Reaction to retrospective 5% VAT in Maharashtra

There has been a prolonged flip-flop in progress with regards to the VAT issue, and the matter was sub judice for quite a while. Earlier, VAT was proposed to be at 5% but was lowered to 1%, and has now been fixed at 5% after all. This will have an obvious negative effect on buyers, because developers are bound to pass the added cost on to them. In cities like Mumbai, this definitely does not spell good news in a scenario which is already defined by high inventory pile-ups and reduced sales.

On the one hand, the market was awaiting new policies that would aim to boost flagging home sales. However, the Government's need to ramp up its fiscal deficit by generating additional revenue seems to have gained the upper hand.

Buyers who had purchased their homes in 2006 would have taken possession of their homes by now and would not be affected. However, those who had made their purchases in under-construction projects in 2010 and have not yet received possession will have to pay 5% extra on the final amount. In some cases, developers have protected their customers from possible VAT-induced price escalations by specific clauses in the agreements, but such incidences are exceptions rather than the rule.

In our view, this ruling will probably lead to a higher degree of disputes between buyers and developers, but will not necessarily result in cancellations. In certain areas, there may be viable alternatives to new constructions available on the resale market. If such options exist, buyers can definitely consider those options.