The Finance Minister of Maharashtra, in his budget speech,
stated that he proposes to announce a Composition Scheme for Builders/Developers
for discharging their tax liability under the MVAT Act, 2002.
U/s.42 of the MVAT Act, 2002 the State Government has power
to prescribe compositions scheme/s for different classes of dealers or for
different types of transactions. There are several schemes for discharge of tax
liability on works contracts, like 5% Composition Scheme, 8% Composition Scheme,
etc. Now, this is a special scheme announced for builders/developers.
Accordingly, the enabling provision is made in the MVAT Act, 2002 by insertion
of S. 42(3A) vide amendment effected in April, 2010. Under the said enabling
power, the State Government has notified a Composition Scheme vide Gazette
Notification dated 9-7-2010.
Before we discuss certain aspects of the said new Composition
Scheme, it may be useful to discuss relevant legal background briefly.
In case of builders, whether there is works contract sale or
sale of immovable property has become a debatable issue. When the builder sells
ready flat i.e., after the flats are constructed, it will amount to sale
of immovable property and there is no question of VAT liability.
The other possibility is that the builder enters into an
agreement for sale of flat with the prospective buyer when the construction is
under progress. Such agreements are referred to as ‘Under Construction
Contracts/Agreements’. Till the judgment of the Supreme Court in the case of
K. Raheja Construction (141 STC 298) (SC), such contracts were considered to
be for sale of immovable property and the Sales Tax Department did not
contemplate any levy on the same. However, after the above judgment a debatable
position arose, which continues as on this day. A view prevails that such under
construction contracts are a works contract transaction. However, the other view
is that such a transaction is basically a transaction for sale of immovable
property, thus, there is no question of works contract and sales tax (VAT)
thereon.
But, the Government of Maharashtra and Sales Tax Department
hold a view that the above mentioned judgment is applicable in all cases, hence,
will cover all ‘under construction agreements’ for flats/premises. Under the
said impression the Commissioner of Sales Tax issued Trade Circular, viz.
Circular No. 12T of 2007, dated 7-2-2007. Similarly, the Government has
also introduced definition of ‘Works Contract’ in the MVAT Act so as to bring
the position of the said definition at par with the definition as was under
consideration before the Supreme Court in the abovestated judgment.
However, in spite of the abovementioned changes and judgment
of the Supreme Court, in most of the cases, it is possible to contend that
‘under construction contracts’ are not covered under the Sales Tax Laws and they
are not liable to tax under the MVAT Act, 2002 as works contract.
Amongst others, the facts of K. Raheja are required to be
seen carefully. In that case the value for undivided share in land was shown
separately and cost of construction was shown separately. However, when such is
not the position i.e., when the cost of land and construction is not
shown separately, then such contract cannot be made liable. There is no enabling
power with the State Government to bifurcate the composite value into land and
construction. Accordingly, if such under construction agreements are considered
to be for sale of immoveable property, they cannot be taxed under Sales Tax
Laws.
Be as it may, the Government of Maharashtra, in its wisdom
continues with its understanding that ‘under construction contracts’ are liable
to tax, and therefore, the Government has provided for one more Composition
Scheme specifically for builders/developers. The salient features of this new
scheme are as under :
(a) The scheme applies to builders/developers who undertake
the construction of flats, etc., wherein they also transfer land or interest
underlying the land.
Normally, builders/developers commence construction on their
own land as per their own project planning. The land is to be transferred to the
society or association which may be formed by the buyers of the premises
collectively, after possession is given. An issue may arise that there will not
be transfer of land or interest in land to any individual purchaser with whom
agreements are entered into. In case of flats/premises, each sale agreement can
be considered to be construction contract. Therefore, if one reads the
Notification literally, then it may be said that when the land or interest in
land is not transferred to the very individual purchaser, the Notification
cannot apply. Therefore, to avoid any dispute in future, it would be necessary
for the Department to clarify about the nature of transfer of land or interest
in land.
(b) The scheme shall apply to registered dealers only.
It is possible that in view of debatable position, the
builders/developers are not registered under the MVAT Act, 2002. However, if
they wish to take benefit of this scheme at this moment or any time in future,
it is necessary that they remain registered dealer. However, being registered
doesn’t mean that the builder is accepting the liability. He can be registered
dealer but can still show no turnover in the returns, considering his contracts
as contracts for immovable property. In future, if the liability accrues because
of clarity in the legal position, he can opt for this scheme. Though one of the
conditions mentions that the dealer should include the contract price in the
return in which the agreement is registered and pay the tax on it by declaring
such contract price as turnover, this can be done even by revising the return at
appropriate time. Therefore, at present, awaiting clarity of the law, the
builders may opt to file return without declaring turnover of such contracts.
It may also be noted that if the builder applies today for
registration, his earlier transactions from
20-6-2006 onwards may also be scrutinised for levy of liability, if any. This
new Composition Scheme does not bring new tax but it only provides one more
method for discharging liability effective from 1-4-2010. Assuming that a
builder opts for this Composition Scheme from 1-4-2010, he can contest the
liability for past period, if the issue arises.
(c) The scheme is applicable to agreements registered on or
after 1-4-2010. Therefore, even if the agreement is executed earlier, but
registered on or after 1-4-2010, it will be eligible for composition scheme.
(d) The composition money is 1% of the agreement amount,
specified in the agreement or value adopted for the purpose of stamp duty,
whichever is higher.
(e) The dealer/s opting for this Composition Scheme shall not be eligible to claim set-off of taxes paid on purchases.
(f) The dealer/s opting for this Composition Scheme shall not be eligible to effect any purchases against ‘C’ Forms.
(g) The dealer/s opting for this Composition Scheme shall not issue Form No. 409 to the sub-contractors in respect of the works contract/s in respect of which composition is opted.
(h) A further condition is that the dealer will not be entitled to change the method of computation of tax liability. (From a plain reading, it appears that this condition is to be seen qua each contract and not the project as a whole.)
(i) The last condition mentioned is that the dealer under this Composition Scheme should not issue tax invoice. (The issue may arise as to whether the builder can collect 1% composition separately. Though, the provisions relating to tax invoice are not worded happily, from the clarification issued by the Commissioner of Sales Tax, it can be said that though tax invoice cannot be issued, still in the normal invoice or bill, etc., the builder can charge composition amount separately. Otherwise he has to include the same in the agreement price.)
From the overall scenario, it appears that though there is uncertainty about attraction of sales tax liability on ‘under construction contracts’, the builders/developers may consider the risk factor and decide accordingly. The passing on the burden to the prospective purchasers will result in burden upon the common person. The issue will be more aggravating if ultimately the liability is not upheld by the judicial forum. There will be a number of difficulties in getting back the tax which was not due to the Government.
The earliest clarification of legal position is the need of the day.
