Vat in Construction Business by CA Deepak Thakkar, …puneicai.org/wp-content/uploads/2015/03/Real-Estate-Seminar-Vat-in... · Vat in Construction Business by CA Deepak ... SC ruling

Vat in Construction Business

by CA Deepak Thakkar, Mumbai

at Pune Br of WIRC of ICAI

21 July 201221 July 2012

Synopsis

� Introduction

� Works Contract- Legislative history

� SC ruling in K Raheja’s case under Karnataka VAT Act

(5-5-2005) 141 STC 298

� Amendment to the MVAT Act – effective 20 June 2006

Trade circular No 12T of 7 February 2007 -trigger point of � Trade circular No 12T of 7 February 2007 -trigger point of

controversy

� Challenge to the Constitutional validity of amendment to the

MVAT Act

� BHC ruling in MCHI & Ors (10-4-2012) 51 VST 168 - Constitutional

validity upheld

� BHC verdict to the Challenges by the Petitioners - Analysis

CA Deepak Thakkar PHD & Associates 216 July 2012

Synopsis

� Determination of SP of Goods involved in Works Contract

� Formula under Rule 58 of MVAT Rules

� Specimen Computation as per Rule 58 from data of P&L A/c

� Interplay Of Charging Provisions and Value Derived under Rule 58

� Consequences of Failure of Computation Mechanism

� Is Rule 58 Directory or Mandatory?


� Is Rule 58 Directory or Mandatory?

� Cost Benefit Analysis for Construction Industry- Option to pay tax as per Vat Provisions or Composition Scheme

� Issues for Construction Industry post MCHI ruling by BHC –Registration, Tax Computation, Returns, Interest, Penalty, Vat Audit, Vat TDS, Refunds, etc

Works Contract- Legislative history

� Forty sixth amendment to the Constitution on 2 Feb 1983

� Insertion of Article 366 (29A)

� Expanded scope of legislative power to tax materials involvedin execution of works contract

� Relevant extracts from the expanded scope

(29A) "tax on the sale or purchase of goods" includes—

(a) a tax on the transfer, otherwise than in pursuance of a contract, of (a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whe ther as goods or in some other form) involved in the execution of a wor ks contract;

(c )…….

� States amended their Sales Tax Laws in line with Article 366(29A)


K Raheja Dev. Corp. vs State of Kar. (5-5-2005) (141 STC 298) (SC)

� Peculiar facts of K. Raheja’s case

� Most flat purchasers entered into agreement with the developer before the construction commenced

� Developer agree to sell to the prospective purchaser an undivided share, right, title and interest in the land (para 18)

� Separate Consideration & Transfer for Land value & Construction value (para18)

� The agreements stipulated that construction by the developer would be on behalf of the purchasers (para 15)

� Important observation of the court� Important observation of the court

‘It must be clarified that if the agreement is entered into after the flat or 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’ (para 19)

� SC’s view: There cannot be a works contract after completion of the construction

implies that there should be live link between the execution of the work and the

tax incidence. The tax cannot be levied to the extent that the work is

completed before the contractual relationship comes into existence.CA Deepak Thakkar PHD & Associates 516 July 2012

Amendment to MVAT Act – effective 20 June 2006

� Definition of sale u/s 2(24):

‘sale’ means a sale of goods made within the State for …..valuable

consideration……Explanation.— For the purposes of this clause,-

(a) a sale within the State includes a sale determined to be inside the State in accordance with the principles formulated in section 4 of the Central Sales Tax Act, 1956 (74 of 1956);

(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

(‘namely’ from 20-6-2006 till 6-8-1987)

‘including’ (retrospectively from 20-6-2006)

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;


Trade circular No 12T of 7 February 2007

� Mvat amendment derived strength from K. Raheja’s ruling

� Trade Circular clarified that:

- Judgment of SC in K. Raheja will be applicable in Maharashtrawef 20-6-2006;

- Tripartite arrangements entered into between the landowners, developers and the prospective buyers would also get covered by the scope of this amendment;

- DDQ Order dt. 28-6-2004 of Addl. Commissioner of Sales Tax, in case of Rehab Housing Pvt Ltd, wherein determined that the contract for of Rehab Housing Pvt Ltd, wherein determined that the contract for the construction of tenements alongwith the land is not treated as ‘works contract’, will have no applicability for subsisting contracts and contracts entered into from 20-6-2006

� The circular is the trigger point of the controversy by which theState Government conveyed its intention to levy tax on MOFAagreements

� It is doubtful whether the phrase “including”, preceding thephrase the works contract in the definition, can, on a strictinterpretation, expand the scope of the term works contract


Issue & Challenge in MCHI & Ors before BHC

The challenge by the petitioners were on the following aspects:

� Amendment to defn of ‘sale’ u/s 2(24) qua works contract, wef 20 Jun 2006, has expanded to cover an agreement for construction of immovable property, which is not a works contract

� Amended Rule 58(1A) qua deduction of land cost w.e.f. 20 Jun 2006 is arbitrary

Trade Circular # 12T dt 7 Feb 2007 explaining & clarifying � Trade Circular # 12T dt 7 Feb 2007 explaining & clarifying applicability of decision of K. Raheja Dev. Corp. v/s State of Karnataka (5-5-05) 141 STC 298 (SC) in Mah w.e.f. 20 Jun 2006

� Composition Scheme of 1% for Building Construction contracts (alongwith interest in land) issued u/s 42(3A) vide Notifn # Vat- 1510/ CR-65/Tax-1 dt 9 July 10, effective from 1 Apr 2010

� Legitimacy of certain Notices issued by DepartmentCA Deepak Thakkar PHD & Associates 816 July 2012

BHC Ruling in MCHI dated 10 April 2012….

� Constitutional validity of amendment of 20-6-2006, upheld

� Analysis of the BHC ruling:

� Scope of the ruling – has HC opined on application of theamendment to the MVAT Act on every type of agreementbetween a developer and customer (MOFA agreement)?

� No opinion given on the Trade circular 12T of 2007

� Important principles laid down in ruling:

“Explanation b(ii) to Section 2(24) in other words covers thosetransactions where there is a transfer of property in goods,whether as goods or in any other form, involved in the executionof a works contract. Once those parameters are met, theamended definition in the State legislation in the present caseprovides a clarification or clarificatory instances.” (para 34)

“Whether there is a works contract in a given case is for assessing authorities to determine.” (para 34)


….BHC Ruling in MCHI dated 10 April 2012

� Important observations in ruling:

“The constitutional validity of the provisions of the MVAT Act,2002, as amended, is not contingent upon any other statutoryregulation of apartments under cognate legislation in the State ofMaharashtra.

We have, however, considered the effect of the provisions of theMOFA since they were pressed in aid on behalf of the Petitioners.The constitutionality of the MVAT Act, 2002 must be determinedby interpreting the statutory provisions of that Act as they stand.”by interpreting the statutory provisions of that Act as they stand.”(Para 31)

“But it is necessary to note here that the MOFA is not the onlyregulatory enactment governing the promotion, sale and transferof flats in the State. The Maharashtra Apartment Ownership Act,1970 was enacted to provide for the “ownership of an individualownership apartment in a building and to make such apartmentheritable and transferable property.”(Para 30)


Who is the Owner of property as per MOFA agreement?

What is the relation between the builder & flat buyer?

� Title to the property of MOFA agreement holder vests with Co-operativeSociety, which is a mandatory condition of the agreement, which thebuilder/developer is bound to abide by.

� Upon formation of the society, the agreement holder obtains membershipof the society. As a member he enjoys privileges of the membership,principally, right to occupation of the designated flat or unit.

� Ownership of the land & the building thereon vest with the Co-operativeSociety.

� Under the above legal background, in the so called “works contract” whois the contractee? Can a flat buyer be regarded as a contractee under acontract whereby he cannot have exclusive ownership of the flat/unitpurported to have been constructed for him under the agreement, whenthe very same agreement asserts that the ownership shall be that of a Co-operative Society?

� In contrast, as per the provisions of Maharashtra Apartment OwnershipAct, apartment owner is vested with right, title and interest of theapartment and undivided interest in the underlying land

� The court therefore is indicating that constitutional validity of the MVATLaw cannot be decided only considering provisions of MOFA.


BHC Verdict to Challenges by the Petitioners….

The Principal Challenge:

Amendment to MVAT Act expanding the scope of works contractis beyond the legislative powers of the State

The Verdict :

The expanded definition which purports to rope in agreements forconstruction of immovable property provides a clarification orclarificatory instances. These agreements have to satisfyparameters of a works contract. The agreements which satisfyparameters of a works contract. The agreements which satisfyingredients of works contract are within the scope of Sec 2(24) ofthe MVAT Act. (Para 34)

Our view:

The expanded definition of ‘sale’ does not enlarge the scope of theterm ‘works contract’ by any deeming fiction. The Court has notlaid down that an agreement which does not have ingredients of aworks contract will be within the scope of levy of the tax. Inprinciple, it is possible for the Taxpayer to demonstrate that hisagreement with the builder is not a works contract exigible to tax.


….BHC Verdict to Challenges by the Petitioners….

The Challenge to the Trade Circular of February 2007:

The circular clarifies about the applicability of SC Ruling in K.Raheja’s Case, the correctness of which (K. Raheja) has beenreferred to larger Bench of SC.

The Verdict :

The circular is clarificatory in nature, it is not binding on theTaxpayer

The circular cannot be used as such, for interpretation of lawThe circular cannot be used as such, for interpretation of law

Our view:

The circular was the trigger point of the grievance, by which theTax Department conveyed its intention to treat agreementbetween flat buyers and the developers as works contract exigibleto tax.

The Court has not given any verdict on validity or otherwise of thetax propositions discussed in the circular. The Taxpayer continuesto be vested with right to challenge applicability of the circular inthe assessment/appellate proceedings.



Other Challenges:

Rule 58 (1A) of MVAT Rule & Composition Scheme of 1% are ultravires

The Verdict :

Petitioners have not brought out materials to prove that the above provisions are arbitrary. Rule 58(1A) provides for the measure of the tax. The measure of the tax, as held by the SC in its decision in UOI Vs. Bombay Tyre International Ltd.17, must be distinguished from the charge of tax & the incidence of tax. The Legislature was acting the charge of tax & the incidence of tax. The Legislature was acting within the field of its legislative powers in devising a measure for the tax by excluding the cost of the land. (para 35)

Our view:

The Court has summarily dealt with petitioners objections. There isno discussion in the ruling as to the objections of the petitioners andhow they are addressed.

Fundamental issues arising from application of the Rule 58, arediscussed in the later slides. The Court not having addressed tothose issues, they are open to agitation by Taxpayers.



The Challenge:

SC ruling in K. Raheja’s case, the ratio whereof has been doubtedby SC in L&T’s case (L&T vs St of Karnataka (19-8-2008) 17 VST460) is pending for decision by LB of SC.

The Verdict:

The issue before SC in K. Raheja’s case was not concerning theconstitutional validity of the provisions of KVAT Act, hence, theobjection raised by the petitioners is not relevant in the presentcase where the court has examined the constitutional validity ofcase where the court has examined the constitutional validity ofthe provisions of MVAT Act de hors the ruling in K. Raheja’s case.

Our view:

In L&T’s case referred above, SC was concerned with a tripartitecontract involving land owner, developer and prospective buyersof the flats in a multi storied building. While referring the case tothe Larger Bench the court observed…….cont’d….


….BHC Verdict to Challenges by the Petitioners

....cont’d....

“The department has relied upon only the judgment of this court in RahejaDevelopment Corporation case [2005] 5 SCC 162(1) because para 20(2)does assist the department. However, we are of the view that if the ratioof Raheja Development Corporation case [2005] 5 SCC 162(1) i s to beaccepted then there would be no difference between works con tractand a contract for sale of chattel as a chattel. Lastly, could it be saidthat the petitioner-company was the contractor for prospec tive flatpurchaser. Under the definition of the term "works contract " as quotedabove the contractor must have undertaken the work of constructionabove the contractor must have undertaken the work of constructionfor and on behalf of the contractor for cash, deferred or any o thervaluable consideration”It is clear from above that Bombay HC has refrained fromcommenting on taxability of transactions under MOFAagreements.

The proposed Larger Bench of SC is likely to bring more clarity onthe scope of the term ‘Works Contract’. Since the issue before theBench is almost identical to the issues arising from MOFAagreements, the verdict of the LB is likely to hold the field.


Determination of SP of goods involved in Works Contract….

Apart from the conceptual issues as to whether or not a MOFAagreement is a Works Contract, there are significant issues arising fromvaluation of the materials involved in execution of Works Contract,assuming for the time being that a MOFA agreement is a Works Contract.

Theory of ‘single sale’ in case of Sub-contract in execution of WC:

� In St of AP vs L&T’s case [(2008) 17 VST 1], SC held that in a WorksContract where the principal contractor has appointed a sub-contractor to carry out a part of the Works Contract then the materialcontractor to carry out a part of the Works Contract then the materialtransferred in execution of the sub-contract is not available for re-transfer by the principal contractor to the contractee. Thus, therecannot be multiple deemed sale in the execution of a works contract.

� The provisions of section 45 of the MVAT Act also support the aboveproposition.

� Thus, if in a given case, the whole of the construction work issub-contracted by a developer, there cannot be any liability on thedeveloper, more so, when the sub-contractor has discharged liabilityattributable to the portion of the works contract executed by him.


….Determination of SP of goods involved in Works Contract

Rule 58 of MVAT Rules:

� Rules are subordinate legislation, cannot transgress or operatebeyond the apparent tenet of the statute under which it is framed

� Application of Rule 58 must determine the value of materialsinvolved in the execution of works contract which is realistic andclose to the actual value of materials used in the WC

� Is Rule 58 mandatory or directory?

� Specimen Computation as per Rule 58 from data of P&L A/c


Formula of Rule 58

Total Works Contract Value (Value of Entire Contract) XXX

(Agreement value or Stamp Duty value, which ever is higher)

Less: Allowable Deduction u/r 58(1A) for land cost: XXX

(Land value as per Bombay Stamp Rules as on 1st Jan…..

…maxm dedn @ 70% of agreement value)

Less: Allowable Deduction u/r 58(1) for labour/services:

1. Sub–Contract price paid - (SC shall be RD; Under form 408 & 407) XXX

2. Labour/service Charges for execution of WC XXX

3. Planning, Designing & Architect’s fees XXX


4. Hire Charges or otherwise, for obtaining Machinery & Tools for WC XXX

5. Cost of Consumables in which there is no transfer of property

e.g.: Water, Electricity, Fuel, etc. XXX

6. Cost of Establishment relatable to supply of labour & services XXX

7. Similar other expenses relatable to supply of Labour & Services XXX

8. Profit relatable to supply of Labour & Services XXX

XXX

Balance = Sale Price (Deemed sale value)of Goods involved in execution of WC…

Liable to tax @ what rate? Under which schedule entry?

Inputs liable @ different rate to apply on what value? Under which provision??

Assumptions in the example which follows:

� Building Project is for construction of 50,000 sq ft. area

� Agreement value is @ Rs. 12,000 per sq ft.

� Sales Turnover Rs. 60 crores

� The land has been purchased @ Rs. 6,000 per sq ft. @ cost of Rs. 30 cr.

� At the time of agreement, the Stamp Duty value of the land is same as the cost

Specimen Computation as per Rule 58 & data of P&L A/c….

cost

� Profit attributable to labour and service charges and establishment cost, etc. is calculated as Net profit as per P&L X Cost of the lbr & service etc.

Total cost of the project


Specimen Computation as per Rule 58 from data of P&L A/c As per P&L A/c (Rs. in crores)

Value of material u/r58 (Rs. in crores)

Sales/ Agreement Value (A) 60.00 60.00

Land Cost (same u/r 58(1A)) 30.00 30.00

Material cost @ 1500 per sq ft 7.50 0.00

Lbr & serv chgs @ 1500 per sq ft 7.50 7.50

Electricity, fuel & consumables 0.10 0.10

Establishment expenses relating to labour 0.25 0.003

Finance Cost (Interest, etc) 10.00 0.00

Depreciation on Capital Assets 0.50 0.00Depreciation on Capital Assets 0.50 0.00

Total Cost (B) 55.85 37.60

Actual Profit as per P&L A/c (say 8% on Total Cost) (A – B) 4.15 0.00

Profit attributable to labour & service charges 0.60 0.60

Profit attributable to other items 3.55 0.00

Value of material u/r 58 chargeable to Vat 21.80

Actual material cost 7.50

Value addition to material chargeable to Vat 14.30

% of value addition to Cost as per rule 58 200%CA Deepak Thakkar PHD & Associates 2116 July 2012

Interplay Of Charging Provisions and Value Derived u/r 58

� Charging provision – section 6 of MVAT Act:

Levy of sales tax on the goods specified in the Schedules :-

(1)There shall be levied a sales tax on the turnover of sales of goods

specified in column (2) in Schedule B, C, D or, as the case may be, E, at

the rates set out against each of them in column (3) of the

respective Schedule…..

[column (3) is for conditions & not rate)[column (3) is for conditions & not rate)

� For levy of tax under section 6, three ingredients are necessary

� description of the material

� value of the specific material

� rate of tax applicable to specific material on specific value

� Rule 58(2) determines value of material involved in execution of WCafter deduction u/r 58(1)…..(No reference of deduction u/r 58(1A))

� Rule 58 fails to prescribe method for determining the second ingredient,namely, value of the specific material that can be charged to tax


Consequences of Failure of Computation Mechanism….

� SC in C.I.T vs B.C. Srinivasa Shetty ((1981) 128 ITR 294) held thata charge of tax would fail if computation of income (which is subject to the charge) cannot be made under the computation provisions of the Statute

� The relevant extracts from said case:

“All transactions encompassed by s. 45 must fall under the governance of its computation provisions. A transaction to which those provisions cannot be applied must be regarded as never intended by s. 45 to be the subject of the charge. .................The character of the computation provisions in each case bears a relationship to the nature of the charge. Thus, the charging section and the computation


to the nature of the charge. Thus, the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section ..................................No doubt there is a qualitative difference between the charging provision and a computation provision. And ordinarily the operation of the charging provision cannot be affected by the construction of a particular computation provision. But the question here is whether it is possible to apply the computation provision at all if a certain interpretation is pressed on the charging provision.”

….Consequences of Failure of Computation Mechanism….

PNB Finance Ltd vs C.I.T (6 Nov 2008) 307 ITR 75 (SC) J. Kapadia:

“Business undertaking can consist of not only tangible items but also intangible items like, goodwill, manpower, tenancy rights and value of banking licence. However, the cost of such items (intangibles) is not determinable............

On facts, we find that item-wise earmarking was not On facts, we find that item-wise earmarking was not possible. On facts, we find that the compensation (sale consideration) of Rs.10.20 crore was not allocable item-wise ..............

For the afore stated reasons, we hold that on the facts and circumstances of this case, it was not possible to compute

capital gains and, therefore, the said amount of Rs. 10.20 crore was not taxable under s. 45 of the 1961 Act.”


� Under the MVAT Act no lump sum tax rate has been prescribed for all group of materials that may have been used in execution of the WC.

� Computation of tax, therefore, is not possible without making assumptions about allocation of the value derived u/r 58, across the goods that are involved in execution of the WC.

� The question arises, whether a tax payer or the tax department can proceed with the assumptions to compute the tax liability,

….Consequences of Failure of Computation Mechanism….

can proceed with the assumptions to compute the tax liability, without such assumptions incorporated in the Statute by way of a deeming fiction?

� Can there be a valid assumption that all the goods involved in execution of WC shall be deemed to have commanded/earned uniform gross profit during the construction work?

� Taxable event in WC is use of material whereas the profit earned or loss incurred is known only at the end of the contract/project, may be after 3 yrs


In the context of interpretation of statutes, Courts have laid down the following principles:

� “No tax can be imposed on the subject without words in the Act clearly showing an intention to lay a burden upon him. The subject cannot be taxed unless he comes within the letter of law: the argument that he falls within the spirit of the law cannot be availed with the Department.”

….Consequences of Failure of Computation Mechanism

the law cannot be availed with the Department.”

� “In a taxing Act one has to look merely at what is clearly said. There is no room for any intendment.”

� “There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used”.


Agreements After Commencement of Construction….

Point of Taxation

� As per charging section, in the case of normal sales, the liability arises on sale of goods. Thus the point of time when sale is concluded, is the time when liability arises.

� In the context of WC, no separate rules prescribed for point of taxation

� The SC in Builders Association’s case (1989) 2 SCC 645 observed as follows: “Ordinarily, unless there is a contract to the cont rary, in the case of a works contract the property in the goods used in th e construction of a building passes to the owner of the land on which the buildi ng is constructed, when the goods or materials used are incorporated in the bui lding. The contractor


goods or materials used are incorporated in the bui lding. The contractor becomes liable to pay the sales tax ordinarily when the goods or materials are so used in the construction of the building and it is not necessary to wait till the final bill is prepared for the entire work.”

� If a flat/unit is sold by an agreement when, say, 70% of the construction is completed, what is the status of chargeability of tax on the materials used for construction till the agreement is made?

In our view, there can be no transfer of material chargeable to tax as WC during the period when the contractor-contracteerelationship was not established….it was for self/no other person….other person came later on

….Agreements After Commencement of Construction

� The incidental question therefore is, how computation is to be made in respect of the materials used post-agreement period by application of Rule 58?

� Rule 58 does not provide for computation mechanism or abatement in respect of partially completed construction – to that extent the vires of Rule and the valuation thereof is under fire

As per Trade Circular of February 2007, any transfer of property


� As per Trade Circular of February 2007, any transfer of property after 20th June,2006 irrespective of whether an agreement was signed prior to 20/06/2006 or otherwise will be governed by amended definition of ‘sale’.

� Can there be any tax levied on materials consumed in the building to the extent constructed by the aforesaid specified date, viz. 20 June 2006?

� Can there be any tax levied on materials consumed in the building to the extent constructed when an agreement was executed after completion of construction upto 70%?

Is Rule 58 Directory or Mandatory? Mat.Cost + Profit = SP?

� Rule 58 itself acknowledges that the Rule ‘may’ be applied for computation for WC

Prima facie, therefore, the Rule appears to be Directory or Optional

� However, if it is so construed, how valuation of the taxable turnover can be made?

� Is it permissible for the Taxpayer to compute the value of material used in the construction as per generally accepted principles of accounting;

say Cost of the material used + appropriate profit margin

Bombay HC in the case of Kusumben D. Mahadevia (124 ITR 799) in the � Bombay HC in the case of Kusumben D. Mahadevia (124 ITR 799) in the context of Rules prescribed for valuation of shares held:

� A valuation Rule which may not throw valid result in harmony with the statue in some situations, cannot be considered as mandatory irrespective of the use of the word ‘Shall’ in the Rules

� The Taxpayer may make valuations using any other recognised methods of valuation

� Prakash Enterprises vs State of Kerala [2004] 137 STC 0144 (Ker) :“that the sale value of the ingots had been rightly estimated by making a gross profit addition of 25 per cent to the purchase value of tin ingots used in WC” (see para 11) CA Deepak Thakkar

PHD & Associates 2916 July 2012

‘Works Contract’ v/s ‘Group of Works Contracts’….

� If a MOFA agreement between a developer and a prospective buyer is a works contract and if 50 flats/ units are constructed and sold by the developer, is there ‘a works contract’ or ‘50 works contracts’?

� Since the agreement value would differ in each case of the flat holder, and all agreements would not have been made at the same time, read with the language of the definition of sale; value of materials need be computed qua each agreement separately


of materials need be computed qua each agreement separately

� In the absence of a deeming fiction for developer/flat holders in a multi-storied building, it is not permissible, in law, to levy tax on the basis of consolidated data for the project as a whole.

….‘Works Contract’ v/s ‘Group of Works Contracts’

� Another issue would arise on account of inter-dependence of a flat/ unit on other flats/ units for bringing the flat under agreement to come into existence. For example, material consumed in piling/ foundation work cannot be exclusively attributable to a particular flat/ unit. The material so used will not be available for re-transfer to the flat holders.

� An issue arises, whether a contract in respect of which proper computation of tax liability cannot be made as a WC; can still be


computation of tax liability cannot be made as a WC; can still be characterized as a WC merely because in the execution of the contract materials have been consumed. SC in Gannon Dunkerley[1958] 9 STC 353 (SC) held that a contract which involves the sale of immovable property cannot be split by the State Legislatures, even if there is an element of a works contract. In other words, the State Legislature cannot locate a sale of immovable property and then attempt to trace out what are the goods involved in the execution of the contract

Composition Scheme for Construction Contracts

5% Scheme for new construction contracts w.e.f 20 June 2006

� New Construction Contracts notified by Govt. e.g. buildings, roads, bridges, dams, etc. for tax @ 5% of total contract value

� Setoff on materials available, in excess of 4% of the Purchase Price (Rule 53(4)(b))

� Setoff on capital assets available subject to Rule 53(6) & Rule 53(7A)

1% Scheme for sale of flats w.e.f. 1 April 2010

� Flats, dwellings, buildings or premises transferred with interest in land


� Flats, dwellings, buildings or premises transferred with interest in land vide agreements, during construction w.e.f. 1 April 2010

� Benefit of this scheme can be availed only by Registered dealers for agreements registered on or after 1 April 2010

� Composition sum=1% of Agreement Value or SDV, whichever is higher, payable upfront on registration of document

� No setoff

� All agreements registered from 1 Apr 2010 will have to be mandatorily governed by this scheme

� No Tax on sale of flats, etc. after completion of construction

The tax positions discussed hereunder is without prejudice to the proposition that the tax levy may fail wholly or partially in certain circumstances discussed in previous slides

� Where substantial work has been sub-contracted by a developer, the composition scheme would prove to be fatal/costly, more so, when the agreement value is higher, of the property located in developed area on account of high cost of land. Since in the composition scheme, no deduction is available for the cost of the

Composition Scheme – Cost Benefit Analysis


composition scheme, no deduction is available for the cost of the land, it would not be preferred over value determined under Rule 58.

� Where substantial work has been completed prior to sale of property, the composition scheme will be a costly affair

� However, in a given case where actual liability pursuant to Rule 58 computation is significantly higher, then the composition scheme can be opted.

� MCHI SLP (Civil) Lodge#21934 of 2012 dt 4 July 2012; PH 23 Jul 2012? ; K Raheja’s LB of SC hearing??

� Registration: Whether to obtain registration?

� Tax collection & Setoff: only by RD

� Penalty for late/Non-Regn u/s 29(2A) wef 1 May 2012 @ sum = tax payable

� Tax Computation: as per Vat Provisions & Composition Schemes

� Returns: Option of Vat or Composition, once selected & return filed, cannot be changed by revising returns ( NCC SMC Unity (JV) Vat SA #

Issues for Construction Industry, post MCHI ruling by BHC


cannot be changed by revising returns ( NCC SMC Unity (JV) Vat SA # 127 of 2010 dt 4 Feb 2012, MSTT, B-I)

� Interest @ 1.25% p.m & Additional Interest @ 25% of addl tax payable after receipt of Intimation in Form 604 issued u/s 63(7)

� Vat Audit: Penalty for late/Non-audit, u/s 61(2) @ sum = 0.1% of Total Sales

� Vat TDS: by Contractee @ 2% if Contractor is RD, else @ 5% of Total CV (@4% upto 31 Mar 2012); Quantum of such TDS shall not exceed quantum of tax payable towardssuch WC (s.31(b)(i))

� Refunds: To Contractor or Contractee? Online application in form e-501 within 18 mths (3 yrs, upto 30 Apr 2011) from end of relevant yr


Documents

Vat in Construction Business by CA Deepak Thakkar, …puneicai.org/wp-content/uploads/2015/03/Real-Estate-Seminar-Vat-in... · Vat in Construction Business by CA Deepak ... SC ruling