FEBRUARY 24, 2014

By Ankit Gulgulia, CA

THE Sales tax thrust on builders and developers have gained drastic momentum post the recent ruling 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 judgement in case of K.Raheja case - (2005-TIOL-77-SC-CT).

Haryana VAT Authorities have released several circulars on back to back basis in this regard:-

+ Prior to L&T Judgement, the Haryana VAT Authorities (in conformity with K. Raheja Law) had released a circular No. 952/ST-1 dated 7 th May, 2013:-

++ 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.

++ 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.

++ 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.

+ 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 opts for composition scheme the benefit of reduced rate under VAT D-1 shall not be available.

+ 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.

+ Circular No. 41/ST-1 dated 14.1.2014 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%.

+ The 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 (to many it comes as a tyranny), the authorities have stirred a significant row of hue and cry because it is felt that the circular has only increased the tax burden drastically but also not addressed other important ancillary issues that are bound to creep up because of this amendment. Some of them will be:-

a) Date of applicability of this Order? Whether it can substitute the relevant valuation mechanism with retrospective effect?

One of the astonishing aspects of the circular is that there is no specific date of applicability mentioned. It clearly means that the revenue will take the stand that the circular is a clarificatory in nature and hence shall have retrospective effect. The stand is surely debatable and will enter into litigation sooner or later.

In case of Ranbir Singh Ram Gopal v. St. Of Hr. CWP No. 11994 dated 11.12.1996, it was held that there shall be no retrospective enhancement in tax-rates by notification / circular. Revenue shall not initiate recovery of enhanced tax for erstwhile assessment periods. Same view was held in Rattan Bhatta & others v. St. Of Haryana and others (2000) 16 PHT 487 (P&H). Similar judgements can be found in other indirect tax laws like service tax& excise.

b) Since many builders would have started paying without land component, can the burden of increased tax be passed on to the customer when composition scheme allows no additional tax recovery from the contractee?

Another problem the builder community faces is lack of proper burden passing on mechanism under the composition schemes of VAT. Under HVAT (similar to most States) the tax cannot be collected separately on the strength of invoice where the dealer opts for composition scheme under rule 49.

c) Whether the assessees' can be re-assessed based on this circular?

Another dilemma is that this circular is silent on whether it can be made as the basis for re-assessment or revision of orders under Section 17 and section 34 respectively. Considering the broadness of circular No. 1166 it is very much on the cards of the revenue to explore this aspect further.

d) Other Issues still be addressed and wanting the under attention of Law Makers and Law Administrators

a. No modus operandi has been identified in regard to WCT deduction by the customers as they cannot be structured as contractee to a normal works contract. Whether every customer who is required to deduct WCT shall now seek registration under Haryana VAT Act?

There is major requirement to insert an exception to WCT deduction provisions to exclude flat buyers from WCT deduction liability. Ironically, the normal individual flat buyer today stand son same footing as a well-structured works contract contractee though ground reality is exactly different. Individual flat owners cannot be expected to take registrations under sales tax, deduct WCT and deposit the same on behalf of Developers.

How to recover the additional taxes and can it affect the Service tax Liability also??

Another very interesting issue to arise here is that most developers enter into an agreement with prospective buyers according to which additional taxes are to be borne by the customers. But the governing section 9 of composition scheme mandates the contractor/developer not to issue any tax invoices. Hence no tax can be collected on the strength of tax invoice. The additional tax might have to be recovered as additional consideration (if agreement so allows) - further this additional consideration shall be subjected to additional service tax under construction service. (Really how easy they made this!!)

Before parting, the author would like to seek an urgent need of streamlining the tax structure for the builders/developers to ensure transparent revenue and unnecessary harassment.

This can be achieved through:-

+ separate composition scheme for developers,

+ the applicability of circular 259 to be clarified as prospective

+ WCT to be dispensed away in developer's cases and complete liability of tax shall be casted on the developers which will be more relished by the trade and would reduce paper work also.

Nonetheless this clarification is bound to travel to other States and ultimately the Centre and would in all probability influence Service Tax matters too.