Basic regulations, tax implications involved in real estate transactions – Part II
Value Added Tax (VAT)
The Value Added Tax (VAT) is a type of indirect tax and is one of the major sources of revenue to the state. The VAT system of taxation was adopted by most of the states in India in the year 2005 by replacing the General Sales Tax Laws with New Value Added Tax Acts and the supporting Value Added Tax Rules for proper administration and collection of Tax.
Every state or union territory follows its own method of the tax assessment and collection from the dealers who fall under the purview of VAT.
Earlier the rate of VAT in Maharashtra was 5% on total value of the property for sale, without including land cost. But from 1-4-2010, the VAT applicable is 1% on the total cost, which is inclusive of the land cost.
In Karnataka, the VAT being levied is 5% on total cost of the property. The Haryana Government has recently announced its plans to impose 4 percent VAT on the builders, developers and promoters of real estate projects in the state.
The recent Supreme Court verdict on VAT in real estate states that, a value-added tax may be levied on real estate transactions in addition to stamp duty. The court has supported the judgement of the Bombay high court which had directed the builders to pay a 5 percent VAT to Maharashtra government on under-construction residential units sold during 2006-10.
The Supreme Court has also said that VAT is not payable if a ready flat (fully built) is sold to a buyer as it would not amount to a work contract.
So far, only few states have been levying VAT on construction. Now, following the Supreme court verdict, it is likely that many other state governments may start levying VAT on real estate transactions. However, though the tax is levied on the sellers, it may get passed onto the buyers only.
Stamp Duty
Stamp duty is the tax levied by the government on the legal recognition of certain documents. The stamp duty charges vary from state to state. In the context of real estate, stamp duty is applicable whenever any property is transferred or whenever any premises is given on the basis of Leave and License.
All documents related to property transfer including Mortgage Deed, Conveyance Deed, Gift Deed, Exchange of Deed, Lease Deed, Power of Attorney, Agreement to Sell, Development Agreement, etc need to be stamped prior to their registration. In case of failure in paying the stamp duty, the document cannot be registered and it will not be considered legally valid.
However, there is an exception for stamp duty not being levied and that is when a property gets transferred through ‘Will’ of a deceased person.
Stamp Duty payable
Stamp duty is fixed based on the consideration that changes hands, or on the basis of the market value of the property as set by the stamp duty authorities, whichever is higher. To determine the amount of stamp duty that is payable, the document is adjudicated with the Stamp Duty Authorities. Adjudication is referred to determining the exact stamp duty amount by the collector of stamps if the document is executed. For this, the final draft copy of the agreement on which the duty has to be paid, along with the property details should be submitted to the collector of stamps along with an application adjudication.
Ready reckoners and online sources
Ready reckoner rates for property valuation are also available at the stamp office, which can be used to find out the exact amount pay. Also there are many websites which provide you with stamp duty calculators to give you an approximation of the charges.
Stamp duty rebates
Rebates are also given on stamp duty under certain circumstances like while buying a old resale property, etc. Another important factor to know is that stamp duty is paid on the basis of built-up area and not just the carpet area.
Stamp duty structure
Generally, in case of residential properties, the stamp duty charges are set at a fixed rate upto a certain value of property. Above that certain limit, the percentage charges for the amount would be greater than that. For instance, on the first Rs 15 lakh of a property in Mumbai, the stamp duty applicable is Rs 68,750 and above that value, the charges applicable will be 8 per cent of the property’s additional value.
How to pay?
The stamp duty charges upto Rs 25,000 can be paid by cash while the charges larger than this should be payable through Bank Drafts or Pay Orders.
Where to pay?
The stamp duty is paid through buying stamps of requisite amount and affixing them on stamp papers and using the same for making the agreement. Stamp papers are available with authorised stamp vendors from whom they can be bought. The maximum value of stamp paper available is of Rs 10,000.
Any number of stamp papers can be bought based on your requirement. Further, it is important to know that the stamp papers must be purchased in the name of one of the parties involved in the agreement to be registered. If not, it is similar to the case of no stamp paper used. Any stamp paper bought is valid only upto six months from the date of purchase, which after that is equal to a normal paper.
