Supreme Court upholds the levy of VAT on sale of flats under construction, affirming the decision in the K. Raheja case

 

This Tax Alert gives an update on the latest Supreme Court (Larger Bench) decision in the case of Larsen & Toubro & Anr. vs. State of Karnataka & Anr. [TS-156-SC-2013-NT], in which the Apex Court has upheld the levy of VAT by the states on the sale of flats which are under construction, as it amounts to works contract.

The Supreme Court has affirmed the division bench decision in the case of K. Raheja Development Corporation vs. State of Karnataka [(2005) 5 SCC 162] and also upheld the Bombay High Court’s verdict in the case of Maharashtra Chamber of Housing Industry (MCHI) & Ors. vs State of Maharashtra & Ors. [2012-(ST1)-GJX-0075-BOM]. In both these cases, it was held that the State has the power/ right to impose VAT on sale of under-construction property, as the same are ‘works contracts’.

This judgment is an important development for the real estate sector as it concludes that any pre-construction/ pre-completion agreement for sale of property would qualify as a ‘works contract’ and hence, attract VAT.

It provides a technical view on the concept of works contract taxation and the resultant applicability of VAT on transactions for property under construction.