With this, buyers making payments before June-end for underconstruction properties will be charged 1% VAT, while payments made after that will attract 6% state GST under the new tax regime

MUMBAI: In a move that would impact all real estate transactions across the state, the Maharashtra government has issued a notification to levy value added tax (VAT) based on staggered payments received from home buyers.

With this, buyers making payments before June-end for underconstruction properties will be charged 1% VAT, while payments made after that will attract 6% state GST under the new tax regime.

Currently , property transactions attract VAT at 1% of the transaction value payable at the time of registration of the agreement. However, with the amendment in the Maharashtra VAT Act, the buyer will have to pay the tax at the time of making staggered payments to the developer. The treatment for payment of VAT is now aligned with the service tax, which is also charged based on milestone payments. With these changes, a home buyer making payments up to June 30 will need to pay tax of 5.5%, including 1% VAT and 4.5% service tax. Post-GST implementation, the same home buyer will have to pay 12% GST, including 6% Central GST and 6% state GST for payments made from July 1. Effectively, home buyers making payments before June 30 will be paying 1% VAT, while any payment post-June end will attract 6% SGST.

“The recent amendment by the Maharashtra government is a welcome move by which the buyers are getting the benefit of VAT payment in a staggered manner instead of paying upfront at the time of registration. However, this positive move will turn out to be negative keeping in mind the advent of GST from July 1, because all payments after GST implementation will attract SGST at 6% against 1% VAT,“ said Rohit Jain, senior partner and Harsh Shah, partner at legal firm Economic Laws Practice.

Jain feels that home buyers may be better off making payments before July 1, especially for housing projects that are nearing completion in the next 3-6 months.

Property buyers will benefit if they avail of the window until Juneend to make the remaining payment for their ongoing deals. However, they will have to bear the burden of additional tax levy if the payments are made after July 1. The burden is expected to be accentuated in tier I cities such as Mumbai and Pune, given the expensive property prices there. While the 12% GST through works-contract comes with eligible input credits on all procurements, such differential credit under the GST regime would not be in excess of 2-2.5% of the agreement value for places like Mumbai, experts said.

“The claimant dealer (builder) opting to pay composition amount (1% VAT in the current regime) under this scheme shall not be eligible to claim to set-off of taxes paid in respect of the purchases (input procurement),“ said the government of Maharashtra's notification.

Thus, under the GST regime, the tax cost for property buyers is likely to increase by around 4.5%, which is the difference between 12% GST and current tax cost of around 7.5%. The current 7.5% tax levy is total of 4.5% service tax, 1% VAT and 2-2.5% of tax credit loss.

The property buyers of projects that are nearing completion may take a bigger hit considering that most of the goods may have already been purchased by the developer. For such projects, the tax cost may be even higher than 4.5% and could go up to 6.5% if all goods have already been procured under the current regime.

“Through this amendment, it is likely that the state government will receive higher tax revenues where the payments are received by the developer on or after July 1,“ said a senior tax consultant.

The notification is effective from June 1 and hence for agreements registered up to May 31, VAT liability will be continued to be paid upon registration.