Black market to blame for high VAT

Developers would be unable to reduce the value added tax (VAT) percentage and pass the benefit to the buyers as a majority of them have purchased the construction materials in the black market, thereby not earning credit points. 

As per the state sales tax department’s Maharashtra VAT circular 2006, rule 58 and 58 (B), if the developers have paid various taxes while buying the construction materials, they are entitled to earn credit points on the basis of the paid taxes.

“The present 5% VAT can be reduced to 0.5% to 2%. But the problem is most of the developers purchase the construction materials, mostly sand and bricks, in the black market. Therefore, they are unable to pass the benefits to their buyers,” said a real estate expert.

However, Anand Gupta, treasurer of the Builders Association of India said that all developers are not involved in the malpractice.

“When we buy materials from remote places where people are not acquainted to the tax system, they refuse to give the bill,” he said. “But there are other factors such as development charges and buying cement and steel where the developer can earn credit points. Even though developers buy sand and bricks in the black market, the VAT should not exceed 1.3%. The sales tax department has created a mess and we all are facing trouble and confusion.”

Another developer said that each lorry of sand costs them around Rs10,000 to Rs15,000. “And most of the sand is bought from far-flung seashore areas of Thane, Ratnagiri and Nasik, where the sand mafias are active. Some of it is also brought from Gujarat. Our priority is to complete the project, so we do not insist on receipts as it might delay the project further,” he said.

He added, “We never imagined that receipts would be required to calculate the VAT. Therefore, most developers, including prominent ones, are sending the 5% VAT notices to buyers.”

The developer said that almost 20%  to 30% of the construction materials and labour cost payment is not shown on paper which makes it difficult for them to reduce the VAT percentage for buyers.

Another developer said the VAT issue was blown out of proportion. He added buyers have become so aware of the issue that they have started asking developers the VAT calculation formula. “Buyers first want to understand the formula, only then do they want to pay the VAT. It has never happened earlier,” he said.