The real estate company - VAT applicability, VAT + CST

[Bijay Shrestha]

Respected Experts and friends,

M/s. ABC Company is Real Estate Company located in Maharashtra/Karnataka (Any place). It has owned Land for construction of Apartments. It has received Advance money from various customers towards purchase of Apartments.

The Company has executed Agreement to sell (AOS) with the Customers for sale of Apartments. But it has not entered into any Development agreement/Construction Agreement with the Customers. Because of this reason; the Company is not paying VAT and also not collecting VAT from customers as there is nothing to show that Work Contracts has been awarded by the Customers to the Company .

The Company says it will pay VAT, if any at the time of handing over the possession to the customers.

Is this approach correct to avoid VAT liability under the respective States VAT Act?

If yes, then again what is the logic/legal provision behind paying VAT at the time of handing over the possession?

The Company either construct the Apartment itself or give it to the sub-contractors.

Please kindly suggest.

Posts / Replies

[Ganeshan Kalyani]

Value added tax is not applicable on immovable property. Therefore on sale of ready made flats ( fully constructed) is not subject to value added tax. But if a customer books a flat while construction is under progress then on material portion involved in execution of construction is subject to value added tax. In your case you need to ascertain the time of booking of flats by the customer.

[Bijay Shrestha]

Yes. actually customers book flats before completion and also pays advance.

But Builder is not collecting VAT from Customers. It says The Company has executed Agreement to sell (AOS) with the Customers for sale of Apartments. But it has not entered into any Development agreement/Construction Agreement with the Customers. Because of this reason; the Company is not paying VAT and also not collecting VAT from customers as there is nothing to show that Work Contracts has been awarded by the Customers to the Company .

[Shipra Garg]

Dear Mr. Bijay Shrestha,

Ordinarily in the case of a works contract the property in the goods used in the construction of the building passes to the owner of the land on which the building is constructed when the goods and material used are incorporated in the building. But there may be contract to the contrary or a statute may provide otherwise. Therefore, it cannot be said to be an absolute proposition in law that the ownership of the goods must pass by way of accretion or exertion to the owner of the immovable property to which they are affixed or upon which the building is built.

With respect to contract entered into with the intended purchaser, the value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later. Thus the point of taxation in VAT comes at the latter stage. The value of said goods at the time of the transfer shall be calculated AFTER making the deductions under the respective VAT laws and the cost of Land from the total agreement value. Therefore, we are of the opinion, that the advance received from the customer can be first adjusted through the Cost of land as per Article 25 (stamp duty for conveyance) for deferring the tax liability. The liability to pay VAT on the amount exceeding the cost of land may be under the tax net depending upon the time of transfer as per the essence of the agreement entered into with the Customer.

[Bijay Shrestha]

Thank you Shipra Garg.

As u mentioned that With respect to contract entered into with the intended purchaser, the value of the goods which can constitute the measure of the levy of the tax has to be the value of the goods at the time of incorporation of goods in the works even though property in goods passes later, even this view is supported by Raheja Case and L&T Case.

But practically it is very difficult job to determine the value of value of the goods at the time of incorporation of goods in the works to levy VAT for each customer because customers come at different stage of projects.

To overcome this difficulty, generally Builders enter into an agreement with customers in which either Sales consideration for land and Construction is mentioned separately or a single consideration is mentioned for whole super structure.

And whenever the builder receives money from customers, first they adjust the same against the land value and balance to the construction for which they also charge VAT and Service Tax.

But in the case of single consideration for both land and construction, how to compute VAT even if the Agreement has been entered with the customers?

In case of Service tax, we can go for 75% abatement. there wont be any problem.

Please suggest.