Present government have constantly emphasized on Infrastructure and development projects and its objectives is clearly evident in last year and this year budgets. Both has focused on Infrastructure development policies and tax benefits. Real estate is one of the important limb of Infrastructure. The sector has been witnessing slowdown in last couple of years and post demonetization the sector has been affected further due to reduction in demand, halted projects, and uncertainties over property prices. Government has rolled out The Real Estate (Regulation and Development) Act(RERA) and Benami transaction Act to make the sector more organized and sanitized, and that is in line with its drive against black money. However, Government has provided boost to real estate sector by providing policy measures such as providing affordable housing to people living in kutcha houses, refinancing housing loans etc.
Government has also proposed certain relief and relaxations in its direct tax proposalto real estate sector. The proposed amendments are sought to bring in Section 2(42A), Section 23, Section 80-IBA, Section 45 and section 55 of Income Tax Act, 1961. The impact of these amendments has been discussed in ensuing paras.
Section 45(5A) – Joint development agreements
The major amendment of all of the above is relief to joint developers. Joint development is an arrangement whereby the land owner having vacant land without capital and facility to develop the land enters into an agreement with a developer or builder who are financially and commercially equipped to develop land into lucrative projects. Joint development arrangements has always remained contentious issue; there are litigation and disputes pending on capital gains tax incidence. Tax authorities have held that capital gains incidence is triggered in the year in which land owner enters into an agreement with the developer on the ground that execution of agreement is part performance of contract which confers developer with right over the property. Further, Courts have laid down rationale wherein capital gains is ought to be computed in the year in which possession is handed over by land owner through the execution of agreement. Courts further held that the deposit money received on entering into agreement and cost of construction incurred by developer or builder as full value of consideration in hands of land owner. Courts negated the argument of land owner that on signing the agreement owners do not receive any actual sale consideration, the sale consideration is received only in subsequent years when the flats/houses are sold. On account of this land owners faced cash crunch to pay the capital gains tax in year of entering into agreement and there were huge demands pending against the land owners. Disputes are pending before various appellate forums. The taxpayers of this sector had made representation to government in order to rationalize the provisions. The expectations of the tax payers has been met by amendment proposed in the provisions of capital gains tax.
The proposed amendment provides that in case if land owner being individual or HUF enters into an agreement with developer for development of any project, the capital gains will be chargeable to tax not in the year of execution of agreement but in the year in which certificate of completion has been received from competent authority. Further, stamp duty value of the share of land owner in land or building or both on the date of issuing completion certificate will be the full value of consideration for purpose of computing capital gains.
At present there are instances where developers defer in obtaining completion certificate or may not obtain completion certificate. However, at present since RERA is in place the incidence of obtaining completion certificate is regulated by RERA. As per the provisions of Chapter II of RERA a promoter being a person who develops land into a project or any development authority will be barred from advertising, marketing, booking, selling or offering for saleetc to purchase any plot, apartment or building, as the case may be, from its project without registering or obtaining necessary constructions approvals under RERA. On registration the promoters are likely to inform expected date of completion of project to the real estate regulatory authority. If the promoters sells the plot without obtaining completion certificate then the project will be deemed to be ongoing and promoters may have to refund entire money with interest to allot tees on their demand. Further, RERA also provides penal provisions for revoking the registration on indulging any unfair trade practices. Hence, in interest of Promoters they are responsible to obtain completion certificate from the relevant competent authority to sell the flat or any part of the project to the allot tees individually or to the association of allot tees as the case may be. For income tax purpose, the year in which completion certificate is obtained capital gains tax will be triggered.
If the land owner relinquishes its right before completion of the project or before the date of issuing completion certificate then the land owner will be liable to capital gains tax in the year in which joint development agreement has been signed. Land owner will not be entitled to the exception provided in the above amendment.
Section 80IBA – Profit linked incentives
In budget 2016 new provision was inserted to provide profit linked incentives to housing project entities wherein one of the conditions to claim deduction was to ensure the built up area of residential units does not exceed 30 Sqmetres if project is located in metro cities and 60 sq meters if any other location. Realistically the said condition did not reap much benefit.
Subsequently, in the current year's budget with a view to make the schemes more attractive the provision is proposed to be amended in order to consider carpet area instead of built up area. "carpet area" means the net usable floor area of an apartment i.e., excluding the area covered by the external walls, balcony or verandah area and open terrace area, but includes the area covered by the internal partition walls of the apartment. In metro cities the difference between carpet area and built up area can be as much as 30-40%. Hence, outcome of proposal to consider carpet area a number of projects can avail benefit of profit linked incentives under the said section. Further, looking at long gestation period for completion of housing project, the earlier restriction of three years for project completion has been extended to five years.
Section 23 – Deemed Income from house property
In practice, the developers or builders have many projects running at a time due to which there are number of house properties completed and ready for sale. Realistically it takes more than a year or two in order to market and sell these houses. On one hand their funds were blocked into the housing projects and on other hand there were huge demands enforced by tax authorities. The tax authorities raised demands against builders on unsold house properties by taxing it as income from house property under deeming provisions. On appeal, Courts have held that the residential units which remained unsold after the completion of projects are property of builder and hence to be taxed as deemed income from house property. Courts negated the argument of builders that such properties are not house property of builders but instead are stock in trade. There are lawsuits pending against number of developers/builders across the country. In view of such hardships the builders /developers had expectations from the budget that the house properties held as stock in trade should not be included in deeming provisions of income from house property.
In view of above the budget proposes to insert new sub section which provides that builders are given relaxation on deemed income from house property for limited period. As per the proposed amendment the annual value of property will be nil if any land or building held as stock in trade by builder or developer which is not let out for a year from end of the year in which completion certificate is obtained. The expectation of developers was to get complete exception from deeming fiction under income from house property with respect to properties held as stock in trade, however, immunity has been granted only for a year from the end of year in which completion certificate is received. On completion of a year from the date of obtaining completion certificate if there are any unsold properties or flats then deemed income would be taxable and builders or developers would have to resort to Court rulings to get immune from deemed income.
Section 2(42A) –Long term capital asset definition amended
The fourth amendment is in Section 2(42A) wherein holding period of land or building has been reduced from existing 36 months to 24 months in order to qualify as long term capital asset. Hence, on transfer of land or building after 2 years the capital gains will be taxed as long term capital gains at a rate lower.
Section 55 – Base year
The fifth amendment is in with respect to base year for purpose of indexation which has been changed from 1.4.1981 to 1.4.2001. Also, for computing the fair market value of old properties the taxpayers now have to obtain valuation certificate for FMV as on 1.4.2001 instead of 1.4.1981.
For instance, if a person who had brought any property in the year 1987 and sells it in the year 2017 then he would have to index the cost of acquisition by taking base year as 1987 and transfer year as 2017. In view of proposed amendment the person now can take fair market value of such property as on 2001 and index the same by taking base year as 2001 and transfer year as 2017. As a result of this amendment the tax payers having property acquired prior to 2001 will get benefit of higher cost of acquisition when compared to its position under earlier provisions.
Further, reference given to the year 1981 in present Act makes it more unrealistic for the tax payers to obtain fair market value of property in such year, hence, proposed amendment is to make the provision rational.
It is perceived that government has given relaxations to real estate / housing sector to make it more attractive for investment for taxpayers to stimulate growth for real estate sector, which is affected severely due to demonetization.