Developers can't pass on 5% VAT to consumers, rules SC

In a major setback to realty developers but good news for some homeowners, the Supreme Court has upheld an earlier Bombay High Court verdict that asked builders to pay 5 per cent value-added tax for sale of houses constructed in the state between 2006 and 2010, and not pass this on to buyers.

The Supreme Court had clubbed all 26 appeals on the issue together. Of these appeals, 14 were from Karnataka and 12 from Maharashtra. The verdict will mean that developers in states such as Maharashtra, Uttar Pradesh and Karnataka where VAT has been levied on such transactions will have to pay the charges.

"We do not find any error in the view of the (Bombay) High Court in this regard," said the order passed by a three judge division bench of Justices R M Lodha, J Chelameswar and Madan B Lokur.

"Moreover, the advocate general for Maharashtra clearly stated before us that implementation of Rule 58(1-A ) (of Maharashtra VAT) shall not result in double taxation and in any case all claims of alleged double taxation will be determined in the process of assessment of each individual case."

MVAT rule 58 (1-A) provides for deduction of expenses on labour and service charges for the execution of the work related to the goods that has already been transferred.

Given that the property market between 2006 and 2010 was witnessing a boom with an exception of around 15-18 months, tax collection from Mumbai and Pune alone may surpass Rs1,000 crore, experts said.

In 2006, the Maharashtra government had imposed a 5 per cent value-added tax on apartments sold following an order of the Supreme Court in the case of K Raheja versus the government of Karnataka.

The Maharashtra government subsequently reduced VAT on sale of flats to 1 per cent from 1 April 2010. In 2007, the realtors had received a stay on the circular asking them to pay 5 per cent VAT since June 2006. Last year, the Bombay High Court had dismissed the plea filed by Builders Association of India.