Vat liability in case of underconstruction property

This query is : Resolved

SMITA BHOSALE (Querist)
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22 February 2013 I booked an under-construction flat, the agreement of which was executed on 1st Feb 2010. The agreement value amounted to Rs. 40,11,000/-. Now the flat is ready for possession and builder has demanded payment of VAT at the rate of 5% of the agreement value which is Rs. 2,00,550/-.
I understand that the issue of 5% VAT is still pending in the court and final verdict is yet to be received.
As per my understanding the developers are allowed to compute the VAT using any of the following options:
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 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 provision to sub-rule 1. Set-off will be calculated subject to the condition u/r 53 and 54.

As per these the developers can claim input tax credit. However the benefits received will not be passed on to the flat owner. Hence please advice what are the options available to me to reduce my VAT liability.

If the developer insists me to pay 5% of the agreement value what should I do to ensure that he passes on the benefit of input tax credit /favouring judgement to me? Please advice.

MJ Krishnamurthy

MJ Krishnamurthy (Expert)
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05 March 2013 Ms Smitha Bhosale,
A builder can charge 5% VAT at composition rate(u/s42/3) only on the construction cost. When you deduct the cost of land(30%) and the charges paid for common amenities like club house,swimming pool,sports facilities,security etc(10%).Some builders also include departmental charges like deposit for water and electric connections,registration etc. These amounts are also to be excluded from the construction cost.So, under normal circumstances, out of Rs 40 lakhs Rs 16 lakhs is to reduced and 5% vat is to be collected on Rs24 lakhs.A regular tax invoice is to be issued for making this collection.In this case no benefit of input tax is available. There is an option to pay 1% vat on the whole of the payments made by you,provided the builder has taken option for this scheme. This matter has been decided by the courts and tax liability is fixed on the flat builders.
Under rule 58 regulaar vat is to be paid on the material value consumed in the construction of flats. For arriving at this value,in addition to the above deductions a further reduction of 30% towards labour charges is to be made.It means the taxable amount will be Rs16.8 lakhs at 12.5% or as applicable rates...MJK