A recent judgement of the Supreme Court is likely to have a far-reaching impact on owners of real estate.

Home and commercial property buyers face the prospect of having to fork out value added tax on their apartments for construction materials, over and above the money they have agreed to pay the builder to acquire the property.

The minimum VAT on construction material is at 4 per cent, though the rate may vary slightly from state to state.

Maharashtra has already implemented the judgement in a circular it issued on February 7, 2007.

The state will begin levying VAT on construction materials and the value of construction in all pre-launches -- that is, on contracts that precede construction -- with retrospective effect from June 20, 2006. Realty companies fear that this might start a chain reaction in other states, in a bid to increase revenue collection.

Quoting the judgement, the circular stated that works contract includes "...any agreement for carrying out, either for cash or for deferred payment or for any other valuable consideration, the building and construction of any moveable or immovable property."

In layman terms this means that in cases where buyers purchase houses before completion of construction, builders would be levied works contract tax on the building material.

Buyers will have to begin shelling out more as they have to bear the tax burden. Customarily, there is an understanding between the buyer and the real estate developer that until the buyer takes possession of the development, any impact of changes in taxation would be borne by the developer.

-Rediff News
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