Home > Business & Investment > ‘DON’T PAY VAT’


Monday, November 05, 2012

Many builders are misleading the media as well as buyers that the VAT will be calculated at 5%, while it actually should be in the range of 0.5% - 3.5%. In the confusion on calculation of VAT, many builders have taken advantage of the situation by passing on the whole burden on to the consumer. Most are likely to pay a part and pocket the rest. In some cases it would be a bonanza for builders. In response legal experts and consumer activists advice consumers not to pay the illegal, excess VAT. Some even go on to say that ‘Don’t pay VAT at all…’  Mayura Shanbaug investigates the complex VAT syndrome and finds out that builders cannot directly ask the buyers to pay - as per the Maharashtra Value Added Tax (MVAT) Act, 2002. Her Report…

The recently passed deadline to pay Value Added Tax (VAT) on under-construction properties purchased by buyers between June 20, 2006, and March 31, 2010 saw builders scurrying to recover the same from buyers. After failed attempts to dissuade the authorities from collecting VAT, developers have woken up to the fact that they will have to pay the tax with interest. This saw around 10,500 developers registering for online remittance within 24 hours of the deadline. The flurry of activities that followed saw developers sending strongly worded legal notices to buyers which include VAT amount calculated at 5% plus penalty or interest for those who have booked before March 31, 2010 and 1% plus interest or penalty for the properties booked after April 1, 2010. 

“In the confusion on calculation of VAT, many builders have taken advantage of the situation by passing the whole burden on consumer, says Advocate and property expert Vinod C Sampat. According to him, builders cannot directly ask the buyers to pay-as per Maharashtra Value Added Tax (MVAT) Act, 2002. To raise a VAT demand, the developer must employ a prescribed invoice format- “if a builder is forcibly asking the buyer to pay, then it amounts to extortion and a criminal offense can be filed against the developer for unfair practices,” he says. “As the situation stands now, in my opinion, no buyer should pay VAT,” he adds.

Mumbai based media professional Mitali Basu (name changed on request) who had booked a flat in a project by Housing Development and Infrastructure Limited (HDIL) at Kurla (West) on October 2010, received a notice by the builder asking her to pay Rs. 69,000 as VAT. She was also asked to pay an additional Rs. 11,149 as an interest or penalty on late payment. The building which is under construction is already delayed by a year.

“I do not understand why I should pay for the penalty since the onus is on the builder to collect and pay the tax. They never told us then and suddenly now we have to pay it with penalty,” says a visibly distraught Basu. “Why should I pay the penalty for builder’s mistake,” she asks.

There are many like Basu who are facing a similar dilemma of being required to shell out large amounts within a short span of time. Most are confused whether to pay or not to pay.

“If a buyer is made to pay the money to the builder under pressure or has any doubts about the amount asked to pay, he can seek redressal in a consumer court after getting possession of the flat,” advices Sampat. He says it is mandatory for builders to provide a detailed break-up of cost of materials used in the construction.

 “There is no need for any interest to be paid,” says Ramesh Prabhu, Chairman of Maharashtra Societies Welfare Association (MSWA). “The consumers should pay only if specified in the sale agreement,” he said, adding “There is no transparency on how much VAT is actually being paid by the builders to the tax department”.

 “Many builders were misleading the  media as well as buyers that the VAT will be calculated at 5% of the total value of the property, till the time the sales tax department itself came out with the clarification that the actual tax will be calculated in the range of 0.5% - 3.5%,” says Prabhu.

“I can confidently say that out of the10, 500 builders who have registered themselves for online remittance so far, very few must have paid their VAT honestly. The builders and their chartered accountants have worked out a way that takes their VAT amount to the fraction of what it actually should be,” says Prabhu who himself is a Chartered Accountant by profession.

 “For example, if the actual calculated tax comes to Rs. 55 crore for a project for any particular builder, then by taking into account land cost reductions adjustments  which otherwise are not included in the final calculations, the builders can reduce the payable VAT amount to just Rs. 3 crore,” explained Prabhu.

Then there is another view. According to media-legal expert Gajanan Khergamker, head of DraftCraft, a legal assistance firm, “VAT is a payment to be made by the builders and buyers are being unnecessarily dragged into it. When a buyer pays for a flat, it is presumed that the cost for the flat includes costs for all comprises the flat, including cost of construction, amounts paid to sub-contractor and service charges.”

According to him, “After making a purchase, the buyer cannot be forced to pay incidental costs as an additional burden. Legally speaking, the cost of “the flat” ought to include all other costs unless they are specified and excluded from the “cost of the flat” in the sale agreement itself. Failing this, forcing the buyer to shell out more in order to pay off VAT is questionable by law…

That leaves us with a question that if at all the consumer or buyer decides not to pay then what are the legal options any developer can exercise to get his money?
There are not many options left with the developers legally,” says Sampat. “The only legal option left with a developer is to file a civil suit in the court,” he said. They cannot revoke the agreement or take the property away,” he says. “If contended, the developer lobby’s move to get buyers to pay up VAT will not hold in a court of law, “agrees Khergamkar.

However, Prabhu warns of the coercive techniques developers are often believed to employ to get their way.    

On the other hand, the sales tax department has repeatedly said that the money towards VAT has to be paid by the builder. Builders may face severe consequences if they do not comply and clear their dues. “The Tax department can freeze the builder’s accounts and in the worst case scenario can attach their properties as well,’ adds Prabhu.  

Incidentally,   pressure is building up on the state government to reduce the VAT from 5% to 1% to reduce the burden and harassment to the people, which so far the government has declined, or to give any rebate or amnesty to the developer on the VAT paid. “We cannot rule out that the politicians will make quick money from builders and give an incentive on VAT liability to get the vote of the citizens,” summarizes Sampat.  

Here Is What You Can Do …

  •     Ask the developer for a break up of how the 5% VAT amount was arrived at.
  •     Ask to see the developer’s records or returns filed with the sales tax department Use the Right to Information (RTI) Act to find out whether a developer—who as per rules is deemed a dealer—has registered with the sales tax department.
  •     Use RTI to access records of the VAT computed and paid by the developer against your building and flat
  •     If the developer has collected excess amount, then ask to refund the excess with interest for the period it is lying with them.
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