Developers will have to pay 5% VAT, rules Supreme Court

MUMBAI: In a major setback to realty developers , the Supreme Court has upheld the earlier Bombay High Court verdict that asked builders to pay 5% value-added tax for sale of underconstruction houses between 2006 and 2010 in Maharashtra.

The Supreme Court had clubbed all 26 appeals under consideration on this issue together . Of these appeals, 14 were from Karnataka and 12 from Maharashtra. The verdict will mean that developers in states such as Maharashtra, Uttar Pradesh and Karnataka where VAT has been levied on such transactions will have to pay the charges.

“We do not find any error in the view of the (Bombay) High Court in this regard,” said the order passed by the threejudge division bench. The bench comprised Justice RM Lodha, Justice J Chelameswar and Justice Madan B Lokur .

“Moreover, the Advocate General for Maharashtra clearly stated before us that implementation of Rule 58(1-A ) (of Maharashtra VAT) shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the process of assessment of each individual case.” MVAT rule 58 (1-A ) provides for deduction of expenses on labour and service charges for the execution of the work related to the goods that has already been transferred.

“Wherever the agreements have been clear on the levy of VAT, developers will be able to recover their payments. However , there could be a rise in issues between developers and home buyers where agreements were silent on the VAT levy and who will bear these charges,” said Hitesh Jain, senior partner, ALMT Legal.

Given that the property market between 2006 and 2010 was witnessing a boom with an exception of around 15-18 months, tax collection from Mumbai and Pune alone may surpass even . 1,000 crore, experts said. In 2006, the Maharashtra government had imposed a 5% VAT on apartments sold following an order of the Supreme Court in the case of K Raheja versus the government of Karnataka .

The Maharashtra government subsequently reduced VAT on sale of flats to 1% from April 1, 2010. In 2007, the realtors had received a stay on the circular asking them to pay 5% VAT since June 2006. Last year, the Bombay High Court had dismissed the plea filed by Builders Association of India.