A GUIDE TO SALES TAX ON APARTMENT BUILDINGS
Works Contract is most questioned and
frequently litigated issue in the Court of Law, and also between the purchaser
of the flat and promoter. The decision
of the Hon’ble Supreme Court in Gannon Dunkerleys case stating that the
expression “Sale of goods as used in Seventh Schedule of Constitution has the
same meaning as in Sale of Goods Act made the law commission in its sixty first
report to recommend to amend the Constitution of India - Accordingly 46th
amendment was passed in 1982. This
empowered the states to legislate laws to levy tax on transfer of
property. The goods involved in
execution of works contract may be in the form of goods or in any other form. Article
269 of the Constitution provides for levy of tax on sale or purchase of goods
other than news paper. In case of interstate trade and commerce, the tax is to
be levied by Government of India, but assigned to the states in which tax is
leviable.
Article 286 of the Indian Constitution works
as restraint on the authority of the same.
Work contract
One has to distinguish the difference between
contract of sale of goods and contract of work. The difference is very thin. It
is terms of the contract and nature of the obligation to be discharged, which distinguishes
works contract from contract for sale.
In case of sale of goods, goods are delivered
as they are to the purchaser, whereas in case of works contract, the goods are
delivered in a modified form. This may be well explained in the purchase of readymade
house, which is sale of goods and contract to construct a house, which is a
works contract. In purchase of readymade house, the house is delivered as it
is, whereas in case of contract for construction, the house is constructed
using various materials and delivered to the purchaser. This is well explained
in case HAL Vs State of Karnataka (1984) 55 STC 314.
Types of Contracts
There
is no well established formula by which contract for sale and contract of work
can be distinguished. Any contract which contains not only the work but also
requires goods to be used may be of the following three types;
q
Contract may
be for works to be done for remuneration and also for supply of goods in
execution of work. This is a composite contract.
q
It may be
contract of work in which use of materials is incidental to the execution of
the work. This is contract for work and labour not involving sale of goods.
q
It may be
contract for supply of goods where some work is required as incidental to
sale. This is purely a contract of work.
Agreements, where in land and buildings are
conveyed to the prospective purchaser and proper stamp duty is paid on such
conveyance are transfer of immovable property and are not liable to tax under
sale tax laws.
Agreement with Builder
However we shall examine cases, where
developer executes General Power of Attorney in favour of builders for valuable
consideration such contracts may be any of the following types;
q
Power of
attorney for valuable consideration.
q
For valuable
consideration in part and partly by way of constructed property.
Hon’ble Supreme Court in Raheja Development
Corporation Vs State of Karnataka (Appeal [Civil]) 2766 of 2000 5/5/2000
observed that “the definition of works
contract under Karnataka Sales tax is very wide and not restricted to
works contract, it also includes “any agreement for carrying out either for
cash or for deferred payment or for any valuable consideration, the building
and construction of any movable or immovable property.
Dual Role of Developer
We may also visualise a situation where a
builder himself acts as contractor. In such situation the sales tax department
considers the builder in dual capacity as contractor and as owner/builder. The
department is subjecting the builder to sales tax. The relevant case is Mittal
investments corporation Vs. State of Karnataka which was decided by Hon’ble
high Court of Karnataka. It was held as
follows;
q
If the
building was first constructed and thereafter agreed to be sold, then it was a
sale of immovable property for which no sales tax is attracted.
q
According to
the agreement, some advance has been taken at the time of executing agreement
and the balance amount to be paid in 15 instalments
q
It has not
been established that at the time of agreement, whether construction has
started by the builder.
q
The
purchaser has to purchase the land from the purchaser and not from the builder.
q
It is not
clear whether plans were approved, before the execution of agreement.
It was held that there is transfer of
property in goods and liable for tax. On
review petition it was held, the builder would not be liable to pay sales tax
under section 5B in respect of buildings which have been completed before
entering into an agreement and also in respect of agreements which have been
entered after the construction of the building was started. However, this was
overruled by Hon’ble Supreme Court in case of K. Raheja Development Corporation
Vs. State of Karnataka
Inference
The question whether a particular contract is
for sale of goods or contract for work or labour is very difficult to
determine. The distinctions and terms specified by various courts are not
exhaustive. They mainly dwell on one or two points which have come in the
cases, which are rigid and can be made applicable to all cases. The deciding
factor would be the contents of contract, the circumstances of the transaction
of the prevailing custom of the trade.The levy of the works contract tax is on
the materials used in execution of particular contract, the property which is
ultimately transferred.
The provisions relating to works contract
under Karnataka Sales Tax Act were inserted with effect from 01.08.1985 but
were given effect from 1986.Section 2(29)(b) of KVAT Act deal with the Works
Contract, which refers to the property in goods involved in execution of works
contract for cash or deferred payment. Section 2(37) defines “Works Contract”
as works contract includes any agreement for carrying out for cash, deferred
payment or other valuable consideration, the building, construction,
manufacture, processing, fabrication, erection, installation, fitting out,
improvement modification, repair, or commissioning of any movable or immovable
property.
The contractor has to include the sales tax
in the quotation itself, so that he can collect it from the principle and pay
same to the Department, if not he has to pay the sales tax on his own profit. The
developer has to include this clause in the agreement to sell and collect the
tax from the purchaser of flat and remit the same to the Commercial Tax
Department.
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