Applicability of VAT on agreement to sell flats
By Sonal Singh Baghel
In a case where the builder of a fully constructed flat enters into an agreement to sell the same to a buyer, the same will be considered as a sale of immovable property and there is no controversy regarding imposition of sales tax on such a transaction. However, applicability of sales tax on an agreement to sell a flat that is still in the process of construction has lately been much under debate after the judgment of Bombay High Court in the case of Maharashtra Chamber of Housing Industry v. State of Maharashtra [(2012) 51 VST 168 (Bom)] which upheld the constitutional validity of the amendment to the definition of ‘sale’ in the Maharashtra Value Added Tax Act, 2002 (M-VAT). To appreciate this Bombay High Court decision and to understand its true implications it is important to trace the events that led to the said case.
States have been empowered to levy tax on sale or purchase of goods vide Entry 54 of List II of Seventh Schedule to the Constitution of India. The meaning and scope of Entry 54 was analyzed by the Supreme Court in Gannon Dunkerley-I [(1959 SCR 379)] wherein the Supreme Court considered the indivisible nature of the building contract and held that in case of the indivisible contracts which are entire and cannot be disintegrated, no sales tax can be charged. To overcome the restriction on imposition of sales tax on such a contract, Article 366(29-A) was inserted, vide 46th amendment of the Constitution, to define the expression “tax on sale or purchase of goods’ to, inter alia include, vide clause (b), a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract.
VAT legislations of certain states, such as Andhra Pradesh, Madhya Pradesh, and Maharashtra have provisions which have semblance of imposition of sales tax on an agreement to purchase a flat which is in the process of getting constructed.
The definition of ‘sale’ in M-VAT was amended to bring “an agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction…of any movable or immovable property”, within the ambit of ‘works contract’. By way of amendment to Maharashtra Value Added Rules, 2005 (M-VAT Rules), Rule 58(1A) was added which provided that in case of a construction contract where immovable property, land or an interest in the land is transferred to the purchaser along with property in goods involved in the execution of the construction contract, then such a transfer will be chargeable to VAT. Also, by a notification dated 9th July, 2010, a scheme for payment of tax by way of composition, in lieu of the amount of tax payable on the transfer of goods whether as goods or in some other form, in execution of works contract under the M-VAT, was provided for the registered dealers who undertake the construction of flats, and transfer them along with land or interest underlying the land.
In the case of Maharashtra Chamber of Housing Industry (MCHI) v. State of Maharashtra [(2012) 51 VST 168 (Bom).] the constitutional validity of the amendment to the definition of ‘sale’ was challenged before the Bombay High Court on the ground that the said amendment transgresses the limitations contained in Article 366(29A) of the Constitution. The petitioners contended that by way of the amendment, the state legislature has brought within the ambit and purview of the expression ‘sale’, an agreement for the building and construction of immovable property which is not a works contract as envisaged under Article 366(29A) of the Constitution. The court upheld the validity of the amendment and held that the effect is to clarify the legislative intent that a transfer of property in goods involved in the execution of works contract including an agreement for building and construction of immovable property would fall within the description of sale of goods within the meaning of the provision. Therefore, the amendment made by the state legislature does not transgress the limitations imposed by Article 366(29A) of the Constitution. A Special Leave Petition against this decision is pending before the Supreme Court.
It is noteworthy that, as a result of this decision, all the agreements that are entered into before the construction/ completion of flats will be chargeable to VAT as well as stamp duty after the construction is over. This amounts to dual taxation of the same transaction under two different legislations by the State.
To save these transactions from dual taxation the need is to classify them either as sale of immovable property chargeable to stamp duty or as works contract chargeable to VAT. Here, it is worth noting that, in a works contract, property gets transferred as a result of accretion during the course of execution of the contract and there is no transfer of immovable property simplicitor, whereas, in cases where there is transfer of a building by a deed of conveyance or transfer of immovable property, the intention is never to constitute a transfer of goods involved in the execution of such a contract. Therefore a contract involving sale of immovable property cannot be regarded as a works contract. Hence, such transactions are essentially one of sale of immovable property and should not be chargeable to VAT.
Now, it remains to be seen whether this decision given by the Bombay High Court will lead to increase in price of flats and will add on to the burden of the purchasers or will the position be reversed by the Supreme Court.
[The author is an Associate, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]