Abbreviations
used: LO - Land Owner; BD - Builder/Developer; PB - Prospective Buyer;
Haryana Value Added Tax Act, 2003 – HVAT Act
1. Introduction
In
Haryana, we look around numerous building projects either under
construction or upcoming, in the form of residential complexes and
townships, commercial complexes, shopping malls, etc. With the issuance
of couple of circulars in May’13 and June’13 by the Haryana VAT
Department recently,
clarifying certain aspects on VAT on builders’
projects, this branch of indirect tax has been activated on these
builders’ projects. Haryana VAT on building contracts is an emerging
challange; not only for the stake holders, which are, land owners,
builders/ developers and the actual users, but also for the tax
professionals. This article is an attempt to discuss various issues in
this regard.
“Joint Development Agreements or the Builders Collaboration Contracts (referred as Builder Contracts)” for
the purpose of our present discussion means the contracts where LO
offers his land to BD for construction of residential/commercial
complex/units and the latter offers part of the constructed flats/units
to LO; and remaining flats are sold by BD to the customers, either
during construction or post construction as ready units. Size of
complex, which may vary from 4 units or 400 units, will not have an
effect on our discussion; nonetheless, in big complexes, number of LOs
can certainly be more than one, and certain other issues would also crop
up. Revenue sharing contracts between LO and BD have been excluded from
our present discussion.
Thus, our present discussion is
confined to implication of Haryana VAT on those contracts where, apart
from material and services, value of land is also taking part of the
bargain.
2. Background
Before coming to the taxability part, it is necessary to look at the history of the same. In a case before the Division Bench of the Supreme Court in K. Raheja Development Corporation vs. State of Karnataka (2005) 141 STC 298 (hereinafter referred as Raheja case),
the owners of the land were also engaged in the business of
constructing apartments/complexes, and for this purpose, they entered
into agreements of sale with the intended purchasers. It was held by the
Supreme Court that even an owner of the property might also be said to
be carrying on a works contract if the builder enters into an agreement
to construct with the intended purchasers. However, if the agreement is
entered into after the unit is already constructed, then there would be
no works contract. But so long as the agreement is entered into before
the construction is complete, it would be a works contract.
However, the Raheja case has been referred to the larger bench in the case of Larsen & Toubro Limited vs. State of Karnataka (2008) 17 VST 460 (SC); but, without grant of any stay by the Apex Court.
Relying upon the judgment in Raheja case,
most of the State VAT Departments initiated imposition of VAT on the
material involved in the transfer of residential and commercial
complexes by considering the activity as works contract.
The Bombay High Court in the case of Maharashtra
Chamber of Housing Industry vs. State of Maharashtra (Writ Petition no.
2568 of 2007 dated 10.4.2012) (2012) 51 VST 1 (Bom) also examined
this issue. The Court observed that since works contracts have numerous
variations, it was not possible to accept the contention of the
appellant either as a matter of first principle or as a matter of
interpretation that a contract for work in the course of which, title
was transferred to the flat purchaser, would cease to be a works
contract. The Court further made a note from the judgment by the Supreme
Court in the case of Builders’ Association vs. U.O.I. (1989) 73 STC 370 (SC),
that the doctrine of accretion is itself subject to a contract to the
contrary. Analyzing various clauses of the agreement under the
Maharashtra Ownership Flats Act, 1963 (MOFA), the High Court held that
it was of the nature of works contract. The High Court also held that
the explanation (b)(ii) to Section 2(24) of Maharashtra VAT Act, which
reads, “‘works contract’ includes 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”, is constitutionally
valid and within legislative competence of the State Legislature.
The
High Court also approved the composition scheme under the Maharashtra
VAT Act, which applies to the registered dealers who undertake
construction of flats, dwellings, buildings or premises and transfer
them in pursuance of an agreement along with land or interest underlying
the land, at 1 percent of the agreement amount specified in the
agreement or the value specified for the purpose of Stamp Duty under the
Bombay Stamp Act, 1958 whichever is higher, subject to certain
conditions.
3. Haryana VAT on Builders Contracts
3.1 Taxability / Incidence of tax
In accordance with Raheja case,
builder contract, where agreement is executed with the intended buyers
before completion of the building, falls within the definition of works
contract. Under the HVAT Act, the term “works contract” has been defined
under section 2(1)(zt) as, -
“(zt) “works contract” includes
any agreement for carrying out for cash, deferred payment or other
valuable consideration, the assembling, construction, building,
altering, manufacturing, processing, fabrication, installation, fitting
out, improvement, repair or commissioning of any moveable or immovable
property.”
The term “sale” has been defined in section 2(1)(ze) of the HVAT Act as, -
“(ze) “sale”
means any transfer of property in goods for cash or deferred payment or
other valuable consideration except a mortgage or hypothecation of or a
charge or pledge on goods; and includes –
(ii)
the transfer of property in goods (whether as goods or in some other
form) involved in the execution of a works contract;”
A Memorandum (No. 152/ST-I; dated 07-05-2013) (hereinafter referred as “Memo”)
has been issued by the Excise & Taxation Commissioner, Haryana in
relation to activities performed by the Builders; and Para No. 1.1
thereof reads as under, -
“1.1
………. agreements or contracts entered into by the developers or others
with prospective customers for sale of fully constructed apartments or
flats or other buildings before the commencement of actual construction
or before completion of construction, should be treated as agreements or
contracts for execution of works contract of construction of building
as held by the Hon’ble Supreme Court in the case of K. Raheja
Development Corporation v/s State of Karnataka (reported in 141 STC at
page 298). It is still a good law and has not been reversed by the Hon’ble Supreme Court in any subsequent judgment. Claims to the contrary, if any, should be rejected.”
In relation to builder contracts, Para nos. 2.1 to 2.3 of the said Memo state,-
“2.1
In the case of Joint Development Projects, where typically there
is an agreement between the owner of a land and a developer to develop
such land which involves construction of a building or buildings
(residential or commercial) on such land, there is an understanding that
an agreed portion of the constructed building would be transferred by
the developer to the land owner. The developer would be given the right
of selling or transferring the balance portion of the constructed
building along with the undivided share in the land on which it is
built. The developer would then enter into agreement for construction of
flats or apartments or the other built up areas with customers or for
sale of constructed flats or apartments or other built up areas. In many
cases, the agreement by the developer for sale of constructed flats or
apartments of other built up areas would be before their completion of
construction. As mentioned earlier, in respect of both the
agreements for construction and agreements for sale of built up area
that are entered before the completion of construction, the developer
would be liable to tax on the taxable turnover relating to
transfer of property in goods involved in execution of such civil works
contract of construction of buildings.
2.2
Further, generally a developer constructing a building in pursuant to a
joint development agreement declares only part of the amounts received
from his customers with whom he has entered into construction agreement
as his turnover relating to the transfer of property in goods in the
execution of such works contract. He would not declare the balance
amounts received from the customers towards transfer of undivided share
of land an which flat or other built up area is constructed and sold to
them as part of his turnover. Similarly, he would not declare the value
of goods transferred in the construction of the building relating to the
share of the land owner as part of his turnover on the ground that no
consideration is received from the land owner on such transaction.
2.3 The
claim that the developer executes works contract of construction of a
portion of a building without any consideration is not factually and
legally sustainable. The correct view would be that the land
owner has sold a portion of his land to the developer for a
consideration and, in turn, the developer has agreed to construct a
portion of the building for the land owner for an amount equal to that
consideration.”
Analyzing the activity in detail in view of Raheja case and
the Memo issued by the HVAT Department, it can fairly be stated that BD
executes works contract for two separate persons, that is, -
(A) Works Contract for the LO: where BD constructs the units for a consideration in the form of share in the land; and
(B) Works contract for PB, if BD receives payment (or enters into
agreement of sale) from PB before completion of the construction.
So
far as activity stated at (A), it is always a works contract activity
(unless, it can be termed as barter transaction, discussed in next
para); whereas activity referred to at (B) has become taxable with the
decision in Raheja case. Supposing, the Raheja caseis overruled by the larger bench, then no VAT will be payable qua this activity.
Valuable Consideration – Barter Transaction
As
per the Courts, valuable consideration includes cash, money, cheques,
bill of exchange, promissory notes, shares and like instruments. Whether
exchange of goods (barter) constitutes a valid sale? It had been a
matter of great controversy and the Courts had expressed different views
in this regard. While discussing the basic elements of “sale”, the Apex
Court in the case of Devi Dass Gopal Krishnan vs. State of Punjab (1967) 20 STC 430 (SC) opined
that cash or other valuable consideration is essential for completion
of a sale. In the absence of cash or deferred payment, it is exchange of
goods (barter), and not a sale.
In the case of CST vs. Ram Kumar Agarwal (1967) 19 STC 400 (All),
gold was paid as a price of jewellery. The jeweller purchased gold from
the market, prepared ornaments, and transferred to the customer against
the gold. It was held that exchange of goods was “barter” and not a
“sale”. It was also observed that it was immaterial whether gold was
given before the preparation or at the time of transfer of jewellery. In
another case, the dealer collected kansa, melted it and returned to the
customer after deducting certain percentage in weight and collected
labour charges extra: the Court held it as a barter transaction and not
as sale. [CST vs. Kansari Udyog (1979) 43 STC 176 (MP)]. However, contrary views were observed in the case of VP Vadivel Achari vs. State of Madras (1969) 23 STC 273 (Mad),
where gold was exchanged for new jewellery; it was held to be a “sale”
since gold, handed over to assessee, could easily be converted into
money.
Where goods are sold partly for goods and partly for money, it is a transaction of sale.[Aldridge vs. John. (1887) 7 E & B 885; LJ QB 296; Sheldon vs. Cox (1824) 3 & C 420] Similarly, in the case CIT vs. M. & G. Stores AIR 1968 SC 200,
an old car was returned and difference was paid in cash: while
explaining the word “price”, the Supreme Court held that it was a
transaction of sale. Likewise, where machinery was transferred against
allotment of shares, it was considered as sale since transfer of shares
was a mode of payment of price and discharge of liability. [Premier Electro Mechanical Fabricator vs. State of T.N. (1984) 55 STC 371 (Mad) followed in State of T.N. vs. T.M.T. Drill (P) Ltd. (1991) 82 STC 59 (Mad);I.B.P. Co. Ltd. vs. Asstt. CCT (2000) 118 STC 33 (WBTT)]
In
another case, the Madras High Court held that even barter or exchange
of goods might be considered as sale under the Act, provided there is
transfer of property in the goods.[Vishweshwasadars Gokuldas vs. Govt. of Madras (1962) 13 STC 113 (Mad)]
In Dhampur Sugar Mills Ltd. vs. CTT (2006) 147 STC 57 (SC),
a company, which owned a sugar mill, executed a deed of licence in
favour of the dealer; wherein the licence fee for the use of the entire
sugar mill complex was to be paid in the shape of molasses. At the end
of every licence year, the value of the molasses had to be ascertained
on the basis of the rates notified by the Government and any excess or
shortage towards the amount of licence fee was to be made good by either
party. The Supreme Court observed that the such adjustment of price
would come within the purview of the term “other valuable consideration”
in as much as the dealer and the company were fully aware that they had
to fulfill their respective terms and obligations, i.e., (i) payment of
licence fee on monetary terms, and (ii) payment of price of molasses
supplied by the appellant to the company which was again in monetary
terms. Thus, it was held that the transaction could not be termed as
“barter”.
Therefore,
looking at the afore-stated pronouncements, it would be difficult to
plead before the courts with success that exchange of land with value of
construction is merely a barter transaction.
3.2 Liability for registration
In
view of our afore-discussion, since the builder is constructing the
property for the land owner, and also booking flats for the intended
buyers before completion of construction, he is liable for registration
under section 11(2) of the HVAT Act. Primarily, the builder is not
liable to obtain registration under the Central Sales Tax Act since the
entire works contract in relation to particular project would be
executed in the State of Haryana. However, if the builder wants to
purchase goods from other States, he should obtain registration under
the Central Sales Tax Act also, which would facilitate him to purchase
goods at a concessional rate of tax of 2 percent against Forms C.
However, the builder cannot purchase goods on the strength of Form C in
relation to those flats, which are sold after completion of construction
on which no VAT is payable.
3.3 Incidence of VAT
The
builder shall be liable to pay HVAT as works contract in respect of
those flats which are constructed for the land owner. In addition, he
shall also be liable to pay tax in relation to those flats which are
sold to the intended buyers before completion of construction. In other
words, in the second case, he is not liable for HVAT in relation to
those flats which are sold after completion of construction as ready
units.
3.4 Measure of tax
Determination
of VAT in case of works contract depends upon the provisions under the
State VAT Act. Three Schemes have been laid for computation of HVAT:
(1) Regular Scheme (1) – Total consideration receivable from the land-owner (in the form of land) and the intended buyer (–) Value of Land (–) Value of actual labour & services as stated in Rule 25(2)(a) of Haryana VAT Rules;
(2) Regular Scheme (2) – Total
consideration receivable from the land-owner (in the form of land) and
the intended buyer (–) Value of Land (–) Value of labour & services
calculated as per percentage specified in Rule 25(2)(b) of Haryana VAT Rules;
(3) Composition Scheme – Under this Scheme, deduction for labour and services shall not be allowed. Rate of VAT would be 4 percent .
Under the Regular Scheme, determination of turnover and output VAT of works contract transaction is as under: -
i
|
Gross Turnover – Work executed during the tax period
|
………….
|
ii
|
Less : Cost of land
|
|
iii
|
Less : Value of labour & services
|
………….
|
|
[Either on actual basis or at percentage basis]
|
|
iv
|
Taxable value of material (Taxable Turnover)
|
………….
|
v
|
Computation of Output Tax on (iii)
|
|
|
Declared goods (mainly iron & Steel) at the rate of 5 percent ……. Tax ……
|
|
|
Other goods at the rate of 12.5 percent ...... Tax ……
|
………….
|
As
per explanation 1 to section 2(1)(zg), “In relation to the transfer of
property in goods (whether as goods or in some other forms) involved in
execution of a works contract, “sale price” shall mean such amount as is
arrived at by deducting from the amount of valuable consideration paid or payable to a person for the execution of such works contract,the
amount representing labour and other service charges incurred for such
execution, and where such labour and other service charges are not
quantifiable, the amount of such charges shall be calculated at such
percentage as may be prescribed.”
3.4.1 Determination of value of land in the builder contracts:
No provisions have been laid for determination of value of land either under the HVAT Act or Rules made thereunder. Here, the value of land would be determined for two purposes, namely: (i)
Determination of value of works contract for the land-owner where
consideration has been received in the form of land; and (ii)
Determination of taxable turnover in the case of sale to prospective
buyer where consideration includes value of land.
It can also be argued that unless the Rules are framed for valuation of the land, Haryana VAT is not payable at all on builders’ activities qua intended buyers. Reliance can be placed upon the judgment by the Supreme Court in the case of K. Damodaraswamy Naidy vs. State of Tamil Nadu (2000) 117 STC 001 (SC),
where five judges bench of the Apex Court, in relation to the
taxability of composite charges received by the hotels, opined that the
composite charge that the hotel owner levied for lodging and boarding
had to be split up and only the element thereof that related to the
supply of meals could be subjected to the sales tax. The Court held that
sales tax could not be levied on the composite charge for boarding and
lodging unless the State made Rules which set down formulae for
determining the supply component on the composite charge. It was further
held that it was not for the assessing authority to split up the
composite price into two and make the one part taxable; that is, only
the State could promulgate rules to indicate how to treat the composite
charges for lodging and boarding and set out formulae for splitting of
the two. The said judgment squarely applies to our case since no rules
have been framed for valuation of land for the purpose of determination
of taxable turnover in builders’ case.
However,
VAT is an indirect tax and if it is not collected from the customers at
the time of execution of contract, it might become a cost to the
builder at a later stage; and thus, taking a conservative view,
we suggest that value of land may be computed on some fair and
reasonable method; which might be at cost or at the circle rate of the
land, discussed hereinafter.
(A) Transaction between the builder and land-owner
In
relation to determination of value of works contract for the land-owner
where consideration has been received in the form of land, Para no. 2.4
of the Memo dated 7.5.2013 issued by the Department states that the
amount payable by the land owner towards construction of his share of
the building shall be calculated on the basis of:
(i)
the aggregate of amounts received from his customers by the
developer with whom he has entered into construction agreements or
entered into agreements for sale of constructed building before
completion of such building, towards transfer of undivided share of land
to them; (that is, on the basis of amount received from prospective buyers towards land); or
(ii)
the aggregate of amounts declared by the developer to be the value
of undivided share of land transferred to the customers with whom he has
entered into construction agreements or agreements for sale of
constructed building but before completion of such building (in short, on the basis of amount declared by the developer to the prospective buyers towards land); or
(iii)
aggregate of amounts fixed under the relevant law as the value of
undivided share of land transferred to the customers with whom he has
entered into construction agreements or agreements for sale of
constructed building but before completion of such building (that is, on the basis of municipal circle rate of land).
(B) Transaction between the builder and the prospective buyer
In
relation to determination of land for the purpose of computation of
value of works contract in the case of sale to prospective buyers, Para
no. 2.3 of the said Memo states,-
(i)
The developer in most of the cases collects amounts separately from
his customers towards the transfer of undivided share of land on which
their earmarked flat or other built up area is constructed. The
aggregate of all such amounts would be the consideration that is to be
taken as payable by the land owner towards construction of his share in
the project (that is, amount received from prospective customers towards land separately).
(ii)
In cases, where such amounts are not collected separately, the
aggregate of amounts declared by the developer to be the value of
undivided share of land transferred to the customers while registering
with relevant authorities transfer of such land along with the
customer’s portion of the building constructed on it, would be the
consideration that is to be taken as payable by the land owner towards
construction of his share in the project. (In short is, amount declared by the builder at the time of registry)
(iii)
in case where the value of the undivided share of land transferred
is not declared separately at the time of registration, the aggregate of
the amounts fixed under the relevant law (circle rate) for the purpose
of payment of fee or consideration that is to be taken as payable by the
land owner towards construction of his share in the project. (that is, on the basis of municipal circle rate of land)
3.4.2 Deduction towards labour and services:
In accordance with Rule 25(2) of the Haryana VAT Rules, -
“(a)
In case of turnover arising from the execution of the works
contract or job-work, the amount representing the taxable turnover shall
exclude the charges towards labour, services and other like charges
subject to the dealer’s maintaining proper records such as invoice,
voucher, challan or any other document evidencing payment of charges to
the satisfaction of the Taxing Authority.
(b)
For the purpose of clause (a) of sub-rule (2), the charges
towards labour services and other like charges shall include, —
(i) labour charges for execution of works ;
(ii) charges for planning and architect’s fees ;
(iii)
cost of consumables such as water, electricity, fuel, etc., used
in the execution of the works contract the property in which is not
transferred in the course of execution of a works contract ;
(iv) cost of establishment of the contractor to the extent it is relatable to supply of labour and services ;
(v) other similar expenses relatable to supply of labour services ;
(vi)
profit earned by the contractor to the extent it is relatable to
supply of labour and services subject to furnishing of a profit and loss
account of the works sites:”
Thus, two methods for determination of labour, services and other charges have been specified under the HVAT Rules, as under:
(A) Actual Basis; and (B) Percentage Basis
(A) Actual Basis
If
labour and services are determined on actual basis, the contractor
shall maintain the records in a manner so as to easily quantify the
value of material, amount of direct labour and services and
proportionate amount of indirect labour and services. Scope of “labour
and services” is not confined to wages and salaries; but it extends to
the other charges of the nature of expenses stated in seven clauses of
Rule 25(2) discussed above.
(B) Percentage Basis
Where
amount of charges towards labour, services and other like charges are
not ascertainable from the books of accounts of the dealer or where the
dealer fails to produce documentary evidence in support of such charges,
the amount of such charges shall be calculated on the basis of
percentages specified in the table given in proviso to rule 25(2)(b) of
HVAT rules. Civil works contracts fall within the following clause: -
Sl. No.
|
Type of contract
|
Labour, service and other like charges as percentage of total value of the contract
|
6
|
Civil works like construction of buildings, bridges, roads, dams, barrages, canals and diversions.
|
25 percent
|
3.5 Composition Scheme notified under section 9 of the HVAT Act
Under
the HVAT Act, in relation to works contracts, the applicable rate of
tax is 4 percent of total valuable consideration received or receivable
for execution of the contract.
In
relation to deduction for the value of land, Para No. 3.1 of Memo dated
7.5.2013 states, “Where a builder or developer has opted for payment of
tax on his turnover relating to transfer of property in goods involved
in execution of works contract under the composition scheme as provided
under Section 9 of the HVAT Act, the total consideration on which such
dealer is liable to tax would not include the amount received from the
customers towards their undivided share in land. However, as explained
earlier, in the case of joint development projects this exclusion would
not be applicable.”
As
per the said Para, deduction of land is available under this scheme if
it is separately charged, and not otherwise. However, the author is of
the view that the intention of legislature cannot be to compute tax at
the rate of 4 percent , whether or not the value of land is included.
Moreover, VAT cannot be levied on the value of land. Therefore, value of
land should be deducted in this Scheme also.
Under
this Scheme, deduction for labour and services shall not be allowed.
Benefit of input tax credit is also not available. The builder can
purchase goods within the State at lower rate of tax u/s 7(2) of the Act
on the strength of Form VAT-D1 [4 percent or such lower rate
applicable on sale of such goods]. He can also purchase goods against
Form C from other States at a concessional rate of tax of 2 percent .
3.6 Booking/Sale of flat during construction
In
a builder agreement, builder’s share in the property could be sold
prior to completion, but at various stages of construction, to the
prospective buyers. Sometimes, the builder sells the flat when the
project has just started, and sometimes when the flat is almost
complete. The question generally arises as to at which value of
construction, VAT shall be paid; that is, on the total value of flat or
on the value received after the date of booking? Memo issued by the HVAT
Department is silent in this regard. However, in the opinion of the
author, where the builder constructs part of the flat for himself due to
non-booking or otherwise, he should be liable to pay tax only in
relation to that portion of works contract which is executed after the
date of booking since before that date he was not a deemed contractor of
prospective buyer. Simultaneously, it may also be noted that if that is
so, the builder shall be eligible for deduction towards labour and
services and benefit of input tax credit only in respect of works
contract executed post-booking.
3.7 Time of turnover / Point of taxation
In
the case of works contracts, unless otherwise contrary in the contract,
goods are deemed to be sold at the time of incorporation of goods in
the works contract. The term “gross turnover” has been defined in
section 2(1)(u) of the HVAT Act as, -
“(u) “gross turnover” when used in relation to any dealer means the aggregate of thesale prices received or receivable in
respect of any goods sold, whether as principal, agent or in any other
capacity, by such dealer and includes the value of goods exported out of
State or disposed of otherwise than by sale;”
3.7.1 Works contract executed by builder for land owner
Here,
the entire land is received by the builder in advance, before
commencement of construction. Therefore, it might be said that time of
turnover would be the execution of agreement between land owner and
builder, and tax would be payable at that time itself on total
construction value. However, the author is of the opinion that since on
the date of agreement, no material is transferred by the builder;
therefore, time of turnover would be the time when goods are
incorporated in the works contract.
3.7.2 Works contract executed by builder for prospective buyer (PB)
In
this case, goods are deemed to be sold at the time of incorporation of
goods in the works contract, and not when installment is received.
However, it would be practically difficult to arrive at the taxable
turnover at that time. Therefore, to maintain uniformity in collection
of tax from the PB and payment of VAT, it is advised that HVAT may be
paid by the builder at the time of raising of bills on the PB or at the
time of receipt of consideration.
It
may further be noted that every installment would consist payment
towards land, material and services. Therefore, the author is of the
view that amount of output VAT may be calculated, in advance, as a
percentage of per square foot rate; and tax be computed accordingly on
the basis of per square foot billing on every installment. At the time
of completion of the project, actual liability of HVAT shall be
ascertained and shortfall, if any, be paid.
3.8 Where a part of the area is booked for the prospective buyers
Where
only a part of total constructed area is being transferred, the
deduction towards labour, services and other like charges mentioned in
rule 25(2) shall be calculated on a pro-rata basis. Further, the input
tax credit shall be available proportionately in respect of that
property which is subjected to the output tax.
3.9 Cancellation of booking by the prospective buyer
If
booking of the flat is cancelled during the construction thereof, and
subsequently the construction is carried by the builder for himself, the
sale shall be treated cancelled, and the builder would be entitled to
adjust/refund the tax already paid. However, if the same flat is again
sold to another PB during construction, then it would be taxable under
the HVAT, as discussed earlier.
3.10 Preferential Location Charges (PLC)
When
charged separately, these receipts shall not form part of sale price of
the builder because these are relatable to the value of land and not
the cost of construction.
3.11 Sale of units by the land owner during construction
As
per Para No. 2.5 of the Memo dated 7.5.2013, “It may be noted that in
some cases even the land owner also may have entered into agreements
with prospective buyers in respect of his portion of building being
constructed by the developer or builder. In such cases, even the land
owner would be liable to tax on the taxable turnover relating to
transfer of property in goods involved in the execution of works
contract of such building (though actually carried out through the
developer or builder). However, it shall be ensured that both the land
owner and the developer or builder is not assessed to tax on the same
transaction.”
3.12 Rates of Output VAT
Under the Regular Scheme, rate of output tax would be the commodity-wise rate as specified in Section 7 of the Haryana VAT Act.
Goods specified in Schedule A of
the Act are taxable at the rate specified against these goods. It
includes bullion, jewellery, certain petroleum products, diesel,
tobacco, ply-board, etc.
Schedule B contains exempted goods. Schedule C contains goods taxable at the rate of 5 percent , including iron & Steel, Aluminum, etc.
Rate of tax on goods not specified in any of the Schedule is 12.5 percent .
In addition, 5 percent surcharge shall be levied on the rates specified in section 7.
3.13 Liability of builder – Computation of HVAT – An Illustration
Let us adapt our discussion in the form of an illustration:
LO enters into a collaboration agreement with BD, wherein
- (Rs. In lacs)
- BD constructs 4 flats/units;
- Out of which, BD gives 2 flats to LO towards consideration of land;
- Remaining 2 flats are kept by BD for further sale in market;
- BD sells 2 flat to PBs during construction for Rs. 1200 (600 per flat); sale deed also executed for Rs. 1200;
- Value of land is Rs. 2000 and value of construction is Rs. 400 (Rs.100 per floor);
- Since BD receives land worth Rs. 1000 (2000*2/4) and gives Rs. 200 as value of construction for 2 floors (100 per floor); it is further agreed that BD will give Rs. 800 to LO towards land or as value for transfer of construction rights;
- Circle rate per flat, of land : Rs. 400; and for construction : Rs. 100;
- Agreements to sell between BD and PBs specify that value of land is Rs. 500 and value of construction is Rs. 100.
- Break-up of value of construction of Rs. 400 is:-
- Material with proportionate overheads & profit - Rs.240
- Labour & Services with proportionate overheads &profit - Rs.120
- Permissions and sanctions (treated as services) - Rs. 40
- Total Expenses - Rs.400
- Proportion of expenses towards LO and BD portion - 50 : 50
(for sale to PB)
- It
is assumed that total material consists of 1/3 iron & steel taxable
at the rate of 5 percent ; and 2/3 other materials taxable at the rate
of 12.5 percent : thus average VAT rate comes to 10 percent (impact of
surcharge ignored for the purpose of this illustration);
- VAT input tax credit is assumed at Rs. 16 (10 percent of 66 percent of 240);
- Total Investment of BD comes to : Rs. 800 paid to LO (+) Construction value of all four flats being Rs. 400 (=) Rs. 1200.
|
Method
|
Description
|
Output VAT-LO
|
Output VAT-PB
|
Input Tax
|
Net Liability
|
Liability ( percent of Investment)
|
(1)
|
(2)
|
(3)
|
(4)
|
(5)
|
(6)
|
(7)
|
I
|
Regular Scheme (1) (Services-Actual; Land - Actual)
|
|
|
|
|
|
|
- · LO-10 percent of (240)/2 [50 percent material pertains to LO]
|
12
|
12
|
16
|
8
|
0.07
|
|
- · PB -10 percent of [(1200-1000) – (160)/2]
|
|
|
|
|
|
II
|
Regular Scheme (2) (Services- percent ; Land-Actual)
|
|
|
|
|
|
|
- · LO-10 percent of 75 percent of 200
|
15
|
15
|
16
|
14
|
1.17
|
|
- · PB -10 percent of 75 percent of (1200-1000)
|
|
|
|
|
|
III
|
Composition Scheme
|
|
|
|
|
|
|
|
8
|
8
|
0
|
16
|
1.33
|
|
- · PB -4 percent of (1200-1000)(Refer Para 3.5)
|
|
|
|
|
|
4. Conclusion
Even
after having a lengthy discussion on the subject, it is difficult to
conclude the topic with certainty and authority. We have taken a fairly
simpler illustration, wherein various complex situations have not been
considered. The measure of tax would further be complex if the
discussion on the amount of conveyance/sale deed, which varies from
customer to customer even in the same building and at the same time, is
also initiated. Further, the exact taxation would depend upon the terms
of the builder agreement between the parties, which might vary from case
to case.
Moreover,
looking at the impact of service tax and VAT simultaneously, double
taxation certainly tortures the stake holders. The VAT Department should
realize that it can tax material portion only; whereas, the value of
land, particularly in the metro cities, has the maximum involvement in
this activity. The variance in the total price of a flat/unit is mainly
due to land rates. For example, a house of 500 sq. yards with same
amenities would price for Rs. 10 crores in Gurgaon and Rs. 5
Crores in Manesar. The land rate may also vary within the same colony,
depending upon its location. Value of material and services would, by
and large, remain the same everywhere. The HVAT Act allows deduction
towards value of land based upon circle rate (which is uniform in the
entire colony), irrespective of its location. It is certainly an attempt
to levy HVAT on the value of land, which is out of its scope.
This
activity is also facing different treatment under different statutes,
even by the same Government. Both, VAT and the stamp duty, are collected
by the State Government; and for the purpose of collection thereof, it
has got different charging provisions: that is, for the purpose of levy
of VAT, land is deemed to be sold during the construction itself; and
for the purpose levy of stamp duty, land is treated to be sold along
with construction, as a ready unit.
Since
the levy is somewhat new, and in the absence of appropriate assistance
in the form of clarifications by the Authorities or the judicial
pronouncements, the builders are always in the sate of confusion while
discharging their obligations and making compliances. Being an indirect
tax, if VAT is not recovered from the customers in time at the time of
making execution of contract, it becomes the cost of the dealer; and if
any additional demand is raised after few years along with interest and
penalty, many of the builders would have no option but to shut down
their businesses; which would not be the intention of the Revenue.
Taxation on this infrastructural activity certainly needs early
attention of the Government and Revenue Authorities for the systematic
growth of this sector; and thus, our economy.
By: Rakesh Garg
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