INFERENCE OF INDIRECT TAX ON REAL ESTATE

INDUSTRY

ROAD MAP

RELEVANT DEFINITIONS….. SALE (Section 2(24)) : means sale of goods made

within the state for cash or deferred payment or other valuable consideration but shall not include a mortgage, hypothecation, charge or pledge.

In explanation (b)(ii) to sec.2(24):“the transfer of property in goods, (whether as goods or in some other form) involved in the execution of a work contract including, an agreement for carrying out for cash, deferred payment, or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repairs or commissioning of any movable or moveable property shall deemed to be Sale.

What is Work Contract?

The Supreme court in various judgment has explained the difference between “Normal sale” and “Work Contract”.

In case of Hindustan Aeronautics, it was held by the apex court that “In contract of sale, the main object is the transfer of property and delivery of possession of chattel as a chattel, where it is not so, it is contract of works & Labour” (Hindustan Aeronautics Ltd. 55-STC 314 –SC)

RELEVANT DEFINITIONS…..

GOODS (Section 2(12)) :Every kind of moveable property

Excludes :Newspapers, actionable claims, money, stocks, securities, lottery tickets

Includes :Live Stocks, growing crop, grass and trees and plants including the produce thereof.

RELEVANT DEFINITIONS

BACKGROUND OF WORK CONTRACTS Before the 46th amendment to the Constitution of India, the

sales tax was only applicable to the sales covered under the Sale of Goods Act (Normal Sales). The work contract transaction were not covered under the state sales tax laws since the work contracts were not normal sale

The supreme court has confirmed the above status in its landmark judgment in the case of Gammon & Dunkerely (9 STC 353)

After the 46th amendment to the Constitution of India made on 2nd February, 1983 sun article (29-4) was added as under

(b)A tax on the transfer of property in goods (whether as goods or some other form) involved in the execution of a works contract”

Thus after amendment, States were empowered to levy tax on the material value which got transferred in the work contract

COMPUTATION OF SALE PRICE Three methods are prescribed under the MVAT Act, 2002 to calculate

the sale price

REGULAR METHOD

Contract Price xxxLess : Labour and service charges xx Sub- contract price xx Architect's , designing fees xx Machinery & tool hire charges xx Cost of consumables such as fuel, water xx Labour Contractor Fees xx Profit earned by the contractor in relation

to supply labour and services xx xxxSale Price xxx

___

PRESUMPTIVE METHOD…..

Contract price xxxLess : Sub-contract price xxx Presumptive amount (expressed as % of the

contract price) xxxSale price xxx

Rule 58(1A) : w.e.f 20th June, 2006In case of construction contract where alongwith immoveable property, the land or interest in land is transferred is to be conveyed, the sale price shall be determined after making deduction under sub-rule 1 and cost of land from the agreement value. Cost of Land shall be determined in accordance with the guidelines appended to the Annual Statement of Rates prepared under provision of the Bombay Stamp (Determination of True Market Value of property) Rules, 1995, as applicable on the 1st January of the year in which the agreement to sell the property is registeredprovided that, deduction towards the cost of land under this sub-rule shall not exceed 70% of the agreement value.

PRESUMPTIVE METHOD

COMPOSITION SCHEME…..

Total Contract Value xxLess : Sub-contract price xx

Sale price xx

COMPOSITION SCHEME…..

NOTIFIED CONSTRUCTION CONTRACTNot. no. VAT-1506/CR – 134/ dtd 30.11.2006

INPUT TAX CREDIT SET – OFF

TAX DEDUCTED AT SOURCE….. Category of persons: vide Not.

Vat/2005/97 dtd 29.08.2005

9 types of contractee are specified which inter-alia includes : A company registered under the Companies Act, 1956.

Limit : where amount or aggregate amount payable equal to or more than Rs. 5 lakhs.

Rate of TDS : In case of registered contractor – 2% & Unregistered contractor – 4%

Pay tax , so deducted, within expiry of 21 days from the end of the month in which tax is deducted in form 210.’

Shall furnish certificate in form 402 immediately after the deduction is made.

Shall file a statement of tax deducted at source on quarterly basis in form no. 403 on or before 20th day following quarter.

Shall also file annual return under form no. 405 within 3 months from the year to which return relates

TAX DEDUCTED AT SOURCE

CASE STUDY….. K RAHEJA Brief facts of the Case :

SL. NO.

PARTICULARS K. RAHEJA DEVELOPMENT CORP.

GENERAL PRACTICE IN MAHARASHTRA

1 Agreement Conveyance of Land and Development for Purchaser

Agreement to sale Apartment

2 Price and Payment Separate for Land and Construction

Price for purchase of Apartment (consolidated)

3 Definition of Work Contract Similar in both the laws

Similar in both the laws

Comparison :

CASE STUDY

TAKE AWAY

Presented by :C.A. Nilesh D. ChhedaRohira Mehta & Associates

Chartered Accountants