Build up to the Case
The Sales tax thrust on builders and developers gained drastic momentum post the recent rulings of Hon’ble Supreme Court in L&T Limited v. State of Karnataka (2013-TIOL-46-SC-CT-LB) (Larger bench) which in principle accepts the law laid down in earlier judgement in case of K. Raheja case (2005) 5 SCC 162 and lays few essential laws as under :-
a. Any agreement entered into by the builder / promoter before the completion of construction tantamount to works contract and hence, liable to Value Added Tax (VAT)/ sales tax.
b. When an agreement is entered into between the promoter/developer and the flat purchaser to construct a flat and eventually sell the flat with the fraction of land, it is obvious that such transaction involves the activity of construction in as much as it is only when the flat is constructed then it can be conveyed. The said activity will be covered by the term “works contract”. The term “works contract” is nothing but a contract in which one of the parties is obliged to undertake or to execute works. Such activity of construction has all the characteristics or elements of works contract.
c. In tripartite agreement between the owner of the land, the developer and the flat purchaser, there is nothing wrong if the transaction is treated as a composite contract comprising of both a works contract and a transfer of immovable property and levy sales tax on the value of the material involved in execution of the works contract.
VAT Authorities released back to back governing circulars
Based on above, Haryana VAT Authorities released several circulars on back to back basis in this regard:-
a. Even prior to L&T Judgement, the Haryana VAT Authorities (in conformity with K. Raheja Law) had released a circular No. 952/ST-1 dated 7th May,2013:-
i. This circular clarified the assessment mechanism and various other issues as relevant for taxing such transactions related to agreements by developers/builders with prospective buyers.
ii. Also, this circular categorically mentioned that where the builder/developer opts for composition scheme under Rule 49 then the value of taxable consideration shall exclude the land component except in cases of joint development agreement.
iii. Currently, with no other clarification available or legal support under the specific scenario of civil works contract and their relevant ancillary issues like WCT, Valuation, procedural compliances and composition scheme (under Rule 49 as applicable on works contractors), the above said circular can be seen as only legal reference point for builder community.
(b) Circular No. 693/ST-1 dated 26.3.2013 clarified that the VAT D-1 benefit is available only to manufacturer and lump-sum dealer under Rule 49. Hence where a Builder/Developer does not opt for composition scheme the benefit of reduced rate under VAT D-1 shall not be available.
(c) This was then followed by another circular No. 1166/ST-1 dated 4.6.2013 which clarified the limitation aspects in regard to both the registered dealers and unregistered dealers under Section 15 and 16 of HVAT,2003 respectively. Further the reassessment under Section 17 and revision of original order under Section 34 have been detailed.
(d) Circular No. 41/ST-1 dated 14.1.2014 wherein it was clarified that the Levy of additional tax @ 5% (i.e. surcharge) is applicable on all the composition rates except that of the retailers. Hence the effective rate of tax for the works contract dealers / Builders and Developers shall be 4.2%. (Erstwhile Rate)
(e) Circular 259/ST-1 dated 10.2.2014 takes a stand exactly opposite to circular No. 952/ST-1 in regard to valuation of taxable consideration under composition scheme. This circular amends the earlier circular to include even the value of land in the value of taxable consideration.
With the above circular no. 259, the authorities stirred a significant row of hue and cry because it was felt that the circular not only increased the tax burden drastically but also not addressed to other important ancillary issues that are bound to creep up because of this amendment.
HVAT Released Lumpsum Scheme for Developers (No Amnesty Scheme though)
The much awaited notification on Composition scheme for Developers was released by state government on 12th August, 2014.
New Composition Scheme for Developers (Rule 49A) – Such Developer referred as Composition Developer
A. Who can Opt this Scheme
A Developer liable to pay tax under the Act, and duly registered may pay, as an option, in lieu of tax payable by him under the Act, by way of composition a lump sum tax.
B. Rate of Tax & Valuation
Tax shall be calculated at the compounded lump sum rate of one percent of entire aggregate amount specified in the agreement or value specified for the purpose of stamp duty, whichever is higher, in respect of the said agreement. The Developer opting for this scheme here-in-after shall be referred to as the composition developer.
(Note: - The notification is silent on the point of taxation)
C. Other Modalities of the Scheme
a. The composition developer opting for composition under this scheme, shall not purchase or receive goods from any place outside Haryana to be used in the execution of the contract at any time during the period for which the composition remains in force under this Scheme
b. Where the goods are purchased or received in course of interstate trade and commerce or transferred from other states or imported from out of India have been used in the execution of the contract, then the composition developer shall pay the tax on their purchase price at the rate/s applicable on the sale of such goods in the State along with interest as applicable under the Act and such tax shall not be adjustable towards his composition tax liability;
c. Composition dealer shall be treated as non-vat dealer and not eligible to claim input tax credit under section 8 of the Act;
d. Composition dealer shall not collect any amount by way of tax under the Act;
e. Composition dealer shall shall not issue `Tax Invoices'
f. Composition dealer shall retain the originals of all tax invoices and all the retail invoices for all his purchases
g. Composition dealer shall not be entitled for any refund.
D. Tax period
The tax period for the composition developer shall be monthly and the payment of lump sum in lieu of tax shall be paid by the composition developer within 15 days of the close of the month. Provided that if a composition developer fails to make the payment of tax in time under this scheme, then he shall be liable to pay interest as per the provision of sub-section (6) of section 14 of the Act
E. No Adjustment of amount paid to Contractors / Sub-Contractor
Where the composition developer awards any portion of his contract to a contractor or sub-contractor, such composition developer shall not be eligible for any deduction on account of any tax paid by the contractor or the sub contractor under the Act.
Composition Scheme’s Issues
Few of the several reasons, why this scheme contains hurdles and seas of uncertain territories are as detailed hereunder:-
A. Point of Tax Incidence – Not Defined
As per Rule 49A (1),
“Tax shall be calculated at the compounded lump sum rate of one percent of entire aggregate amount specified in the agreement or value specified for the purpose of stamp duty, whichever is higher, in respect of the said agreement."
Since when the tax incidence / point of taxation is not defined, the same will create confusion and uncertainty in the trade. On the widest on the interpretations possible (since no boundaries outlaid in the law), department may hold a view that the same is liable to accrue at the time of execution of agreement to sell itself.
B. Developer Definition – Very Broad Ambit
As per Rule 2(mmmm) of HVAT Rules,
`Developer' means a person who is engaged in and undertakes the construction of civil structures, flats, dwelling units, buildings, premises, complexes, commercial or otherwise, whether wholly or partly (either himself or through an authorized person) for sale and transfers them in pursuance of an agreement along with land or interest underlying the land to a buyer, where the value of land or interest underlying the land is included in the total consideration received or receivable;"
There is incidentally no provision to exclude the consideration received by developers in cases where the entire consideration is received after the completion certificate which are contrary to recent rulings of Hon’ble Supreme Court in L&T Limited v. State of Karnataka (2013-TIOL-46-SC-CT-LB) which in principle accepts the law laid down in earlier judgments in case of K. Raheja case. This shall lead to confusion in trade and shall be addressed to for smoother implementation.
It is pertinent to note that even under Composition scheme for Delhi VAT Effectuated vide Notification No. 3(13)/Fin.(Rev-I)/2012-13/dsvi/180 dated 28th February,2013., there is a specific exclusion to this account. It mentions that,
“Contracts where the entire consideration is received after issuance of completion certificate by the competent authority are excluded here”
C. Interstate Additional Purchase Tax (APT) is very harsh and uncalled for.
As per Rule 49A(2)(i),
“The composition developer opting for composition under this scheme, shall not purchase or receive goods from any place outside Haryana to be used in the execution of the contract at any time during the period for which the composition remains in force under this Scheme”
Its proviso says,
“Where the goods are purchased or received in course of interstate trade and commerce or transferred from other states or imported from out of India have been used in the execution of the contract, then the composition developer shall pay the tax on their purchase price (referred as Additional purchase tax – APT in this article) at the rate/s applicable on the sale of such goods in the State along with interest as applicable under the Act and such tax shall not be adjustable towards his composition tax liability;”
This additional APT is very harsh in multiple senses; firstly it is applicable w.e.f. 1.4.2014 even where the developer was unaware about any such provisions. Further, it does not consider whether the selling dealer is registered or not. A Flat APT in all cases of interstate purchases / stock transfers inward.
Say cement is purchased by developer from outside Haryana (C Form benefit is not available) at the rate of 13.125% plus an additional APT of 13.125% making total tax of 26.25%. This shall be making such purchases unviable.
It is to be noted that no APT was imposed by several states releasing such composition scheme for developers including Maharashtra and Andhra Pradesh.
D. No tax can be collected from buyers – Complicates the Story further
As per Rule 49A(2)(iii),
“Composition dealer shall not collect any amount by way of tax under the Act.”
This shall be another hindrance to the developer. It is worth exploring that can the developers even recover the additional tax of 1% even as additional considerations when above provisions are read along with additional tax clauses of the agreements.
E. Amnesty not operational as yet
The amnesty part of the draft notifications has not been operationalised vide the final notification dated 12th August, 2014. This may hint at several clues, one of them might be that the state government is reconsidering the implementing provisions.
Currently as on date, this notification of 1% shall be only applicable for FY 14-15 onward without any option of being opted for w.e.f 1.4.2007 as earlier suggested by draft notification dated 5th July, 2014.
F. No Benefits of Form C, VAT D1 & deductions on account of payment made to sub-contractors
The said scheme does not allow the benefit of concessional rate of tax under central declaration form C etc. Further the explicit allowance of vat form D1 shall also not be allowed. This coupled with no input tax credit, no deduction of sub-contractor payment, no refund and additional APT would make purchasing a costly affair.
G. No Exit Option – Is it really beneficial to the developer
There is no exit option in Rule 49A unlike Rule 49.
As per Rule 49(8),
“A lump sum contractor may at any time by appearing before the appropriate assessing authority himself or through an authorized agent express in writing his intention to opt out of the scheme of payment of lump sum in lieu of tax payable under the Act.”
A lack of such option in Rule 49A can open several new instances of litigation between the dealers and department.
​​H. No Refunds – Even in genuine cases
As per Rule 49A (2) (vi),
The composition dealer opting for this scheme shall not be entitled for any refund. Say, hypothetically an agreement on which composition tax was duly paid by the developer was cancelled later, the adjusting mechanism is silenced and refund mechanism is not allowed, what a developer can resort to in such cases.
I. Interest to be paid even if opted for within 30 Days w.e.f 1.4.2014.
As per Rule 49A(3),
“The tax period for the composition developer shall be monthly and the payment of lump sum in lieu of tax shall be paid by the composition developer within 15 days of the close of the month.
Provided that if a composition developer fails to make the payment of tax in time under this scheme, then he shall be liable to pay interest as per the provision of sub-section (6) of section 14 of the Act”
As per Rule 49A(5),
“A registered developer who is paying tax or composition tax under the Haryana Value Added Tax Act, 2003 on the date of this notification, may opt this scheme with effect from Ist April, 2014 by filing an application to the appropriate assessing authority within a period of thirty days from the date of publication of the notification”
On plain joint reading of above provisions, even where developer opts for this scheme w.e.f 1.4.2014 by filing application within 30 days, still he would be required to pay interest on tax payments including APT!!
The Litigation – Punjab & Haryana High Court {CWP No. 5730 of 2014 & others}
Meanwhile, during the above, the petitioners represented by a total of 65 Civil Writ Petitions filed (as reported in the order) writs to Hon’ble Punjab & Haryana High Court on following issues :-
a. Whether the developers and builders are works contractors and the agreement between the developer/builder/promoter and the prospective purchaser to construct a flat and thereafter sell the same with some portion of land, authorises the State to impose VAT thereon?
b. If the answer to the first issue is in the affirmative, whether the method of valuation of VAT on such agreements, can directly or indirectly, include the value of land by following the method of calculation of the taxable turnover in the manner expressed by the Commissioner vide circulars dated 7.5.2013, 4.6.2013 and 10.2.2014 and also in terms of Explanation (i) to Section 2(1)(zg) of the Act and Rule 25(2) of the Rules?
c. Whether the provisions of Section 42 of the Act and also Section 9 of the Act read with Rule 49 of the Rules would qualify to be legal and valid?
Hon’ble Punjab & Haryana High Court’s Order dated 22th April, 2015
Held That
On Whether Builders / Developers are Works Contractors?
“In a contract to build a flat, necessarily there will be an element of sale of goods included therein and therefore, building contracts are species of the works contract.” {Para 30}
On Works Contract
The activity of construction undertaken by the developer etc. would be works contract only from the stage he enters into a contract with the flat purchaser. However, the deduction permissible under various heads would depend upon facts of each case on the basis of material available on record. {Para 31}
Valuation of Taxable Turnover – To Exclude Land
- Where the developer/builder/promoter/contractor or the sub-contractor maintains prope books of account, it shall be the value of the goods incorporated in the works contract as per books of account. {Para 31}
- On the other hand, where the developer/builder/ promoter/contractor/sub-contractor does not maintain proper accounts or the accounts maintained by him are not found worthy of credence, it would be permissible for the State Legislature to prescribe a formula for determining the charges for labour, service and cost of land by fixing a particular percentage of the works contract and to allow deduction of the amount thus determined from the value of the works contract for assessing the value of the goods involved in the execution of the works contract. {Para 31}
Circulars by Department - Upheld
In view of legal position enunciated hereinbefore, there is no illegality in the issuance of circulars dated 7.5.2013 and 4.6.2013. {Para 34}
Upheld the Section 2(1)(u)
It (on section 2(1)(u) – i.e. definition of ‘sale price’) is in the definition clause of the Act and the provision does not embrace within its ambit something which is otherwise prohibited by law. Thus, the said provision does not suffer from any vice or defect of unconstitutionality. {Para 38}
Deductive Method to be prescribed in consonance with the judgement
- The 'deductive method' thereunder does not provide for any deduction which relate to the value of the immovable property. The legislature has not made any express provision for exclusion of value of immovable property from the works contract and its method of valuation has been left to the discretion of the rule making authority to prescribe. {Para 39}
- In case the provisions of law are seeking to charge sales tax on any amount other than the value of goods transferred in course of execution of works contract, the provisions would be ultra vires the Constitution of India. The tax is to be computed on a value not exceeding the value of transfer of property in goods on and after the date of entering into agreement for sale with the buyers. However, the 'deductive method' requires all the deductions to be made therefrom to be specifically provided for to ensure that tax is charged only on the value of transfer of property in goods on and after the date of entering into agreement for sale with the buyers. Where 'deductive method' has been prescribed under the rules for ascertaining the taxable turnover, ordinarily it should include a residuary clause in consonance with the mandate of law so as to cover all situations which can be envisaged. {Para 44}
- Consequently, Rule 25(2) of the Rules is held to be valid by reading it down to the extent indicated hereinbefore and subject to the State Government remaining bound by its affidavit dated 24.4.2014. The State Government shall bring necessary changes in the Rules in consonance with the above observations. {Para 45}
Section 9 & Rule 42 for Lumpsum Scheme and Circular dated 14.2.2014 upheld
- Validity of provisions of lumpsum taxation: Constitutional validity of Section 9 and rule 49 regarding lump sum schemes have been upheld, and the Circular dated 14.2.2014 was also accordingly upheld.
- No tax can be charged from the developer/builder/promoter or contractor in respect of the value of goods incorporated in the works contract after the agreement with the flat purchaser on which the sub-contractor has already paid the tax. {Para 31} Though Validity of section 42 of HVAT Act upheld
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