The Government of India has fathomed that housing and infrastructure are the two pillars to increase GDP and accelerate economic growth. Several initiatives have been proposed towards to promote affordable housing, addressing the demand as well as supply side through this budget. Joint Development agreement (JDA) are currently the most prevalent form of land development in the real estate sector.
Under a JDA, both land owner and developer come together for development of the property. The land owner hands over the possession and clear title of its immovable property (for e.g. a residential flat, land and building) to the developer for consideration of agreed share in the constructed property / monetary payment or combination of both, while the developer incurs the cost of construction. The balance stock of constructed property is owned by the Developer and sold as he deems fit.
Although JDA is most convenient for real estate development within the country, its taxation has been highly litigious. Under the existing provisions of Section 45 of the Income-tax Act, 1961 ('the Act'), capital gain on transfer under a JDA transaction is chargeable to tax in the year in which the transfer takes place. The definition of 'transfer' inter alia, includes any arrangement or transaction where any rights are handed over in execution of part performance of contract, even though the legal title has not been transferred.
As a result, the land owners are required to pay capital gains tax immediately on handing over of a possession of an immovable property due to trigger of Section 53A of Transfer of Property Act, 1882 in spite of the fact that the consideration thereof (i.e. the actual constructed property) will be received only after a couple of years. Further, litigation around characterization of income, timing of taxation of capital gains, determination of sale consideration etc. are is aggravating the assessee's concerns.
To remove existing hardships on JDA taxation, the Finance Bill 2017, has proposed the following:
• New sub-section (5A) to Section 45 introduced to provide that capital gain arising on transfer of land or building or both, by an individual or Hindu Undivided Family (HUF)entering into a JDA, shall be chargeable to tax in the previous year in which certificate of completion is issued for the whole or part of the project by the competent authority.
• Stamp duty value of the land owner's share, on the date of issue of completion certificate as increased by money consideration, if any, is proposed to be the full value of consideration;
• Further, the pre-sale, on or before the date of issue of completion certificate, shall lead to taxation of capital gains in the previous year of transfer.
Earlier the land holder had to evaluate the price of the land while entering into an agreement with the builder and pay the tax on notional gains. Now this payment will be deferred. Thus, this proposal will obviously settle the long drawn litigation on point of taxation of transfers under a JDA by overruling various High Court1 and Tribunal2 decisions.
At first sight, the above proposal is welcomed by the land owners as it has provided clarity on the point of taxation (when the construction of immovable property is completed) and the amount of taxation (stamp duty value on the date of issue of completion certificate). However, it is nurturing certain additional concerns listed as under:
1) The proposed amendment restricts its scope to individual and Hindu Undivided Family. There is no reason why the similar tax treatment should not be extended to Companies or housing societies given that they too are battling with the issue of taxability of JDA.
2) Transfer Development Rights (TDR) is the development potential i.e. the Floor Space Index (FSI) of land allotted to the land owners. TDRs allotted to the land owners can be used by the owner himself for development of his own plot or can be transferred to another person. As upheld in various judicial precedents, sale of TDR is not liable to capital gain tax. The position continues even after the amendment in Section 55(2)(a) of the Act as the said provisions do not specifically include TDR. However, the Income-tax Authorities may now contend that the transfer of TDR is taxable and may accordingly tax the stamp duty value of entire constructed area (including the additional FSI) in the year in which completion certificate is received. In the light of the above, taxability of TDRs and its point of incidence of tax in case of redevelopment agreements will continue to be a grave question for the land owners.
3) Stamp duty value prevalent in the year of issuance of certificate shall be considered instead of the year of entering into JDA. With high soaring prices in the real estate sector, this would result in excess outflow of tax in the hands of the land Owner.
4) Transfers of part share by the land owner before the date of issuance of completion certificate will bring the entire transaction under the tax net in the year of transfer itself. This could dampen the development of projects requiring sizable number of years for completion of construction , because, the land owners may not be willing to enter into JDA with respect of such projects
5) The period of holding for the immovable property in a JDA transaction ought to be calculated up to the date of issuance of completion certificate. However, the Finance Act 2017 has not expressly specified the same.
6) Customarily, the Completion certificate is received within 30 days of submission of the application. A situation may arise where the issuance of the certificate and its receipt fall under different assessment years. This may arise due to the considerable time lag between the time the authority issues the certificate and the time of actually receipt. If the time lag is considerably more, tax shall become payable in the previous year in which the certificate is issued; requiring the land owner to pay additional capital gains tax due to delay beyond his control.
Irrespective of the above issues, the Government has demonstrated its clear intent to promote the ever booming real-estate sector and it has proposed various initiatives to make the sector more attractive for investment.
Along with deferral of tax incidence on JDA transactions, it has proposed reduction in the period of holding for long term capital assets in case of immovable property, extension of time limit for completion of housing projects, relaxation in claiming exemption on affordable housing projects based on carpet area instead of built up area which is further increased to 60 sq. meters. Further, unsold inventory held as stock in trade is proposed to be taxed only after completion of one year of construction. This would facilitate developers to liquidate/ sell off their inventory in time.
The policy directives provided for in the Union Budget 2017 credit positivity for realty developers operating in affordable housing segment.
In this way, the Finance Bill 2017 really revolves around a dream of developing India with world class infrastructure and the proposals takes few steps forward in turning it into a reality.
1. Chaturbhuj Dwarkadas Kapadia [TS-1-HC-2003(Bombay High Court)]
2. Dnyaneshwar Mulik [TS-2-ITAT-2005 (Pune)], A. Ram Reddy] [TS-6729-ITAT-2012(Hyderabad)-O],Krishna Kumar D. Shah (HUF) [TS-5927-ITAT-2012(Hyderabad)-O] and Mrs. Durdana Khatoon [TS-5384-ITAT-2013(Hyderabad)-O]