harvat builders rg1

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IMPLICATIONSOFHARYANAVATONJOINTDEVELOPMENTAGREEMENTS

byRakeshGarg,FCA,Author&Consultant

Abbreviationsused:LOLandOwner;BDBuilder/Developer;PBProspectiveBuyer;

HaryanaValueAddedTaxAct,2003HVATAct

1. Introduction

InHaryana,welookaroundnumerousbuildingprojectseitherunderconstructionorupcoming, in the form of residential complexes and townships, commercial complexes,shoppingmalls,etc.With the issuanceof coupleof circulars inMay13and June13by theHaryanaVATDepartmentrecently,clarifyingcertainaspectsonVATonbuildersprojects,thisbranchofindirecttaxhasbeenactivatedonthesebuildersprojects.HaryanaVATonbuildingcontracts isanemergingchallange;notonly for the stakeholders,whichare, landowners,builders/developersandtheactualusers,butalsoforthetaxprofessionals.Thisarticleisanattempt to discuss various issues in this regard. Joint Development Agreements or theBuilders Collaboration Contracts (referred as Builder Contracts) for the purpose of ourpresentdiscussionmeans the contractswhere LOoffershis land toBD for constructionofresidential/commercialcomplex/unitsandthelatterofferspartoftheconstructedflats/unitstoLO;andremainingflatsaresoldbyBDtothecustomers,eitherduringconstructionorpostconstructionasreadyunits.Sizeofcomplex,whichmayvaryfrom4unitsor400units,willnothaveaneffectonourdiscussion;nonetheless,inbigcomplexes,numberofLOscancertainlybemore thanone,andcertainother issueswouldalsocropup.Revenue sharingcontractsbetween LO and BD have been excluded from our present discussion. Thus, our presentdiscussionisconfinedtoimplicationofHaryanaVATonthosecontractswhere,apartfrommaterialandservices,valueoflandisalsotakingpartofthebargain.

2. Background

Before coming to the taxabilitypart, it isnecessary to look at thehistoryof thesame. Inacasebefore theDivisionBenchof theSupremeCourt inK.RahejaDevelopmentCorporation vs. State of Karnataka (2005) 141 STC 298 (hereinafter referred as Rahejacase), the owners of the land were also engaged in the business of constructingapartments/complexes,andforthispurpose,theyenteredintoagreementsofsalewiththeintendedpurchasers.ItwasheldbytheSupremeCourtthatevenanownerofthepropertymightalsobesaidtobecarryingonaworkscontractifthebuilderentersintoanagreementtoconstructwiththeintendedpurchasers.However,iftheagreementisenteredintoaftertheunit isalreadyconstructed,thentherewouldbenoworkscontract.Butso longastheagreementisenteredintobeforetheconstructioniscomplete,itwouldbeaworkscontract.

However, theRaheja casehasbeen referred to the largerbench in the caseofLarsen&ToubroLimitedvs.StateofKarnataka(2008)17VST460(SC);but,withoutgrantofanystaybytheApexCourt.

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Relying upon the judgment in Raheja case,most of the State VAT Departmentsinitiated imposition of VAT on the material involved in the transfer of residential andcommercialcomplexesbyconsideringtheactivityasworkscontract.

TheBombayHighCourtinthecaseofMaharashtraChamberofHousingIndustryvs.State ofMaharashtra (Writ Petition no. 2568 of 2007 dated 10.4.2012) (2012) 51 VST 1(Bom) also examined this issue. The Court observed that since works contracts havenumerousvariations,itwasnotpossibletoacceptthecontentionoftheappellanteitherasamatterof firstprincipleorasamatterof interpretation thatacontract forwork in thecourse ofwhich, titlewas transferred to the flat purchaser,would cease to be aworkscontract.TheCourt furthermadeanote from the judgmentby theSupremeCourt in thecaseofBuildersAssociationvs.U.O.I.(1989)73STC370(SC),thatthedoctrineofaccretionis itself subject to a contract to the contrary.Analyzing various clausesof theagreementundertheMaharashtraOwnershipFlatsAct,1963(MOFA),theHighCourtheldthatitwasofthenatureofworkscontract.TheHighCourtalsoheldthattheexplanation(b)(ii)toSection2(24) ofMaharashtraVATAct,which reads, works contract includes an agreement forcarrying out for cash, deferred payment or other valuable consideration the building,construction, manufacture, processing, fabrication, erection, installation, fitting out,improvement, modification, repair or commissioning of any movable or immovableproperty,isconstitutionallyvalidandwithinlegislativecompetenceoftheStateLegislature.

TheHighCourtalsoapprovedthecompositionschemeundertheMaharashtraVATAct,whichappliestotheregistereddealerswhoundertakeconstructionofflats,dwellings,buildingsorpremisesand transfer them inpursuanceofanagreementalongwith landorinterestunderlyingtheland,at1%oftheagreementamountspecifiedintheagreementorthe value specified for the purpose of Stamp Duty under the Bombay Stamp Act, 1958whicheverishigher,subjecttocertainconditions.

3. HaryanaVATonBuildersContracts

3.1 Taxability/Incidenceoftax

InaccordancewithRaheja case,builder contract,whereagreement isexecutedwiththe intendedbuyersbeforecompletionofthebuilding,fallswithinthedefinitionofworkscontract.UndertheHVATAct,thetermworkscontracthasbeendefinedundersection2(1)(zt)as,

(zt) works contract includes any agreement for carrying out for cash,deferredpaymentorothervaluableconsideration, theassembling,construction,building,altering,manufacturing,processing,fabrication,installation,fittingout,improvement,repairorcommissioningofanymoveableorimmovableproperty.

Thetermsalehasbeendefinedinsection2(1)(ze)oftheHVATActas,

(ze) salemeansanytransferofpropertyingoodsforcashordeferredpaymentorothervaluableconsiderationexceptamortgageorhypothecationoforachargeorpledgeongoods;andincludes

(ii) thetransferofproperty ingoods(whetherasgoodsor insomeotherform)involvedintheexecutionofaworkscontract;

AMemorandum(No.152/STI;dated07052013)(hereinafterreferredasMemo)hasbeen issuedby the Excise& TaxationCommissioner,Haryana in relation to activitiesperformedbytheBuilders;andParaNo.1.1thereofreadsasunder,

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1.1 . agreementsor contracts entered intoby thedevelopersorotherswith prospective customers for sale of fully constructed apartments or flats or otherbuildings before the commencement of actual construction or before completion ofconstruction,shouldbetreatedasagreementsorcontractsforexecutionofworkscontractofconstructionofbuildingasheldby theHonbleSupremeCourt in thecaseofK.RahejaDevelopmentCorporationv/sStateofKarnataka(reportedin141STCatpage298).Itisstillagood lawandhasnotbeenreversedbytheHonbleSupremeCourt inanysubsequentjudgment.Claimstothecontrary,ifany,shouldberejected.

Inrelationtobuildercontracts,Paranos.2.1to2.3ofthesaidMemostate,

2.1 In the case of Joint Development Projects, where typically there is anagreement between the owner of a land and a developer to develop such land whichinvolves construction of a building or buildings (residential or commercial) on such land,there is an understanding that an agreed portion of the constructed building would betransferredbythedevelopertothelandowner.Thedeveloperwouldbegiventherightofselling or transferring the balance portion of the constructed building along with theundivided share in the land on which it is built. The developer would then enter intoagreementforconstructionofflatsorapartmentsortheotherbuiltupareaswithcustomersor for saleof constructed flatsorapartmentsorotherbuiltupareas. Inmany cases, theagreementby thedeveloper for saleof constructed flatsorapartmentsofotherbuiltupareaswouldbebeforetheircompletionofconstruction.Asmentionedearlier,inrespectofboth theagreements forconstructionandagreements for saleofbuiltuparea thatareenteredbefore the completionof construction, thedeveloperwouldbe liable to taxonthetaxableturnoverrelatingtotransferofpropertyingoods involvedinexecutionofsuchcivilworkscontractofconstructionofbuildings.

2.2 Further,generallyadeveloperconstructingabuildinginpursuanttoajointdevelopment agreement declares only part of the amounts received from his customerswith whom he has entered into construction agreement as his turnover relating to thetransferofpropertyingoodsintheexecutionofsuchworkscontract.Hewouldnotdeclarethebalanceamounts received from thecustomers towards transferofundividedshareofland anwhich flat or other built up area is constructed and sold to them as part of histurnover.Similarly,hewouldnotdeclarethevalueofgoodstransferredintheconstructionofthebuildingrelatingtotheshareofthelandowneraspartofhisturnoveronthegroundthatnoconsiderationisreceivedfromthelandowneronsuchtransaction.

2.3 Theclaimthatthedeveloperexecutesworkscontractofconstructionofaportionofabuildingwithoutanyconsiderationisnotfactuallyandlegallysustainable.Thecorrectviewwouldbethatthelandownerhassoldaportionofhislandtothedeveloperforaconsiderationand,inturn,thedeveloperhasagreedtoconstructaportionofthebuildingforthelandownerforanamountequaltothatconsideration.

Analyzingtheactivity indetail inviewofRahejacaseandtheMemo issuedbytheHVATDepartment, it can fairlybe stated thatBDexecutesworks contract for twoseparatepersons,thatis,

(A) WorksContractfortheLO:whereBDconstructstheunitsforaconsideration intheformofshareintheland;and

(B) WorkscontractforPB,ifBDreceivespayment(orentersintoagreementofsale)fromPBbeforecompletionoftheconstruction.

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Sofarasactivitystatedat(A),it isalwaysaworkscontractactivity(unless,itcanbetermedasbartertransaction,discussed innextpara);whereasactivityreferredtoat (B)hasbecometaxablewiththedecisioninRahejacase.Supposing,theRahejacase isoverruledbythelargerbench,thennoVATwillbepayablequathisactivity.

ValuableConsiderationBarterTransaction

As per the Courts, valuable consideration includes cash, money, cheques, bill ofexchange,promissorynotes,sharesandlikeinstruments.Whetherexchangeofgoods(barter)constitutes a valid sale? It had been a matter of great controversy and the Courts hadexpresseddifferent views in this regard.Whilediscussing thebasicelementsof sale, theApexCourtinthecaseofDeviDassGopalKrishnanvs.StateofPunjab(1967)20STC430(SC)opinedthatcashorothervaluableconsideration isessentialforcompletionofasale. Intheabsenceofcashordeferredpayment,itisexchangeofgoods(barter),andnotasale.

InthecaseofCSTvs.RamKumarAgarwal(1967)19STC400(All),goldwaspaidasapriceof jewellery.The jewellerpurchasedgoldfromthemarket,preparedornaments,andtransferred to the customer against the gold. It was held that exchange of goods wasbarter andnot a sale. Itwas alsoobserved that itwas immaterialwhether goldwasgivenbefore thepreparationorat the timeof transferof jewellery. In another case, thedealer collected kansa, melted it and returned to the customer after deducting certainpercentage in weight and collected labour charges extra: the Court held it as a bartertransaction and not as sale. [CST vs. KansariUdyog (1979) 43 STC 176 (MP)]. However,contraryviewswereobservedinthecaseofVPVadivelAcharivs.StateofMadras(1969)23STC273(Mad),wheregoldwasexchangedfornewjewellery;itwasheldtobeasalesincegold,handedovertoassessee,couldeasilybeconvertedintomoney.

Wheregoodsaresoldpartly forgoodsandpartly formoney, it isa transactionofsale. [Aldridgevs. John. (1887)7E&B885;LJQB296;Sheldonvs.Cox (1824)3&C420]Similarly, inthecaseCITvs.M.&G.StoresAIR1968SC200,anoldcarwasreturnedanddifferencewaspaidincash:whileexplainingthewordprice,theSupremeCourtheldthatitwasatransactionofsale.Likewise,wheremachinerywastransferredagainstallotmentofshares, itwasconsideredassalesince transferofshareswasamodeofpaymentofpriceanddischargeofliability.[PremierElectroMechanicalFabricatorvs.StateofT.N.(1984)55STC371(Mad)followedinStateofT.N.vs.T.M.T.Drill(P)Ltd.(1991)82STC59(Mad);I.B.P.Co.Ltd.vs.Asstt.CCT(2000)118STC33(WBTT)]

Inanothercase,theMadrasHighCourtheldthatevenbarterorexchangeofgoodsmight be considered as sale under theAct, provided there is transfer of property in thegoods.[VishweshwasadarsGokuldasvs.Govt.ofMadras(1962)13STC113(Mad)]

InDhampurSugarMillsLtd.vs.CTT(2006)147STC57(SC),acompany,whichownedasugarmill,executedadeedoflicenceinfavourofthedealer;whereinthelicencefeefortheuseoftheentiresugarmillcomplexwastobepaid intheshapeofmolasses.Attheendofevery licenceyear,thevalueofthemolasseshadtobeascertainedonthebasisoftheratesnotifiedbytheGovernmentandanyexcessorshortagetowardstheamountoflicencefeewastobemadegoodbyeitherparty.TheSupremeCourtobservedthatthesuchadjustmentofpricewouldcomewithinthepurviewofthetermothervaluableconsiderationinasmuchasthedealerandthecompanywerefullyawarethattheyhadtofulfilltheirrespectivetermsandobligations, i.e., (i)paymentof licence feeonmonetary terms,and (ii)paymentofpriceofmolassessuppliedbytheappellanttothecompanywhichwasagaininmonetaryterms.Thus,itwasheldthatthetransactioncouldnotbetermedasbarter.

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Therefore,lookingattheaforestatedpronouncements,itwouldbedifficulttopleadbefore thecourtswithsuccess thatexchangeof landwithvalueofconstruction ismerelyabartertransaction.

3.2 Liabilityforregistration

Inviewofouraforediscussion, since thebuilder isconstructing theproperty for thelandowner,andalsobookingflatsfortheintendedbuyersbeforecompletionofconstruction,heisliableforregistrationundersection11(2)oftheHVATAct.Primarily,thebuilderisnotliabletoobtainregistrationundertheCentralSalesTaxActsincetheentireworkscontractinrelationtoparticularprojectwouldbeexecutedintheStateofHaryana.However, ifthebuilderwantstopurchasegoodsfromotherStates,heshouldobtainregistrationundertheCentralSalesTaxActalso,whichwouldfacilitatehimtopurchasegoodsataconcessionalrateoftaxof2%againstFormsC.However,thebuildercannotpurchasegoodsonthestrengthofFormCinrelationtothoseflats,whicharesoldaftercompletionofconstructiononwhichnoVATispayable.

3.3 IncidenceofVAT

Thebuilder shallbe liable topayHVAT asworks contract in respectof those flatswhich are constructed for the landowner. In addition,he shall alsobe liable topay tax inrelation to those flats which are sold to the intended buyers before completion ofconstruction.Inotherwords,inthesecondcase,heisnotliableforHVATinrelationtothoseflatswhicharesoldaftercompletionofconstructionasreadyunits.

3.4 Measureoftax

DeterminationofVATincaseofworkscontractdependsupontheprovisionsundertheStateVATAct.ThreeSchemeshavebeenlaidforcomputationofHVAT:

(1) RegularScheme(1) Totalconsiderationreceivablefromthe landowner(intheformofland)andtheintendedbuyer()ValueofLand()Valueofactuallabour&servicesasstatedinRule25(2)(a)ofHaryanaVATRules;

(2) RegularScheme (2)Totalconsideration receivable from the landowner (intheformofland)andtheintendedbuyer()ValueofLand()Valueoflabour&servicescalculatedasperpercentagespecified inRule25(2)(b)ofHaryanaVATRules;

(3) CompositionSchemeUnderthisScheme,deductionfor labourandservicesshallnotbeallowed.RateofVATwouldbe4%.

Under the Regular Scheme, determination of turnover and output VAT ofworkscontracttransactionisasunder:

i GrossTurnoverWorkexecutedduringthetaxperiod .

ii Less:Costofland

iii Less:Valueoflabour&services .

[Eitheronactualbasisoratpercentagebasis]

iv Taxablevalueofmaterial(TaxableTurnover) .

v ComputationofOutputTaxon(iii)

Declaredgoods(mainlyiron&Steel)@5%.Tax

Othergoods@12.5%......Tax .

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Asperexplanation1tosection2(1)(zg),Inrelation tothetransferofproperty ingoods(whetherasgoodsorinsomeotherforms)involvedinexecutionofaworkscontract,sale price shallmean such amount as is arrived at by deducting from the amount ofvaluable consideration paid or payable to a person for the execution of such workscontract, the amount representing labour and other service charges incurred for suchexecution, and where such labour and other service charges are not quantifiable, theamountofsuchchargesshallbecalculatedatsuchpercentageasmaybeprescribed.

3.4.1 Determinationofvalueoflandinthebuildercontracts:

Noprovisionshavebeen laid fordeterminationofvalueof landeitherunder theHVATActorRulesmadethereunder.Here,thevalueoflandwouldbedeterminedfortwopurposes,namely: (i)Determinationofvalueofworkscontract for the landownerwhereconsideration has been received in the form of land; and (ii) Determination of taxableturnoverinthecaseofsaletoprospectivebuyerwhereconsiderationincludesvalueofland.

ItcanalsobearguedthatunlesstheRulesare framed forvaluationofthe land,HaryanaVATisnotpayableatallonbuildersactivitiesquaintendedbuyers.Reliancecanbe placed upon the judgment by the Supreme Court in the case of K.DamodaraswamyNaidyvs.StateofTamilNadu(2000)117STC001(SC),wherefivejudgesbenchoftheApexCourt,inrelationtothetaxabilityofcompositechargesreceivedbythehotels,opinedthatthecompositechargethatthehotelownerleviedforlodgingandboardinghadtobesplitupandonlytheelementthereofthatrelatedtothesupplyofmealscouldbesubjectedtothesales tax. TheCourtheld that sales tax couldnot be leviedon the composite charge forboardingandlodgingunlesstheStatemadeRuleswhichsetdownformulaefordeterminingthesupplycomponentonthecompositecharge.Itwasfurtherheldthat itwasnotfortheassessingauthoritytosplitupthecompositepriceintotwoandmaketheoneparttaxable;thatis,onlytheStatecouldpromulgaterulestoindicatehowtotreatthecompositechargesfor lodgingandboardingandsetout formulae forsplittingof the two.Thesaid judgmentsquarelyappliestoourcasesincenoruleshavebeen framed forvaluationof land forthepurposeofdeterminationoftaxableturnoverinbuilderscase.

However,VATisanindirecttaxandifitisnotcollectedfromthecustomersatthetimeofexecutionofcontract,itmightbecomeacosttothebuilderatalaterstage;andthus,takingaconservativeview,wesuggestthatvalueoflandmaybecomputedonsomefairandreasonablemethod;whichmightbeatcostoratthecirclerateoftheland,discussedhereinafter.

(A) Transactionbetweenthebuilderandlandowner

In relation todeterminationofvalueofworkscontract for the landownerwhereconsideration has been received in the form of land, Para no. 2.4 of the Memo dated7.5.2013 issued by the Department states that the amount payable by the land ownertowardsconstructionofhisshareofthebuildingshallbecalculatedonthebasisof:

(i) theaggregateofamountsreceivedfromhiscustomersbythedeveloperwithwhomhehasenteredintoconstructionagreementsorenteredintoagreementsforsaleofconstructed building before completion of such building, towards transfer ofundivided share of land to them; (that is, on the basis of amount received fromprospectivebuyerstowardsland);or

(ii) theaggregateofamountsdeclaredby thedevelopertobethevalueofundividedshare of land transferred to the customers with whom he has entered intoconstructionagreementsoragreementsforsaleofconstructedbuildingbutbefore

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completion of such building (in short, on the basis of amount declared by thedevelopertotheprospectivebuyerstowardsland);or

(iii) aggregateofamountsfixedundertherelevantlawasthevalueofundividedshareof landtransferred tothecustomerswithwhomhehasentered intoconstructionagreementsoragreements forsaleofconstructedbuildingbutbeforecompletionofsuchbuilding(thatis,onthebasisofmunicipalcirclerateofland).

(B) Transactionbetweenthebuilderandtheprospectivebuyer

Inrelationtodeterminationoflandforthepurposeofcomputationofvalueofworkscontractinthecaseofsaletoprospectivebuyers,Parano.2.3ofthesaidMemostates,

(i) Thedeveloperinmostofthecasescollectsamountsseparatelyfromhiscustomerstowards the transferofundivided shareof landonwhich theirearmarked flatorotherbuiltupareaisconstructed.Theaggregateofallsuchamountswouldbetheconsiderationthatistobetakenaspayablebythelandownertowardsconstructionof his share in the project (that is, amount received from prospective customerstowardslandseparately).

(ii) In cases, where such amounts are not collected separately, the aggregate ofamounts declared by the developer to be the value of undivided share of landtransferredtothecustomerswhileregisteringwithrelevantauthoritiestransferofsuchlandalongwiththecustomersportionofthebuildingconstructedonit,wouldbe the consideration that is to be taken as payable by the land owner towardsconstructionofhisshareintheproject.(Inshortis,amountdeclaredbythebuilderatthetimeofregistry)

(iii) incasewherethevalueoftheundividedshareof landtransferred isnotdeclaredseparatelyatthetimeofregistration,theaggregateoftheamountsfixedundertherelevantlaw(circlerate)forthepurposeofpaymentoffeeorconsiderationthatistobetakenaspayablebythe landownertowardsconstructionofhisshare intheproject.(thatis,onthebasisofmunicipalcirclerateofland)

3.4.2 Deductiontowardslabourandservices:

InaccordancewithRule25(2)oftheHaryanaVATRules,

(a) Incaseofturnoverarisingfromtheexecutionoftheworkscontractorjobwork, the amount representing the taxable turnover shall exclude the charges towardslabour, servicesandother like charges subject to thedealersmaintainingproper recordssuchas invoice,voucher,challanoranyotherdocumentevidencingpaymentofchargestothesatisfactionoftheTaxingAuthority.

(b) For thepurposeof clause (a)of subrule (2), the charges towards labourservicesandotherlikechargesshallinclude,

(i) labourchargesforexecutionofworks;

(ii) chargesforplanningandarchitectsfees;

(iii) cost of consumables such as water, electricity, fuel, etc., used in theexecutionoftheworkscontractthepropertyinwhichisnottransferredinthecourseofexecutionofaworkscontract;

(iv) costofestablishmentofthecontractortotheextentitisrelatabletosupplyoflabourandservices;

(v) othersimilarexpensesrelatabletosupplyoflabourservices;

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(vi) profit earned by the contractor to the extent it is relatable to supply oflabourandservicessubjecttofurnishingofaprofitandlossaccountoftheworkssites:

Thus,twomethodsfordeterminationof labour,servicesandotherchargeshavebeenspecifiedundertheHVATRules,asunder:

(A) ActualBasis;and(B)PercentageBasis

(A) ActualBasis

Iflabourandservicesaredeterminedonactualbasis,thecontractorshallmaintainthe records in amanner so as to easily quantify the value ofmaterial, amount of directlabour and services and proportionate amount of indirect labour and services. Scope oflabour and services is not confined towages and salaries; but it extends to the otherchargesofthenatureofexpensesstatedinsevenclausesofRule25(2)discussedabove.

(B) PercentageBasis

Whereamountofcharges towards labour,servicesandother likechargesarenotascertainablefromthebooksofaccountsofthedealerorwherethedealerfailstoproducedocumentary evidence in support of such charges, the amount of such charges shall becalculatedonthebasisofpercentagesspecifiedinthetablegiveninprovisotorule25(2)(b)ofHVATrules.Civilworkscontractsfallwithinthefollowingclause:

Sl.No.

Typeofcontract Labour,serviceandotherlikechargesaspercentageoftotalvalueofthecontract

6 Civilworkslikeconstructionofbuildings,bridges,roads,dams,barrages,canalsanddiversions.

25%

3.5 CompositionSchemenotifiedundersection9oftheHVATActUndertheHVATAct,inrelationtoworkscontracts,theapplicablerateoftaxis4%

oftotalvaluableconsiderationreceivedorreceivableforexecutionofthecontract.

Inrelationtodeductionforthevalueofland,ParaNo.3.1ofMemodated7.5.2013states,Whereabuilderordeveloperhasoptedforpaymentoftaxonhisturnoverrelatingto transfer of property in goods involved in execution of works contract under thecompositionschemeasprovidedunderSection9oftheHVATAct,thetotalconsiderationonwhichsuchdealerisliabletotaxwouldnotincludetheamountreceivedfromthecustomerstowards theirundivided share in land.However, asexplained earlier, in the caseof jointdevelopmentprojectsthisexclusionwouldnotbeapplicable.

As per the said Para, deduction of land is available under this scheme if it isseparatelycharged,andnototherwise.However,theauthorisoftheviewthattheintentionoflegislaturecannotbetocomputetax@4%,whetherornotthevalueoflandisincluded.Moreover,VATcannotbe leviedon thevalueof land.Therefore,valueof land shouldbedeductedinthisSchemealso.

UnderthisScheme,deductionforlabourandservicesshallnotbeallowed.Benefitof inputtaxcredit isalsonotavailable.ThebuildercanpurchasegoodswithintheStateatlowerrateoftaxu/s7(2)oftheActonthestrengthofFormVATD1[4%orsuchlowerrateapplicableonsaleofsuchgoods].HecanalsopurchasegoodsagainstFormC fromotherStatesataconcessionalrateoftaxof2%.

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3.6 Booking/SaleofflatduringconstructionIn a builder agreement, builders share in the property could be sold prior to

completion,butatvariousstagesofconstruction,totheprospectivebuyers.Sometimes,thebuildersellstheflatwhentheprojecthasjuststarted,andsometimeswhentheflatisalmostcomplete.Thequestiongenerallyarisesastoatwhichvalueofconstruction,VATshallbepaid;that is,onthetotalvalueofflatoronthevaluereceivedafterthedateofbooking?Memo issuedbytheHVATDepartment issilent inthisregard.However, intheopinionoftheauthor,wherethebuilderconstructspartoftheflatforhimselfduetononbookingorotherwise,he shouldbe liable topay taxonly in relation to thatportionofworkscontractwhichisexecutedafterthedateofbookingsincebeforethatdatehewasnotadeemedcontractorofprospectivebuyer.Simultaneously,itmayalsobenotedthatifthat is so, the builder shall be eligible for deduction towards labour and services andbenefitofinputtaxcreditonlyinrespectofworkscontractexecutedpostbooking.

3.7 Timeofturnover/Pointoftaxation

Inthecaseofworkscontracts,unlessotherwisecontraryinthecontract,goodsaredeemed tobesoldat the timeof incorporationofgoods in theworkscontract.The termgrossturnoverhasbeendefinedinsection2(1)(u)oftheHVATActas,

(u) grossturnoverwhenused inrelationtoanydealermeanstheaggregateof thesaleprices receivedor receivable in respectofanygoodssold,whetherasprincipal,agentor inanyothercapacity,bysuchdealerand includes thevalueofgoodsexportedoutofStateordisposedofotherwisethanbysale;

3.7.1 WorkscontractexecutedbybuilderforlandownerHere,theentirelandisreceivedbythebuilderinadvance,beforecommencementof

construction. Therefore, itmight be said that time of turnoverwould be the execution ofagreementbetween landownerandbuilder,andtaxwouldbepayableatthattime itselfontotal construction value. However, the author is of the opinion that since on the date ofagreement,nomaterialistransferredbythebuilder;therefore,timeofturnoverwouldbethetimewhengoodsareincorporatedintheworkscontract.

3.7.2 Workscontractexecutedbybuilderforprospectivebuyer(PB)Inthiscase,goodsaredeemedtobesoldatthetimeofincorporationofgoodsinthe

workscontract,andnotwheninstallmentisreceived.However,itwouldbepracticallydifficulttoarriveatthetaxableturnoveratthattime.Therefore,tomaintainuniformityincollectionoftaxfromthePBandpaymentofVAT,itisadvisedthatHVATmaybepaidbythebuilderatthetimeofraisingofbillsonthePBoratthetimeofreceiptofconsideration.

Itmay furtherbenoted thatevery installmentwouldconsistpayment towards land,materialandservices.Therefore,theauthor isoftheviewthatamountofoutputVATmaybecalculated,inadvance,asapercentageofpersquarefootrate;andtaxbecomputedaccordinglyon thebasisofpersquare footbillingonevery installment.At the timeofcompletionof theproject,actualliabilityofHVATshallbeascertainedandshortfall,ifany,bepaid.

3.8 Whereapartoftheareaisbookedfortheprospectivebuyers

Where only a part of total constructed area is being transferred, the deductiontowardslabour,servicesandotherlikechargesmentionedinrule25(2)shallbecalculatedonaproratabasis.Further,the inputtaxcreditshallbeavailableproportionately inrespectofthatpropertywhichissubjectedtotheoutputtax.

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3.9 CancellationofbookingbytheprospectivebuyerIfbookingoftheflatiscancelledduringtheconstructionthereof,andsubsequently

theconstructioniscarriedbythebuilderforhimself,thesaleshallbetreatedcancelled,andthebuilderwouldbeentitled toadjust/refund the taxalreadypaid.However, if thesameflat is again sold to another PB during construction, then itwould be taxable under theHVAT,asdiscussedearlier.

3.10 PreferentialLocationCharges(PLC)When charged separately, these receipts shall not form part of sale price of the

builderbecausethesearerelatabletothevalueoflandandnotthecostofconstruction.

3.11 SaleofunitsbythelandownerduringconstructionAsperParaNo.2.5oftheMemodated7.5.2013,Itmaybenotedthatinsomecases

even the land owner also may have entered into agreements with prospective buyers inrespectofhisportionofbuildingbeingconstructedbythedeveloperorbuilder.Insuchcases,even the landownerwouldbe liable to taxon the taxable turnover relating to transferofpropertyingoodsinvolvedintheexecutionofworkscontractofsuchbuilding(thoughactuallycarriedoutthroughthedeveloperorbuilder).However,itshallbeensuredthatboththelandownerandthedeveloperorbuilderisnotassessedtotaxonthesametransaction.

3.12 RatesofOutputVAT

UndertheRegularScheme,rateofoutputtaxwouldbethecommoditywiserateasspecifiedinSection7oftheHaryanaVATAct.

Goods specified inScheduleAof theActare taxableat the rate specifiedagainstthesegoods.It includesbullion,jewellery,certainpetroleumproducts,diesel,tobacco,plyboard,etc.

Schedule B contains exempted goods. Schedule C contains goods taxable@ 5%,includingiron&Steel,Aluminum,etc.

RateoftaxongoodsnotspecifiedinanyoftheScheduleis12.5%.

Inaddition,5%surchargeshallbeleviedontheratesspecifiedinsection7.

3.13 LiabilityofbuilderComputationofHVATAnIllustration

Letusadaptourdiscussionintheformofanillustration:LOentersintoacollaborationagreementwithBD,wherein

(Rs.Inlacs) BDconstructs4flats/units; Outofwhich,BDgives2flatstoLOtowardsconsiderationofland; Remaining2flatsarekeptbyBDforfurthersaleinmarket; BDsells2flattoPBsduringconstructionforRs.1200(600perflat);saledeedalso

executedforRs.1200;

ValueoflandisRs.2000andvalueofconstructionisRs.400(Rs.100perfloor); SinceBD receives landworthRs.1000 (2000*2/4) and givesRs.200 as valueof

construction for 2 floors (100 per floor); it is further agreed that BDwill giveRs.800toLOtowardslandorasvaluefortransferofconstructionrights;

Circlerateperflat,ofland:Rs.400;andforconstruction:Rs.100;

ImplicationsofHaryanaVATonJointDevelopmentAgreements

ByRakeshGarg,FCA,Delhi&Gurgaon#ssarca.rgarg@gmail.com;9810216270 11

AgreementstosellbetweenBDandPBsspecifythatvalueof land isRs.500andvalueofconstructionisRs.100.

BreakupofvalueofconstructionofRs.400is:o Materialwithproportionateoverheads&profit Rs.240o Labour&Serviceswithproportionateoverheads&profitRs.120o Permissionsandsanctions(treatedasservices)Rs.40o TotalExpenses Rs.400o ProportionofexpensestowardsLOandBDportion 50:50

(forsaletoPB)

It isassumed that totalmaterialconsistsof1/3 iron& steel taxable@5%;and2/3 other materials taxable @12.5%: thus average VAT rate comes to 10%(impactofsurchargeignoredforthepurposeofthisillustration);

VATinputtaxcreditisassumedatRs.16(10%of66%of240); TotalInvestmentofBDcomesto:Rs.800paidtoLO(+)Constructionvalueofall

fourflatsbeingRs.400(=)Rs.1200.

Method

Description OutputVATLO

OutputVATPB

InputTax

NetLiability

Liability(%ofInv

estment)

(1) (2) (3) (4) (5) (6) (7)

I RegularScheme(1)(ServicesActual;LandActual)

LO10%of(240)/2[50%materialpertainstoLO]

12 12 16 8 0.07

PB10%of[(12001000)(160)/2]

II RegularScheme(2)(Services%;LandActual)

LO10%of75%of200 15 15 16 14 1.17

PB10%of75%of(12001000)

III CompositionScheme

LO4%of200 8 8 0 16 1.33

PB4%of(12001000)(ReferPara3.5)

4. Conclusion

Evenafterhavinga lengthydiscussionon the subject, it isdifficult toconclude thetopicwithcertaintyandauthority.Wehavetakenafairlysimplerillustration,whereinvariouscomplexsituationshavenotbeenconsidered.Themeasureoftaxwouldfurtherbecomplexifthe discussion on the amount of conveyance/sale deed, which varies from customer tocustomereveninthesamebuildingandatthesametime,isalsoinitiated.Further,theexacttaxationwoulddependuponthetermsofthebuilderagreementbetweentheparties,whichmightvaryfromcasetocase.

ImplicationsofHaryanaVATonJointDevelopmentAgreements

ByRakeshGarg,FCA,Delhi&Gurgaon#ssarca.rgarg@gmail.com;9810216270 12

Moreover, looking at the impact of service tax and VAT simultaneously, doubletaxationcertainlytorturesthestakeholders.TheVATDepartmentshouldrealizethat itcantaxmaterialportiononly;whereas,thevalueofland,particularlyinthemetrocities,hasthemaximuminvolvementinthisactivity.Thevarianceinthetotalpriceofaflat/unitismainlyduetolandrates.Forexample,ahouseof500sq.yardswithsameamenitieswouldpriceforRs.10croresinGurgaonandRs.5CroresinManesar.Thelandratemayalsovarywithinthesame colony, depending upon its location.Value ofmaterial and serviceswould, by andlarge,remainthesameeverywhere.TheHVATActallowsdeductiontowardsvalueof landbaseduponcirclerate(whichisuniformintheentirecolony),irrespectiveofitslocation.ItiscertainlyanattempttolevyHVATonthevalueofland,whichisoutofitsscope.

Thisactivity isalso facingdifferent treatmentunderdifferent statutes,evenby thesameGovernment.Both,VATandthestampduty,arecollectedbytheStateGovernment;andforthepurposeofcollectionthereof, ithasgotdifferentchargingprovisions:that is, forthepurposeof levyofVAT, land isdeemedtobesoldduringtheconstruction itself;andforthepurposelevyofstampduty,landistreatedtobesoldalongwithconstruction,asareadyunit.

Sincethelevyissomewhatnew,andintheabsenceofappropriateassistanceintheformof clarificationsby theAuthoritiesor the judicialpronouncements, thebuilders arealwaysinthesateofconfusionwhiledischargingtheirobligationsandmakingcompliances.Being an indirect tax, ifVAT isnot recovered from the customers in time at the timeofmaking execution of contract, it becomes the cost of the dealer; and if any additionaldemand is raised after few years alongwith interest and penalty,many of the builderswouldhavenooptionbuttoshutdowntheirbusinesses;whichwouldnotbetheintentionoftheRevenue.TaxationonthisinfrastructuralactivitycertainlyneedsearlyattentionoftheGovernmentandRevenueAuthoritiesforthesystematicgrowthofthissector;andthus,oureconomy.

Disclaimer:

ThisPapercontainspersonalviewsof theauthorandhasbeenprepared foracademicuseonly.Thetaxabilitywouldalsodependuponthecontentsandnatureofagreementbetweentheparties.SincetheseviewsmightnotbeacceptabletotheAuthorities,thereaders/stakeholdersareadvisedtounderstandtheimplicationsofdiscussioncontainedtherein.

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