Supreme Court favors imposition of VAT on under-construction properties
Homebuyers who had not paid value added tax (VAT) while buying under-construction properties, may now have to bear the additional costs.
In Larsen & Toubro case, the Supreme Court has supported the constitutional validity of VAT being imposed by the state governments on the sale of under-construction flats. The apex court has clarified that the works contract tax is applicable on agreements entered between builders and buyers for under-construction flats.
The real estate market sentiment which has been on the lower side for the last few quarters has further worsened with the court’s decision. It is important that the end-users have to evaluate the implications for transactions.
How does it impact builders?
The builders will have to pay VAT to the government and also they will have to charge VAT from the buyers to whom they sell their under-construction flats.
The state governments, mainly Maharashtra and Karnataka, are likely to ask developers in their states to pay all the pending VAT charges for the projects they have developed in the past.
The builders who have already cleared their VAT dues at the time of regular assessment or during the protest before the Court’s judgement was announced, may not have to face further interests or penalties. But those who have neither charged nor paid VAT are probably expected to have faced troublesome after the court order.
Some builders had tried to avoid the VAT payments so far under the Special Leave Petition. But now, they are also expected to pay their outstanding tax amounts, and mostly, along with certain penalty or interest charges. Their ability to pay and the extent to which such payment might affect the industry’s working capital requirement remain to be seen.
However, builders may get some help through certain features available under State-VAT provisions. And one such important relief is the possibility of claiming State-VAT input credits to minimise or balance the gross VAT liability arising from the verdict. Adding to this, several State-VAT laws also provide composition schemes to compute and pay VAT dues.
How does it impact end-users?
As developers generally pass on the extra burden to buyers, the buyers will have to shell out more money on such indirect taxes.
In some cases, the buyers had already been charged VAT. Now they would heave a sigh of relief as the court verdict assures them that the amount was payable. While the buyers, who were not charged VAT earlier, have to carefully observe the various tax clauses in the under-construction agreement. They have to ensure that the builder has inserted the right clauses in it to recover the pending tax dues. So it is sure that the buyers will have to end up paying the additional charges over the flat though it was not taken into consideration during their purchase.
Will it affect the sector?
The Supreme Court’s verdict may be applicable to the under-construction flats sold to the lower middle-class group. In the recent times, the state governments and the centre have been targeting towards developing more and more affordable housing projects in order to ensure housing to the lower middle-class people in the urban areas.
Industry experts opine that the state governments may probably come up with some concessions or exemptions to these type of projects, so that the buyers could be relieved from extra charges.
Will it impact the tax system?
Indian government is all set to introduce the Goods and Services Tax (GST) to replace the prevalent indirect tax system. According to sources, the real-estate transactions are not supposed to be a part of the initial GST framework. But it is likely that the apex court verdict may permit GST to cover agreements for sale of under-construction properties. This gives a thought that, the related issues of the court decision may even influence the tax system in future.
