Introduction Whether builders are liable to tax under MVAT Act, 2002 has been a burning issue since 20th June, 2006. The matter has been ultimately decided by the Hon’ble Supreme Court by way of judgment in case of
Larsen & Toubro & others (65 VST 1). In the said judgment, the Hon’ble Supreme Court observed that the tax can be levied from the stage of agreement and thereafter. The Hon’ble Supreme Court also observed that the tax can be levied on the value of the goods only and no tax can be levied on the value of immovable property. So far as Maharashtra is concerned Hon’ble Supreme Court has directed to align the provisions in tune with above observations.
Amendment to MVAT Rules, 2005
As a follow-up to the above Supreme Court judgment, the Government of Maharashtra issued notification dated 29-01-2014 by which certain rules are amended. The short gist of amended rules is as under:
i) In Rule 58(1) an amendment is made so as to provide that the deduction as per the table will be available after the reduction of land value from the contract price.
ii) Rule 58(1A), which is related to the calculation of land value, is amended and a proviso is added. It has now been provided that if a higher value is proved before the Department of Town Planning and Valuation then the dealer can take that higher value instead of ready reckoner value.
iii) Rule 58(1B) is inserted to provide that if the agreement is entered into where some work is already done, then the value of the goods, after taking deduction for labour and land, will be as per the following calculation:
(b) For determining the value of goods as per the above Table, it shall be necessary for the dealer to furnish a certificate from the Local or Planning Authority certifying, the date of completion of the stage referred above and where such authority does not have a procedure for providing such certificate then such certificate from a registered RCC consultant.
(1C) If the dealer fails to establish the stage during which the agreement with the purchaser is entered into then the entire value of goods as determined after deductions under sub-Rules (1) and (1A) from the value of the entire contract, shall be taxable.
Certain issues
In light of the above new rules and the Supreme Court judgment, various issues arise. Some of them are discussed below:
In the above judgment, the Hon’ble Supreme Court held that the Constitution of amendment bringing works contract in the sales tax net did not prohibit that if in addition to labour and material, if a third element like land is involved, there cannot be a taxable works contract. In other words, the Supreme Court has decided that even if in a contract, a third element like immovable property is involved, it can still be a taxable works contract under Sales Tax Laws. Accordingly, liability in case of builders can be attracted from the date of amendment in constitution, i.e., 1983, though in Maharashtra it will be enforced from 20th June, 2006.
The other fall out is that the contract with the builder is also to be treated as a normal contract. A normal contract can take place even by a mutual understanding and without a written document. Similarly, in the case of builders, a contract may arise by any action for the effecting transaction, though the actual agreement for sale may be registered subsequently. For example, the builder may issue an allotment letter, though agreement may be registered subsequently. In light of the interpretation made by the Hon’ble Supreme Court, the works contract will take place from the date of allotment letter itself.
An issue may also arise about the deduction for cost of land. In addition to the purchase cost, there are other expenditures like registration fees, TDR purchase cost etc. The issue will be whether, in addition to working as per Rule 58 (1A), such additional expenses will also be allowable. It is to be noted that Rule 58(1A) provides for deduction for probable sale value of the land involved in the contract. The value is to be worked out as per the ready reckoner rate.
Therefore, there cannot be further deductions on account of TDR etc. If at all, because of TDR etc., land value is increasing, the builder will be required to get a certificate from the Department of Town Planning and Valuation. Without such certificate, it will be difficult to get the extra deduction.
An issue may also arise for set-off. Although, tax is payable as per slabs given in Rule 58(1B), i.e., as per the completion stage, there is no provision requiring reduction of set-off in any given proportion. Therefore, as per the Rules that are in force today, the set off will be allowable fully, though tax may be payable on given percentage. To avoid litigation it is better that the department clarifies the above issue at the earliest.
It is also be noted that the builder now becomes a normal dealer. Therefore, he can claim set-off as any normal dealer. As per the normal provisions, set-off is allowable on effecting purchase and entering it in the books. The restrictions and negative list will be operative as applicable to a normal dealer. If Rule 53(6) is not applicable to the builder, he can claim set-off on all purchases. If at all ultimately, part of the premises are sold as immovable property, i.e., after completion of the building/unit in the building, there will still not be any adverse effect on the set off already taken.
As per Rule 58(1B), tax is payable according to the completion stage. One of the issues will be that even if the cost of work completed prior to agreement is higher, the tax will still be payable as per the given percentage. In other words, tax will get paid even on the completed portion.
In case of K. Raheja Development Corporation vs. State of Karnataka (141 STC 168)(SC), the Hon. Supreme Court has observed that if the sale agreement is after completion of the premises, then Sales Tax cannot apply. From the new Rule 58(1B) it appears that even if the building is fully complete, but occupation certificate is not received, the builder will be liable to pay tax on 55% value of the goods. This is contrary to the above judgment delivered by the Supreme Court. Thus, there will be a situation where tax will get attracted on sale of immovable property portion also, because of above mentioned Rule.
This will be unconstitutional. It is expected that an alternative scheme to grant higher deduction, as per completion stage, should be framed based on the records of the builder. Further the taxation after completion of building, but before getting occupation certificate, should be revisited by the Government.
Conclusion
There may be many further issues in respect of the taxation of builders. As per the ordinance dated 03-03-2014, the time limit for assessment for the year 2006-07 for the builders is extended to September, 2015. We hope that before such completion date, the above referred issues will be clarified by the department.
