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Realty gets dearer in Mumbai with 1% VAT

Friday, 26 March 2010 - 1:30am IST | Place: Mumbai | Agency: dna

Bad news for buyers: State budget levy will raise costs of under-construction property after April 1.

If you’ve booked your new flat, here’s the bad news. You will now have to pay 1% of the sale price mentioned in the agreement as value-added tax (VAT). Maharashtra finance minister Sunil Tatkare has decreed that VAT on under-construction property will be levied at this rate. Thus, if you have booked a flat for Rs50 lakh, you will have to dish out Rs50,000 as VAT. This tax can be paid through the builder or online.

The good news is that the levy, which takes effect from April 1, brings clarity to the calculation of VAT on under-construction property sales. In the earlier dispensation, the effective VAT rate on under-construction property varied depending on the level of setoffs available on taxes already paid on inputs like cement, steel, labour, etc. After the setoff, the effective cost to buyers worked out to about 2-3%. Now, this figure is a clear 1% with no setoffs.

The Bombay high court had, on a petition filed by the Maharashtra Chamber of Housing Industry (MCHI), stayed a 2007 state circular authorising the levy of VAT on construction material. After the stay, developers continued to collect VAT from buyers and deposited the money in escrow accounts. If the new 1% levy is made applicable to these past sales contracts, those who have deposited VAT in escrow accounts at higher rates could get some refunds.

Sunil Mantri, president-elect of MCHI, welcomed the government’s decision as it effectively reduced the tax burden on the buyer to 1%.

Said Mantri: “This is a major relief for new flat owners. Instead of shelling out Rs2.5 lakh earlier, they will now be shelling out merely Rs50,000 additional for a Rs50 lakh flat.”

Senior sales tax officials in Maharashtra said that there was confusion earlier due to the varying rates of VAT on construction material and labour. “VAT was levied at 12% on cement, 4% steel, etc. Developers were not adopting a uniform way to calculate VAT. We, therefore, decided to simply the computation of this tax by fixing VAT at 1% of the flat price in the agreement of sale,” said a senior official.

However, even while the state has simplified the VAT regime, there are other levies to worry about. The 2010-11 Union budget proposed a service tax on under-construction property, which effectively adds 3.4% to costs. Besides this, there is the state government’s stamp duty and registration charges.

So, in short, a buyer will have to make an additional provision of approximately Rs5 lakh to purchase a flat worth Rs50 lakh.
Property experts are a worried lot, as sales could receive a further dampener. “We are busy doing nothing,” says Pravin Makhija, a Mumbai broker based in Bandra. “We are getting a lot of inquires for flats but hardly any are converting to sales. Property sales have dropped by almost 40-50% due to prices increasing by almost 20% in the past six months. The levy of 1% VAT may worsen the slowdown.”

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