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This week the Supreme Court upheld the state governments to charge the developers with a value added tax (VAT) on the cost of building a flat and also to re-open the past purchases. Currently, only few states are levied with VAT for property. The Court giving a clear logic to its judgment explained that the VAT for property is chargeable under the VAT rules as when the developers construct a flat it involves construction activity too that comes under works contract. The law also states that the tax levied after incorporation will not impact if the flat or the building is transferred. But Harishanker Subramaniam, Partner & National Leader of Indirect Tax, EY said that it will be interesting to see the buyers reaction to this and how the developers commercially overcome the extra burden of the tax from the flat buyers. With ups and downs in the property reviews across India in past years and with recent demand slowdown, developers who have already reduced the property price are now shocked with Supreme Court’s decision of levying VAT for properties. However, Prashanth Bhat Director of Indirect Tax, BMR Advisors said to media that the impact will be most in the northern and eastern states like Rajasthan, Delhi, Uttar Pradesh, West Bengal, etc, where the developers are not levied VAT for properties. This will not have much impact on developers in the southern states as they have been already paying VAT on sale of flats under construction. Many financial advisors do believe with the levy of VAT for properties and the rise in rate of interest by RBI will have adverse effect on the property rating and property reviews. But the developers are looking forward for the Real Estate Regulatory Bill, hoping it may ease the pain.
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