‘Works contract’- VAT on property under construction
VAT is applicable on works contract. So according to supreme court, VAT is applicable on building contracts and property under construction. In a building contract where the land owner gives the land to the builder for construction and in return gets a portion of the developed property, then it comes under a work contract. Then builder executes sale agreements with buyers before the construction is completed. Such sale agreements will attract VAT on transfer of property in goods involved in the works contract.
Works contract is not only contracts involving labour or service but a composite contract comprising of works contract and transfer of property. Works contract means when any of the parties is liable for construction in a contract. Execution of such contract is leviable to tax as sale of goods. Even after incorporation of goods in the property, the tax is levied provided the tax is directed only on the value of the goods during incorporation. So, state governments can levy tax on the flats which are sold before the completion of construction.Supreme Court has said that an agreement entered into by a builder with a buyer before a project is completed is in effect a works contract and VAT can be levied.
A bench of the Supreme Court, affirming the judgment in the case, said an agreement entered into by a builder with a buyer before a project is completed is in effect a works contract. As such VAT can be levied. In 2005, the Supreme Court had upheld the decision of the Karnataka high court, in a case which allowed the Karnataka state government to levy VAT on a builder.
The Supreme Court says that irrespective of the type of contract, the agreement between a buyer and builder involved in construction work, tax is applicable. Only the value of goods transferred after the agreement is entered into with the buyer is liable to VAT. A works contract arises only from the stage at which the developer enters into a contract with the buyer. Tax is chargeable only on the value of the materials involved and transferred after an agreement is entered into with the buyer. Further, there will be no works contract if the agreement is entered into after the flat or unit is already constructed. As such, VAT will not be payable if a fully-constructed flat is sold.
The builders and developers who are in a works contract need to pay tax. If the developer or builder sells the flat with the construction in pending, then irrespective of the type of contract VAT can be levied. VAT is levied on the value of goods and materials involved only after the agreement is once done.
