The finance minister is keen to introduce the Direct Tax Code Bill (code) in the monsoon session of Parliament and has promised to address the issues raised by various stakeholders.

One area of focus, while redrafting the Bill, is likely to be computation of income from house property.

Under law, income from rentals can be taxed either as income from house property, based on actual/ reasonable rent and with a standard deduction of 30%, or as income from business or profession by actual income/ expense method.

The code proposes that income from leasing of any house property (except specified properties like SEZs, hotels, convention centres, among others) be considered income from house property.

Under the code, for computation of income from house property, rental value shall be higher than actual rent or presumed rent of 6% of ratable value or cost of construction (where ratable value is not available).

Further, the deduction for expenses, including depreciation but excluding post construction interest, municipal taxes paid and service tax paid on rent, shall be restricted to 20% of annual rental value.

The proposed standard deduction of 20% merits an upward revision as suggested deduction may not be a fair presumption for cost of maintaining and managing properties, depreciation and pre construction interest.

Moreover, new presumptive provision is iniquitous in that the presumptive rent based on construction cost would be much lower for older properties compared to newer ones, even though both properties might be fetching similar rentals.

The code also proposes 2% minimum alternate tax (MAT) on gross assets of companies, including those engaged in leasing of property. This leads to additional burden, as without the 2% levy on gross assets, the effective tax burden in case of presumptive taxation of income from house property would be only 1.2% of the cost of the property (where ratable valuable is not available).

For businesses/ corporates engaged in business of leasing of properties, income should be computed as income from business and not as income from house property and all expenses incurred for the purpose of business should be allowed. Computation of income from house property could be provided only for small investors (individuals/ HUFs) leasing immovable property with threshold provided for built-up space or cost of construction.

Also, MAT should not be levied where leasing income is taxed as income from house property. Alternatively, leasing income should be treated as business income with appropriate modifications in respect of MAT.

The code proposes to levy presumptive tax for the full year even in a scenario where a property lies vacant for the whole/ part of the year. Due to the global meltdown, companies had curtailed their expansion plans and deferred capital expenditure. However, spurred by the buoyancy in real estate segment in earlier years, the developers created huge capacities resulting in increased vacancy rates. Even in a normal situation, expectation of 100% occupancy from the very first year is unrealistic. Therefore, the protection of vacancy allowance and deduction for unrealised rent should be provided as in the current law, especially for commercial properties.

The code defines ?actual rent? as rent ?receivable?, whether or not the rent is finally realised. Tax will need to be paid even on rent that is eventually not recovered. The code also does not provide any relief for interest expenses incurred during the pre-commencement period. Deduction for pre-construction interest should be separately allowed over and above the 20% standard deduction and on the lines of the current provisions, the deduction can be continued to be allowed over a period of five years from completion of construction of property.

Addressing the above issues would help provide a more facilitative tax structure in respect of house property income and give impetus to the real estate sector.