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Sep 28, 2013, 03.52 PM IST | Source: CNBC-TV18

SC upholds levy of 5% VAT, realtors hit

The Supreme Court order will have a direct impact on realtors in Maharashtra, Karnataka, and Uttar Pradesh.

The Supreme Court (SC) has upheld the right of the state governments to levy value added tax (VAT) o the sale of flats. The Maharashtra government had imposed a 5 percent VAT on contracts entered into in 2006 and 2007, a move that was contested by builders.

The SC comes as a blow for realtors who are already grappling with a demand slowdown, reports CNBC-TV18’s Ashmit Kumar.

The realtors contention was that it was unfair for the state governments to levy VAT on the materials that are used under construction and there were two parallel battles, one in the Karnataka High Court, the other in the Bombay High Court.

The SC has now taken a very definitive view on the subject. The state government does have the right, and is justified in levying such a tax on the sale of flats, the SC ruled. Looking at the fallout, realtors with exposure in the states of Maharashtra, Karnataka and Uttar Pradesh are likely to take a hit.

As far as Maharashtra is concerned, in 2006 it had issued a circular levying a 5 percent VAT. Analysts have pointed out that there are many realtors who are sheltered against this hit as they have already collected the VAT dues and have parked it in an escrow account, but there are players such as Tata Housing who have pointed out that they will be taking a hit as they have not collected the VAT dues from the end users.

Another concern on a broader level is the fact that prospectively, if the state governments were to levy such a burden, would the realtors then absorb the burden or pass it on to the end user which could have an impact as far the demand is concerned.

So there are issues that need to be looked at, but for now the circular concerning VAT has been approved by the SC.

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