While home buyers in Maharashtra are confused over the payment of value added tax (VAT) on property purchased by them between 2006-2010, legal experts say, the recent government circular on the issue provides marginal relief to them.
According to property, consumer lawyers and consultants, tax out go for home buyers should not be more than 2.5 per cent of their agreement value and they should not bow to builder's demand of 5 per cent.
"Effective tax out go for buyers should be up to a maximum of 2.5 per cent of the entire amount mentioned in the purchase agreement. VAT is applicable on the agreement value after land and construction cost are deducted from it," said senior Mumbai based property lawyer Vinod Sampat.
VAT is applicable at the rate of 5 per cent on the agreement value for those who purchased property between 2006 - June 2010. For those who purchased property after June 2010, VAT will be applicable at 1 per cent of their agreement value and there is no confusion over this.
As per a recent circular by Maharashtra government, the cost of construction and value of land have to be deducted from amount mentioned in the agreement, and VAT will be applicable on the remaining sum. This is for those who have to pay 5 per cent VAT. The government has suggested three methods for calculating VAT in the circular, which leads to nearly 50 per cent reduction in the amount on which VAT is applicable, experts say.
Both Sampat and another Mumbai-based consumer lawyer Anand Patwardhan belive the buyers should know various aspects before paying VAT. They say, the builder will have to give them at least a months notice and should not pressurise them to pay up in next 15 days. Also, builders can collect money from their clients only if such a clause is mentioned in their agreement.
"October 31 is the last day for developers to pay and they will have to give property buyers at least a months notice. If any builder fails to pay by October end, he cannot transfer the penalty on consumer for that."
Jehangir Gai, a Mumbai based consumer activist said, "If your agreement doesn't mention (that future costs will have to be born by you), then in that case it is only your builder who has to pay this VAT. After several deductions, the real VAT arrives at 1.8 to 2 per cent and not 5 per cent."
Gai says, as a home buyer must ensure the developer is choosing a cost effective option to pay VAT. "As a consumer, you can demand for the cost sheet from your developer where he has calculated the VAT for your flat. One must also check your developer has registered at the sales tax office, in order to ensure that the money you shell out for VAT payment is made appropriately," said Gai.
Patwardhan also gives a remedy to clear confusion over how to calculate value of agreement after various deductions and says buyers should ask the builder for the tax registration certificate. As the agreements for sale of flats have one composite value of the transaction, there is no price mentioned separately for land, services and goods, the value of goods involved has to be determined in accordance with the provisions of rule 58 of Maharashtra VAT rules.
"A registered dealer (builder or developer) shall pay tax on his turnover of sales of ‘goods’ at prescribed rates. Before making payment of tax as above he is entitled to deduct the amount of input tax credit (setoff of taxes paid on purchases) as may be available to him in accordance with the rules. An unregistered dealer, although liable to pay tax on his turnover of sales, is not entitled to collect tax from the purchasers and also not entitled to claim input tax credit."
The cost of the land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under the provisions of the Bombay Stamp (Determination of True Market Value of Property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registered. Provided that, deduction towards cost of land under this sub-rule shall not exceed 70 per cent of the agreement value.
Similarly, rule 58(1) provides for deduction of various charges in relation to services In case of construction of building done through sub-contractor/s, deduction is also available for amounts paid to sub-contractor/s. In case of difficulty in arriving at the value of various services involved in the execution of works contract for the purposes of deduction u/r 58(1) a table is appended to the Rule, listing various types of contracts and a lump sum percentage of deduction from the total contract value. In case of construction of building contract, rate of deduction on account of services is provided at 30 per cent.
"For instance, on agreement value of Rs. 10 lakh on under construction flats, prorata cost of land on actual amount incurred is say 6 lakh and prorata expenses as stated above in Rule 58(1) is say Rs. 2.70 lakh. Thus, tax liablity will be calculated after deducting Rs 6 lakh and Rs 2.7 lakh from Rs 10 lakh. VAT will be charged on Rs 1.3 lakh and 5 per cent of this will be Rs 6,500," said Patwardhan.
Builder must have the details of the cost and Labour of the expenses stated in Rule 58(1). it may be noted that in a case where a builder sells ready made flat i.e. after the flat is constructed (after the date of Occupancy Certificate issued by Town Planning Authority), there is no controversy, it is considered as a sale of immovable property and there is no question of VAT liability, Patwardhan said. Flat owners should ask for this break-up from the builder and a tax invoice.