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21 Jul 2015

States not empowered to levy VAT on transfer of immovable property - under normal provisions

Recently, on 22.04.2015, P&H High Court in CHD Developers v. State of Haryana & Ors. (TS-147-HC-2015(P&H)-VAT) upholded the levy of VAT on sale of goods in an agreement to sale of flat, and further held that States are not empowered to levy VAT on transfer of immovable property.

Rule 25 of Haryana VAT Rules was sought to be challenged on premise that levy of VAT on value of land was ultra vires the powers of State Legislature. However, Circular No. 259/ST-1 dated February 10, 2014 which provides composition scheme was declared optional and hence no deduction of land is allowed, for the lump sum dealer.

The settled pronouncements of the said case are as under –

  1. Where the agreement is entered into after completion of flat/unit, there would be no element of works contract, hence VAT is not applicable.
  2. Further, in case of developer, the activity of construction undertaken by him would be called as works contract only from the stage he enters into a contract with the flat purchaser. Thus the value addition made to the goods transferred after the agreement is entered, shall only be made chargeable to VAT.
  3. The major conditions for activity to be chargeable under VAT are –
    1. There must be works contract
    2. Goods should be involved in the execution of works contract
    3. Property must be transferred to a third party either as goods or some other form
  4. In case the Developers opt for the deductive method of calculation of VAT, the deduction of labour and like charges (similar to other work contractors as specified in rule 25 of HVAT) is admissible. However, in case of Haryana VAT, provisions for deduction of value of land for the developer are not expressly specified. Hence, the P&H HC, relying on the landmark judgment of Supreme court in the case of M/s Larsen and Toubro v. State of Karnataka {(2013) 46 PHT 269 (SC)} held that State has no power to charge tax on anything except the value of transfer of property in goods and thus deduction of land is permissible in the case of developers. (reference was also made to affidavit dated 24.4.14 of Shri B.L. Gupta, Additional Excise and Taxation Commissioner, Haryana).
  5. However, in case of non-VAT dealer, i.e. lump sum works contractor, no deduction of value of land is admissible to the developer. Here it is held that since composition method is optional to the dealer, and the same is not a charging provision, no deduction toward value of land can be granted.