Real estate news on Bombay High Court Dicssion on VAT good for builders

Building materials, Regulations/ Legal aspects
Posted on Aug 29, 2012
Nothing is gone from Builders pocket as far as VAT or service taxes are concerned. In fact, Builders must be thankful to the Hon. Court for giving retrospective decision on VAT.
There is a provision in VAT for claiming Set Off against the VAT paid just like service tax. Under Maharashtra Value Added Tax 2002, a registered vendor or dealer can claim the Set Off of tax paid. Hence builders or contractor paid VAT on building materials like cement, tiles, steel, paints, glass and almost 3000 number of items used for construction including elevators and gadgets would have been unclaimed if the end users were given the relief.
The builders will collect the VAT or collected VAT kept in escrow account will be utilised to Set Off VAT already paid through construction material bills. The onus is on the flat or property purchasers to pay the VAT. Builders or contractors will get input tax credit, if they paid the taxes u/r 58 or u/s 42 (3). State of Maharashtra had merged Works Contract Tax with VAT and hence VAT is applicable to the real estate.
If the agreement is not entered into and only advances were given then there is no VAT applicable.
From 20.06.2006 to 31.03.2010
1. Composition Scheme U/s 42 (3)- Under this scheme developer has to pay 5% tax on the agreement value. Land deduction is not available. Input tax credit is available subject to the reduction of 4 per cent.
2. Actual Expense Method U/r 58- Under rule 58, the deduction of Labour 86 service charges is available on actual basis. Land deduction is also available. Set-off will be calculated subject to the condition u/r 53 and 54.
3. Standard Deduction Method U/r 58- Under rule 58, the deduction of land cost will be allowed. Thereafter 30% standard deduction from remaining amount will be available as per proviso to sub-rule 1. Set-off will be calculated subject to the condition u/r 53 and 54.
After 01.04.2010
The developers can opt for fourth option also, under this option u/s 42 (3A), developer has to pay 1% tax on agreement value. No land deduction and input tax credit is available.
The Builder will be required to make the payment of interest according to the provisions of law.
However, all the VAT is collected from the flat purchaser will be retained by the builders and set off will be claimed. Hence neither government nor flat purchasers will benefit from paying VAT.

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