Remove ambiguities in the definition of works contract in construction Industry-PHD Chamber

The construction industry has called for immediate steps for resolving ambiguities in the taxation principles governing the industry since lack of clarity on the tax liability has led to arbitrary action by the authorities adversely affecting the growth of the industry.

If a building/ flat is constructed on the land which belongs to the purchaser, the activity would be construed in the nature of construction for and on behalf of the prospective buyer. In that case, both VAT under works contract and service tax would be levied on the consideration received from the prospective buyer. On the other hand, if building/flat is constructed on the land, which belongs to the builder/developer and constructed flat is sold to the buyer, the activity will be in the nature of sale of immovable property and not construction on behalf of prospective buyer. In that case, neither VAT under works contract nor service tax would be levied on the same.

This glaring anomaly was the subject of intense discussion among the builders, policy makers, consulting firms etc today at a seminar organized by PHD Chamber& CREDAI NCR on Tax Issues faced by the Real Estate Sector. Initiating the discussion, Mr. Pradeep Jain, Chairman, Housing & Urban Development Committee, PHD Chamber said “if immediate steps are not taken for rectification of this abnormality, it would lead to substantial litigation and may retard the growth of the sector. This is especially so because none of the prospective buyer is willing to pay VAT as he says what he is buying is a flat, which is immovable property. On sale/purchase of immovable property, no VAT can be levied.”

The Knowledge Partner of the Seminar was Deloitte Haskins & Sells.

The Conclave of the Builders examined various court decisions and the principles emanating from them. It also has taken into account that based on the judgment of K Raheja Development Corporation; tax authorities in Delhi and Maharashtra have already issued necessary notification even providing the method of computation of tax. “This is creating a lot of uncertainty and substantial litigation, which is totally avoidable as the intention in most of the agreements is to sell flat and not to sell proportionate cost of land and do construction for and on behalf of the prospective buyer,” Mr. Jain observed. One of the principles laid down in K Raheja Developers case is that works contract tax is payable by the builder so long as the construction is for and on behalf of the land owner/prospective buyer. However, Allahabad High Court in Assotech Reality held that activities in question are not works contract. Guhawati High Court in Magnus Construction case has held that activities are in the nature of sale of building/flats and no service is provided.