Generally, the developers, who are not builders, enter into agreement through works contract to build the apartments.  Wherein, such activities attract VAT and SERVICE TAX. The average buyer has to enter into two agreements.  One, for the undivided share of the land,( Agreement to sell)and the other, construction agreement.  Executing two agreements confuses the buyer.  Is it necessary? NO.

A single “Agreement for Sale” reflects the true nature of the transaction between the landowner/developer and the Purchaser. It can be argued that transactions involving transfer of immovable property attracting payment of Stamp duty cannot be subjected to tax on sale of goods or services attracting VAT or Service Tax. In order to strengthen one’s case, one could consider registration of the “Agreement for Sale” with the sub registrar. It is possible, that the department will contend the transaction to be taxable. In order to mitigate the impact of taxes it is advisable to have an all-inclusive price as far as the purchaser is concerned. The “Agreement for Sale” or any other documents / brochure etc., must not indicate any collections from customers towards taxes, since taxes are not being collected. In order to mitigate the hardship on account of levy of taxes, if any, by the department at any future date, it is advisable to maintain adequate bank deposits, equivalent to or higher than the tax amounts. Some developers also feel that an “undertaking” from the customer would suffice. Some others are also looking at escrow accounts wherein the monies collected as “deposits” can be deposited to take care of possible future litigations.

The concept of “single agreement” is yet to be tried and tested. Litigation is a certainty in this situation. The Courts are yet to lay down a sustainable guideline in a “single agreement” scenario. The matters are also yet to be tested by the developers. Therefore, the developers may be guarded. In adopting the “single agreement” concept. The builders/developers may also feel that indirect taxes are passable to the customers and therefore take a stand as to why look at a scenario which has to be litigated.

General practice followed by developers

Most of the developers are still following the two agreements concept- one for sale of undivided share of land and the other for construction. In the last few months some of the developers have started trying out the concept of “single agreement” theory. But was given to understand that the prices are determined by the developers by taking into consideration the possible future litigation and also on the premise that customers may not pay the taxes at a future date in case the litigation fails, and Courts fail to accept the “single agreement” concept.

a. Single agreement concept

A single “Agreement for Sale” reflects the true nature of the transaction between the landowner/developer and the Purchaser. This, in my view is the best option. However, the law, in this method is yet to settle down since we do not have a legal sanction. The risk is higher in this methodology but I believe that it must be a workable proposition. Litigation is a certainty in this model.

b. Regular method of paying taxes

This is a tried and tested method. It has the sanction of law and would be a cumbersome process but the impact of taxes can be minimized if properly planned at the project inception stage. It is a generally advisable method of payment of taxes.

c. Composition method of paying taxes

This is a hassle free method of paying taxes. It has the sanction of law but it is tied up with various conditions and restrictions. One needs to take a call on a case-to-case basis before opting for payment of taxes under this scheme.