Few Mumbai Real-estate Developers Collecting LUC Tax Despite SC Order

Despite a November 2022 ruling by the Supreme Court (SC) against the tax on Land Under Construction (LUC), builders in Mumbai have continued to collect the tax from home buyers, consultants and property lawyers told Businessworld. A division bench of Justice UU Lalit and Ajay Rastogi in the SC had upheld an order of the Bombay High Court (HC) of April 2019, which said that Municipal Corporation of Greater Mumbai (MCGM) cannot levy property tax on the capital value of the LUC.

The court's ruling came in response to a petition filed by the Central Mumbai Developers Welfare Association (CMDWA) in 2016. The court's ruling included the following key points:

"If any builder is collecting Land Under Construction Tax (LUC) from flat buyers or home buyers, then the builder is legally, morally and ethically wrong. The Supreme Court Order is very clear that the collection of LUC is illegal. In fact, after the court order it is clear that even the Municipal Corporation has to return any such tax collected and people can also file for contempt of court proceedings," said Anand Gupta, Vice President, Builders Association of India.

The court ruled that the MCGM can only consider the current physical attributes and status of the land and building when determining its capital value. The court ruled that the MCGM cannot consider future prospects or the FSI of the land when determining its capital value.The court ruled that the MCGM's rule-making powers cannot create a liability for the period before the rules came into effect.

Yet, a few real-estate developers in Mumbai are still collecting the tax from the home buyers blatantly by mentioning the same in the property purchase agreement, which is illegal, a lawyer fighting the case said. According to the lawyers, against such practices of the builders, the property buyers can approach the Maharashtra Real-Estate Regulatory Authority and file a complaint.

The MCGM had been levying property tax based on the “capital value of the land under construction” formula, which has forced developers to pay exorbitant amounts in tax. Central Mumbai Developers Welfare Association (CMDWA) had filed the petition, challenging the rules framed under the Capital Value system by the MCGM.

The SC order also meant the MCGM may have to refund the amounts with interest collected as prohibitive taxes from the developers from 2010 till now. It is estimated that the MCGM has earned the revenue of about Rs 5,000 crore per annum from taxes imposed on land under construction.

The controversial Rule 20-22 on LUC that was taken down by the Bombay HC and upheld by SC, took into consideration the potential of construction on the vacant land for a valuation. And it took almost a decade, and a lengthy legal battle for many federations like the Central Mumbai Developers Welfare Association (CMDWA) to convince that under construction will have to be treated as vacant land in the new property tax regime. Property tax is among the biggest and ‘crucial’ revenue sources for the BMC, especially since the abolition of the octroi. "The supreme court upheld no provision under the BMC Act to consider the development potential of vacant land for determining its capital value," the SC upheld.