K. Raheja

The apex court has held that the tax can be levied on the development contracts. The judgment is reported in 141 STC 298. Now, whether the development contract is the executory contract or not is an another issue. We do not want to express any opinion on that aspect. Nor we want to comment upon the competency of the State legislature to define ‘Works Contract’ in the manner it has defined the same. We have left it to the affected persons (developers). They should now move the Court and get the redressal.

But we would certainly like to expose the bureaucracy. The Commissioner of Sales Tax, Maharashtra State has issued Circular No. 12T of 2007 dated 7th February, 2007 and has informed the trade how he has followed the judgment of the apex court and introduced the definition similar to that under the Karnataka Act. It is also learnt that in his interview with the media he informed the public that such measure should curb the black money.

We welcome any such welfare measure undertaken by the Government. But will it really benefit the common man? We have received information that the flat purchasers are being asked to pay five per cent composition on the sales price of flats. All such agreements contain a clause that any future taxes would be borne by the customers. Poor common man will have to pay stamp duty and the VAT on full value as well.

We do not blame the developers for making such exorbitant demand. They were never under the tax net. All these years they have paid tax at the most purchase tax on their URD purchases. We blame the bureaucracy. When you make somebody liable to pay tax, you should also ensure that he does not recover or pay anything in excess. Unlike Karnataka, in our State the price offered per square feet for sale of flat also includes the price of land. There are no two separate agreements for land and construction. Rule 58 is not amended to allow the deduction for the price of land. The lump sum deduction of thirty per cent may be justified in case of the contractor but not at all justified in the case of developer.

The Commissioner of Sales Tax will also have to explain the applicability of the set-off rules in case of developers. Clause (g) of Rule 54 speaks about ‘employer’. MHADA, Slum Development Authority are the employers for the contracts which those would be awarding. But take a case where the developer and owner is one and the same. Who is the employer in such a case? Prospective purchaser? This is what apex court says in K. Raheja. See paragraph 19 of the judgement.

The developer now becomes the dealer. The Commissioner should now decide whether the property in the goods purchased by the developer gets transferred to him or owner of the land or to the customer for the purpose of clause (h) of Rule 54. Kindly see the judgment of the apex court in Gammon Dunkerley & Co. reported in 9 STC 353 and the observations of their Lordships on Page No. 385 regarding the transfer of property. All these implications should have been explained in the circular issued by him. This would have enabled the developers to know their exact liability and relieved the common man from paying exorbitant taxes. We pray that, this be immediately done.

It be remembered that the exercise of power of taxation in relation to building activity is going to affect the housing projects of the under privileged and weaker sections of society. It has socio-economic effects. Kindly see the concern expressed by the apex court in Builders Association’s case on Page No. 403 of 73 STC.

Meanwhile, we wish to bring to the notice of the developers the following observations of the Court in the case of Builders Association of India reported in 73 STC Page 370 on Page 400 (third paragraph).

"After the 46th Amendment, it has become possible for the States to levy sales tax on the value of goods involved in a Works Contract in the same way in which the sales tax was leviable on the price of the goods and material supplied in building contract which had been entered into two distinct and separate parts, one for sale of goods and other for supply of labour and services."

In other words the payment of tax even under the Works Contract can’t be more than the tax leviable on the sale of materials by the traders. The sale price of materials in case of developers can’t exceed that of the wholesalers. They can unhesitantly work out their tax liability considering those prices and disregarding Rule 58 which is directory. They should also claim the input tax credit and they shall get it.