Things You Should Know About VAT On Property Purchase

Bringing transparency into the country's taxation system was one of the main reasons why authorities had in 2005 introduced value-added tax (VAT) in India. It was believed that other forms of goods and services taxes could be easily manipulated, making a huge dent in the government's revenue collections. Some amount of confusion, however, followed with respect to this multi-layered taxation regime and the ultimate brunt was borne by the consumer – while producers of goods and services were supposed to pay this tax, the burden of paying VAT on residential property was shifted to the end user.

PropGuide looks at key features of this tax and explains how to calculate VAT on property purchase:

When is VAT charged?

Under the VAT regime, the tax is charged at every stage of production of goods and services, for adding value to any product.

Who collects VAT?

VAT is a state levy, and the Centre acts only as a facilitator in collecting it. Haryana was the first state to implement VAT, and by 2007 about 30 states and Union territories had implemented it. Critical of VAT in the initial stage, Uttar Pradesh also implemented this tax in 2008. The rate of VAT differs from state to state; many states have also separated the tax into several categories. However, similar things are taxed on a par.

When do home buyers pay VAT?

Those who go for resale properties do not have to pay VAT on their transaction; this tax is levied only on under-construction properties. This is also true of service tax, despite the fact that the latter is a central levy. After a completion certificate is granted to a project, its developer is not liable to pay the tax. This means he can't make home buyers pay it, either.

Who pays VAT – buyer or developer?

Developers are supposed to pay VAT to states. And, unless it is clearly stated in the sale agreement, these charges cannot be extended to home buyers. As a home buyer in, say, Mumbai, it is important for you to read the sale agreement carefully to know whether it has any clauses making you liable to pay VAT on property in Mumbai.

How is VAT calculated?

Most states charge developers a certain percentage of their total project cost – minus land cost – as VAT.

Here is an example: Suppose the Maharashtra government has kept VAT charges at one per cent of the total cost of a project, excluding land charges. Now, if a developer in Pune has built a project at a total cost of Rs 100 crore, of which Rs 35 crore is the land cost, he will be liable to pay one per cent of Rs 65 crore (Rs 65 lakh) as VAT on property in Pune. This charge will be divided further and passed on to each buyer in that project. This part of VAT calculation and payment is the most confusing; there has been a lot of litigation related to this.