The Institute of Chartered Accountants

of India

Vasai Branch of WIRC

Seminar on Construction Industry-

VAT in Real Estate

On

Sunday 06th February 2011

By

CA AMAR N SHUKLA

amarshukla.ca@gmail.com

VAT in Real Estate

• Sales Tax is a levy on sale of ‘goods’

• ‘Goods’ u/s 2(12) of MVAT Act, 2002 : ‘ means every kind of movable

property ………’

• NO tax on immovable property

• What is movable property ? What is an immovable property ?

– No Definitions under MVAT

• Sec 3 of Interp.Clause of TOPA, 1882 reads “ unless there is something

repugnant in the subject or context , immovable property does not

include standing timber, growing crops or grass ” ; a –ve definition

• Sec 3(26) of Genl. Clauses Act : “ I.P. shall include land ,benefit to arise

out of land & things attached to the earth , or permanently fastened

to anything attached to the earth ”

• M.P. means property of every description except I.P.

2CA AMAR N SHUKLA

269UA (d) of I.T.Act,1961• (d) “immovable property” means—

(i) any land or any building or part of a building, and includes, where

any land or any building or part of a building is to be transferred

together with any machinery, plant, furniture, fittings or other things,

such machinery, plant, furniture, fittings or other things also.

Explanation.—For the purposes of this sub-clause, “land, building,

part of a building, machinery, plant, furniture, fittings and other

things” include any rights therein ;

(ii) any rights in or with respect to any land or any building or a part of

a building (whether or not including any machinery, plant, furniture,

fittings or other things therein) which has been constructed or which is

to be constructed, accruing or arising from any transaction (whether

by way of becoming a member of, or acquiring shares in, a co-

operative society, company or other association of persons or by way

of any agreement or any arrangement of whatever nature), not being a

transaction by way of sale, exchange or lease of such land, building or

part of a buildingCA AMAR N SHUKLA 3

VAT in Real Estate

� What is Real Estate ?

• Immovable property

- Land

- Sale of Flats / Dwellings / Bungalows / Buildings / premises/ tenements/…

• Other Contracts incidental or ancillary to above ;

-Under Construction Contracts by Builders and Developers

- Civil Contracts

- Construction Contracts

- Other Contracts

• Are they all Works Contracts ??

• Are they all taxable ??

CA AMAR N SHUKLA 4

VAT in Real Estate

• Works contracts - taxable under earlier WC (Re-enacted )Act,’89

• M/s. Rehab Housing Pvt Ltd, DDQ Order dt. 28/06/2004 wherein the contract for the construction of tenements alongwith the land was not treated as ‘works contract’.( under earlier WC Act,1989 )

• WC taxable as deemed sale- 2(24) Expln. Of MVAT. wef 1-4-2005

• K. Raheja Development Corp (SC) 141 STC 298 (5-5-2005 )

( Separate considerations for Land and then for Construction )

• Sale as per Sec 2(24) – Explanation for WC from 20-6-2006 under MVAT Act.

• Position of builders till 20-6-2006

- Booking

- Under Construction

- After completion of construction.

5CA AMAR N SHUKLA

2(24) SALE ; Explanation…• (b)(i) the transfer of property in any goods, otherwise

than in pursuance of a contract, for cash, deferred

payment or other valuable consideration;

(ii) the transfer of property in goods (whether as goods

or in some other form) involved in the execution of a

works contract including, an agreement for carrying

out for cash, deferred payment or other valuable

consideration, the building, construction,

manufacture, processing, fabrication, erection,

installation, fitting out, improvement, modification,

repair or commissioning of any movable or

immovable property] ;

shall be deemed to be sale.6CA AMAR N SHUKLA

VAT in Real Estate

• Circular 23T dt 11-9-2006 – Amendments wef 20-6-2006

explained .

• Circular 12T dt 7th Feb 2007 – K Raheja applicability explained

M/s. Rehab Housing Pvt Ltd, DDQ Order dt. 28/06/2004 no

more applicable to new expln to 2(24) wef 20-6-2006.

• Deemed Works Contracts made taxable !!

• Position of builders & developers After 20-6-2006

- Booking ????

- Under Construction ????

- After completion of construction

CA AMAR N SHUKLA 7

Construction Contracts –as NotifiedNotif No VAT.1506/CR-134/Taxation-1 dt 30-11-2006

• (A) Contracts for construction of,--

1 Buildings,

2 Roads,

3 Runways,

4 Bridges, Railway overbridges,

5 Dams,

6 Tunnels,

7 Canals,

8 Barrages,

9 Diversions,

10 Rail tracks,

11 Causeways, Subways, Spillways,

12 Water supply schemes,

13 Sewerage works,

14 Drainage,

15 Swimming pools,

16 Water Purification plants and

17 Jettys

• (B) Any works contract incidental or ancillary to the contracts mentioned in paragraph (A) above, if

such work contracts are awarded and executed before the completion of the said contracts

8CA AMAR N SHUKLA

Judicial History….

• Assotech Realty Pvt ltd V/s State of U.P.

8 VST 738 ( All ) ( 23-3-2007 )

No VAT as Builder constructing not for and behalf of allottees.

• WP 2022 of 2007 by MCHI in Mumbai HC ( 8-2-2008 )

Stay only to members as of that date

Not to Compel to get registrations

Quarterly submission of details of agreements & purchases

• Magus Construction P Ltd V/s UOI 15 VST 17 (Gau); 15-5-08

( favor of assessee after considering K. Raheja & Assotech )

• No amendment in Rule 58 & Sec 42 for a long time.

9CA AMAR N SHUKLA

Judicial History….

• L & T ltd V/s State of Karnataka 17 VST 460 (SC)

Matter referred to larger bench for review of K. Rahejacase. ( 19-8-2008 )

• Rule 58(1A) notified for deduction of Land dt.1-6-2009 wef 20-6-2006

• Sec 42(3A) vide notification dt 9-7-2010 wef 1-4-2010

• Can we still argue

it is Sale of future immovable property ??

Construction for self and

not on behalf of the prospective buyer ??

MOFA / Stamp Act / Dominant Intention ??

10CA AMAR N SHUKLA

VAT TDS ( sec.31 /rule 40 )� Notif .JC(HQ)/VAT/2005/97 dt 29-8-2005

� Circular 42T of 2008 dt 26-12-2008.

• TDS by Notified Employers only.

• 2% for R.D. Contractor/4% for URD

• No TDS if Gross Amount < 10 lakhs in a f.y. -forCHS

< 5 laksh in a f.y. – for others

• No TDS on amount of tax or service tax charged separately

• No TDS on sub-contracts

• Deduction on date of payment / credit to a/c whichever is earlier

• Advance payment liable only on adjustment

• No facility for lower rate in Form 410

• No need for VAT Tax deduction account no.

CA AMAR N SHUKLA 11

VAT TDS ( sec.31 /rule 40 )

• Claim credit for TDS in the month in which it is deductible / in which

actual TDS Certificate is received.

• TDS payment by 21st of next month in Form 405

• TDS certificate in Form 402

• Register for TDS in Form 404

• Annual TDS return in Form 405 within 3 months – JC ( Returns )-

Mumbai

JC (VAT Administration )- Rest of the state

• URD Employers of Mumbai– pay in Form 210 with DD/PO + PAN to

DCST (E-810), BA-2,Mazgaon

• Other URD Employers – pay as above to concerned STO-Returns

Branch

• DD/PO in favour of ‘ SBI a/c MVAT ; location ’

CA AMAR N SHUKLA 12

Different Schemes for taxation of WC

under MVAT Act

• Rule 58(1) : Normal Scheme

( Gannon Dunkerley (SC) -88 STC 204 )

• Proviso to Rule 58(1) : Table – Adhoc deduction method

• Sec.42(3) : General Composition Scheme –Construction Contracts* & Other Contracts

• Sec 42(3A) : Special Scheme for Developers & Builders

13CA AMAR N SHUKLA

Rule 58(1) : Normal Scheme

� Total Contract Value*

Less :

• Land Cost ,if any -58(1A)

( Upto 70% of Agreement value � )

• Deductions as given under rule

• Form 407 & F 408 – amounts paid to Regd. Sub-contractor

Balance taxable @ 4/5/12.5% in the ratio of purchases

• Set-off under normal provisions

14CA AMAR N SHUKLA

Proviso to Rule 58(1) : Table Method

� Total Contract Value *

Less :

• Land Cost ,if any -58(1A)

( Upto 70% of Agreement value � )

• Ad-hoc deduction as per table

• Form 407 & F 408 – amounts paid to Regd. Sub-contractor

Balance taxable @ 4/5/12.5% in the ratio of purchases

• Set-off under normal provisions.

15CA AMAR N SHUKLA

Sec.42(3) : General Composition

Scheme – Construction contracts

� Total Contract Value *

Less :

• Land Cost ,if any -58(1A)???

( Upto 70% of Agreement value � )

• Form 407 & F 408 – amounts paid to Regd. Sub-contractor

Balance taxable @ 5% flat - for construction contracts

• Set-off in excess of 4% - Rule 53(4)(b)

16CA AMAR N SHUKLA

Sec.42(3) : General Composition

Scheme – Other contracts

� Total Contract Value *

Less :

• Land Cost ,if any -58(1A) ???

( Upto 70% of Agreement value � )

• Form 407 & F 408 – amounts paid to Regd. Sub-contractor

Balance taxable @ 8% flat - for construction contracts

• Set-off @ 16/25 ( 64% only) - Rule 53(4)(a)

17CA AMAR N SHUKLA

42(3A) Composition Scheme for

Builders and developers

• Notif VAT/1510/CR-65/Taxn-1 dt 9-7-2010

• Wef 01-04-2010

• Only for R.D.

• Composition Amount @ 1% of Agreement value/Stamp

duty value whichever is high

• Agreements regd on or after 01-04-2010

• Make e-payment for the return period in which

agreement is registered & include agreement value as

t.o. of sales in the said return

• Not eligible for set-off on purchases

18CA AMAR N SHUKLA

42(3A) Composition Scheme for

Builders and developers ….

• No Concessional purchases against C form on

purchases (in which transfer of property takes place )

• Barred from issue of Form 409 to sub-contractor.

• Barred from change of method of computation for

said contract.

• Barred from issue of TAX INVOICE.

CA AMAR N SHUKLA 19

42(3A) Composition Scheme for

Builders and developers - ISSUES

• Notif . Dt. 9-7-2010 For 1% Composition – is it contempt of court ? Or

is it a trap ? Or carrot dangling ?

• Scheme qua dealer / project / agreement ?

• Tax payable on letter of allotment ?

• Can it be covered under composition scheme ?

• Refund on cancellation ? Resale after cancellation ?

• On cancellation of booking –can the vat collected @ 1% be claimed as

goods return ?

Will period of 6 months apply ? Will the fresh agreement entered into

after 1-4-2010 for the same flat be eligible under the scheme ?

• Full tax payment in month of Registration of agreement !!

• Periodicity issues

• Set-off on Capex- Machinery , equipments ?20CA AMAR N SHUKLA

42(3A) Composition Scheme for

Builders and developers - ISSUES

• Agreements regd before 1-4-2010 ( from 20-6-2006 )

• Agreements regd after 1-4-2010 till date of registration

• Admin relief – whether from 20-6-06 or 1-4-2010 ?

• Scheme envisages transfer of land/ interest in land along with the

construction of flats/dwellings/bldgs/premises. How far applicable to

majority of cases ?

• Eligibility of Agreements entered after 1-4-2010, but payment/s

received prior to 31-3-2010 ?

• If yes, then what about the taxes already paid as per earlier rules ? Can

he revise returns ?

• Eligibility of earlier construction contracts taxable @ 5% ? Can they

switch over ? If yes, will it be eligible for set-off for periods upto 31-3-

2010 ? How to compute liability upto 31-3-2010 and after 1-4-2010 ?

21CA AMAR N SHUKLA

42(3A) Composition Scheme for

Builders and developers - ISSUES• Past transactions affected against C form ?

• Whether F form can be issued ?

• In past , form 409 already issued , whether 1% Scheme still applicable ?

• Can builder still accept Forms 407-408 from sub-contractor ?

• Sub-Contractor to charge applicable VAT to Main contractor ; with no

corresponding set-off . Can the scheme be challenged in view of the

ratio laid down in Larsen & Toubro Ltd.

• Can Regd MCHI members opt for this scheme?

• Whether prospective buyers liable for VAT -TDS ? TDS @ 2%/4%/1% ?

• How to collect the tax ?

• What Document to be relied upon to prove the completion of

construction ?

22CA AMAR N SHUKLA

Redevelopment

• Is tax payable in case of re-development ? If yes, for :

- Giving back same area to original occupant

- Giving additional area to original occupant

- Selling extra area to original occupant

Davi Dass Gopal Krishnan & Others – 22 STC 430 (SC)

• SRA Schemes eligible for set-off as per notif. no.

VAT.1510/C.R.136/Taxn-1 dt 18-10-2010. ( even urd

eligible ?! )

23CA AMAR N SHUKLA

THANK YOU

&

GOOD LUCK

CA AMAR N SHUKLA 24