. 9.07.2010, was challenged in a spate of writ petitions.

On behalf of the petitioners, it was contended as under:

The amendment was beyond the scope of the States power to tax under Sl. No. 54 of List II of the Seventh Schedule to the Constitution.

 In order to attract the application of Article 366(29A)(b), a contract would have to inter alia involve a transfer of property in goods and immovable property does not constitute goods. Consequent to the 46th Amendment to the Constitution, only a transfer of property in goods involved in the execution of a works contract is taxable and a contract for the sale of immovable property is not a works contract. A works contract involves only two elements viz. (i) the transfer of property in goods; and (ii) supply of labour and services. If a third element, the sale of immovable property, is involved in the contract it does not constitute a works contract and hence to such a contract, the legal fiction which is created by Article 366(29A) would not apply. Contracts governed by the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) cannot be regarded as a works contract, being agreements for the purchase of immovable property.

 On behalf of the Revenue, it was contended as under:

An unduly restrictive meaning should not be given to the provisions of Article 366(29A) otherwise the object underlying the Constitutional amendment would be defeated. The purpose underlying the enactment of the deeming fiction in Article 366(29A) was to override the limited definition of the expression sale in the Sale of Goods Act, 1930 and to isolate the sale of goods element involved, inter alia, in a contract which is a works contract. The amended definition of sale falls within the compass of Article 366(29A). A works contract is a contract to execute works and encompasses a wide range of contracts; it is not restricted to building contracts having only two elements viz. the sale of material and goods and the supply of labour and services.

 The well settled connotation of the expression works contract is that a building contract may also involve in certain situations a sale of land. A works contract does not cease to be such merely because any other obligation exists.

Held:
Works contracts have numerous variations and it is not possible to accept the contention either as a matter of first principle or as a matter of interpretation that a contract for work in the course of which title is transferred to the flat purchaser would cease to be a works contract. The effect of the amendment to Section 2(24) is to clarify the legislative intent that a transfer of property in goods involved in the execution of works contract including -

an agreement for building and construction of immovable property would fall within the description of a sale of goods within the meaning of the provision. The constitutional validity of the provisions of the MVAT Act, 2002, as amended, is not contingent upon any other statutory regulation of apartments under cognate legislation in the State of Maharashtra. Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor. The Constitutional validity of the amended definition of sale, the Trade Circular dated 7.02.2007 etc. upheld. Held Liable to VAT

Position as on date
Trade circular No. 14T of 2012 dated 06.08.2012, issued by the Commissioner of Sales Tax, Maharashtra
Issue pursuant to the Decision of Honble Bom. High Court in Maharashtra Chamber of Housing Industry case States that developers are liable to pay tax under the MVAT Act, w.e.f. 20.06. 2006 Asked builders to pay 5 % VAT plus penalty on purchase of properties between 20 June, 2006, and 31 March, 2010, by 31 August this year. Provides for certain facilitation for obtaining registration, grant administrative relief for unregistered period, and filing of returns for the period from 20.06.2006

 The Maharashtra Chamber of Housing Industry and Confederation of Real Estate Developers Associations of India (MCHI CREDAI) has filed a Special Leave Petition in the Supreme Court which will be heard on August 28. The MCHI - CREDAI wants the VAT to be scrapped, or at least the state to introduce an amnesty scheme which will reduce the tax load on flat buyers. Approximately 125 builders are attached to CREDAI in Pune and about 2,000 across Maharashtra. The Supreme Court has admitted a special leave petition filed by the Maharashtra Chamber of Housing Industry and Confederation of Real Estate Developers' Associations of India (MCHI-CREDAI) and CREDAI-Pune against the state sales tax departments move to levy 5% value added tax (VAT) on properties purchased since 2006. The Supreme Court extended that deadline to 15th October and will continue hearing the matter on a later date. The court also extended the deadline for filing returns and payment of VAT liability, without interest and penalty to the states sales department to 31st October.

Options available for Payment of VAT under MVAT,2002

Position For the Period 20.06.2006 to 31.03.2010
3 options are available for payment of Service Tax Options 1: Composition Scheme under Section 42(3) Vat Payable @5% tax on the agreement value Land deduction is not available Input Tax Credit is available subject to the reduction of 4%

Provision for Payment of VAT

Position For The Period After 01.04.2010

4 options are available for payment of Service Tax Options 1: Composition Scheme under Section 42(3) Vat Payable @5% tax on the agreement value Land deduction is not available Input Tax Credit is available subject to the reduction of 4%

Position For the Period 20.06.2006 to 31.03.2010 Options 2: Actual Expense Method under Rule 58 The deduction of Labour and Service charges is available on actual basis. Land deduction is also available Set-off available subject to the condition u/r 53 and 54 Options 3: Standard Deduction Method U/r 58 Deduction of land cost will be allowed Thereafter 30% standard deduction from remaining amount as per proviso to sub-rule 1 Set-off available subject to the condition u/r 53 and 54

Position For The Period After 01.04.2010 Options 2: Actual Expense Method under Rule 58 The deduction of Labour and Service charges is available on actual basis. Land deduction is also available Set-off available subject to the condition u/r 53 and 54 Options 3: Standard Deduction Method U/r 58 Deduction of land cost will be allowed Thereafter 30% standard deduction from remaining amount as per proviso to sub-rule 1 Set-off available subject to the condition u/r 53 and 54

Position For the Period 20.06.2006 to 31.03.2010

Position For The Period After 01.04.2010

Options 4: Option available u/s 42(2A) read with Notification No.VAT 1510 /CR-65 /Taxation -1 dated 09.07.2010 All agreements registered on or after 01.04.2010 covered VAT payable @1% tax on agreement value No Land deduction available No Input Tax Credit is available

FAQs on Taxation of Developers

Questions Whether Credit available of input tax paid on purchases of materials like cement, iron, steel etc. what point of time the VAT would be payable Answers Yes, input tax credit available, if the taxes u/r 58 or u/s 42 (3) i.e. except 1% scheme Taxability arises on agreement. Tax is levied as and when the instalments become due and payable or are received, whichever is earlier. Yes. VAT will apply. It will be levied on value received or receivable after 20th June, 2006

The agreement to sell the flat was executed before 20.06.2006 and the building was under construction and possession is given after 20.06.2006.

Whether the VAT will apply in such case? If yes how the sale value will be determined for calculation of VAT?
Whether the amount received prior to 20.06.2006 will be exempt from VAT

Questions

Answers

The point of liability when advances are Tax will be levied from the date of the received and agreement is executed much agreement. The amount of advance, as later. and when it is adjusted towards the agreement amount, will be taxed. Non-refundable deposits and other charges under the agreement such as electricity deposit, water charges, legal charges, development charges etc. will also form part of sale price for VAT? Whether VAT applicable be collected by raising a debit note or the same should be mentioned in the agreement itself? Whether VAT should be collected on each instalment or at one go upon execution of the agreement What will be VAT the implications where mere advances are received from buyers and agreement for sale is not executed with the buyer? No. The amounts which are received as deposits will be deducted to the extent such amounts are actually paid to other authorities. Yes. It can be collected by raising a debit note. Specific mention in the agreement is a choice of the contracting parties. It should be collected as and when the instalment becomes due. There is no tax liability.