If the Andhra Pradesh government has eyed estate business as a mode for raising funds, the income tax department, too, has followed suit.

According to informed sources, tax officials recently raised a demand on urban development agencies for capital gains tax of 30% on land sale proceeds, which may lead to litigation. The total demand is estimated at Rs 1,200 crore.

Though governments are exempted from capital gains tax, public sector units and local bodies were brought under its ambit after an amendment, say the officials.

Sources in urban development agencies said they were planning to move the courts for redressal from the tax burden. They said urban development agencies were acting as agents to the government as regards selling of land. The realised monies belonged to the government only, they added.

For sale purposes, the state government had identified Hyderabad Urban Development Agency, Visakhapatanam Urban Development Agency, APIIC, AP Housing, Deccan Infrastructure as nodal agencies to auction government lands, officials said. As on date, these agencies have earned about Rs 4,500 crore through land sales in Hyderabad, Ranga Reddy and Visakhapatnam.

Interestingly, the state government included the proceeds from land sales in the budget for 2007-08 at Rs 9,000 crore, but could raise only about Rs 4,500 crore. It is understood that in the budget for 2008-09 the government is planning to include about Rs 13,000 crore towards land sale income. This fund will entirely be utilised to take up welfare and infrastructure schemes, sources said.

The officials thus feel that the tax would limit the government?s urban developmental agenda. The land was given by the government to urban agencies to sell and finance projects approved under the Jawaharlal Nehru National Urban Renewal Mission. “We (urban agencies) are not into the real estate business ,” officials argue. For instance, Hyderabad Urban Development Authority was asked to sell some land to finance the ‘out ring road’ project. “Now, we may have to raise additionally to part finance the ORR project,” sources said.