Wednesday, September 25, 2013

LBT chared by Builder, Whether Right?

I have received many questions and queries regarding whether builders are allowed to charge extra LBT over and above the consideration for the house/ shop.

I had also explained this previously through comments on this post, but not so in detail, considering that many customers are being harassed by the builders by charging extra LBT over and above the agreement value, it become important that we all understand what is right and what is wrong.
If the builder asks you to pay LBT, take printout of this post and give it to builder. You can also translate it to any language before taking printout.

This discussion requires some maturity to think and also considers some ethics issues. So if you feel that there is no Ethics in business, then this discussion is probably not for you.

First of all let’s be clear as to what can be charged from customers from builders and what forms the consideration for a house.
Land cost
Material – Cement, Iron & Steel
Labour – skilled and unskilled
Designing – Architect fees
Planning – Landscaping
Administrative – Accounting, Auditing
Sales overheads – Advertisement
Infrastructure – Light & Water connection
Other facilities – Parking, Club Membership
Registration – Society registration fees
Taxes – VAT, Service Tax
And at last over and above these costs his profit

From this above list what breakup generally as a customer receives is this:
House Value                     yy
(Built-up X Rate)
VAT                                 yy
Service Tax                      yy
Stamp duty                     yy
Registration fees              yy
Total consideration          yyy

That’s all, no further bifurcation. So suppose the Service Tax rate increases, the consideration shall also be increased proportionately by the builder. This is right the amount derived for calculating consideration considers Service tax. This logic also applies to VAT, Stamp Duty, and Registration Fees.
What if now suppose there is increase in cement rates in the market, will the builder charge extra consideration after it has already entered into agreement? The answer is No (of-course), so is the case of LBT. He can’t charge extra LBT as this is not considered for calculating consideration.

If still not convinced that it should not be charged then continue reading for other reasons.

2nd Logic

Let’s take the situation of pre LBT times, when octroi was prevailing. Did the builders charge octroi in the calculation of consideration? The answer is No. Then why charge LBT?
Even if there was any change in Octroi rates, the burden (if rates increased) and benefit (if rates decreased) was never passed on to customers. Thus LBT cannot be passed on to Customers.

If still not convinced that it should not be charged then continue reading for other logic.

3rd Logic

The agreement generally provides that if there is any increase in the taxes, those shall be borne by the buyer. The word taxes in these agreement means those taxes which are applicable on the sale of House i.e. VAT and Service Tax. LBT in no way can be included in this definition. Thus there can’t be additional collecting of LBT over and above Consideration.

If still not convinced that it should not be charged then continue reading for Final logic, which shall definitely be convincing.

4th Logic – The Ultimate one

Under the Octroi regime the builders used to pay for the goods which entered the city limits, there was no substitute for this payment, but under LBT Rules, builders can opt for “Lump Sum Payment scheme” and can pay mere 10% (Rough Calculation) of what they used to pay under Octroi.

This means LBT shall actually lessen the burden of entry taxes on Builders. Instead of builders charging for LBT, Customers should ask for reduction in the prices.

LBT is mere replacement for Octroi and thus not a new tax, thus collecting extra for this is totally unethical.

Thus, I conclude the discussion and hope that after reading this, builders shall agree that LBT should not be charged to buyers.

(This discussion is taken from and written by Adarsh Ashok Madrecha)

(If you are giving printout to builder restrict in to this line only)

But the discussion on this topic continues as to state legal aspects of charging LBT.

Unfortunately, there is no provision (or at least I am not aware of) which states that LBT can’t be charged by builders on the agreement.

If still builder does not convince that LBT should not be charged then as a buyer the best option will be to convince him to charge only the amount of LBT which he is actually paying. So you need to know what amount of LBT he is supposed to pay.

The amount of LBT unlike VAT or Service Tax is not based on percentage for builders. It is paid on per square meter basis (Please be careful that it is meter and not foot). The table for LBT for builder is posted here