Budget 2018: 2017 was a year of transformation for the real estate sector, legislatively. In the wake of the Real Estate (Regulation and Development) Act, 2016, Goods and Services Tax, and a number of other factors working in favour of the real estate sector (such as reduction in interest rates), expectations of the industry from the Union Budget 2018 were high. The Budget has, however, only mildly touched upon the real estate industry, leaving a lot to ask for.
We have analysed the hits and misses of the Budget with respect to the real estate sector below:
Deemed income taxation – marginally liberalised – A 5% standard reduction?
The Income Tax Act, 1961 (IT Act) enlists some deeming provisions which allow the tax authorities to make upward adjustments where the consideration received for an immovable property (whether held as a capital asset of stock in trade) is less than the circle rates of the property. These deeming provisions require the seller to pay tax at least on the circle rate of the property sold irrespective of the actual consideration received on its sale.
The purchaser may also be taxed on this difference on account of a deeming provision treating the difference as a receipt of benefit. This leads to levy of double tax on a deemed consideration. While this dual taxation has been acknowledged, no provision has been introduced to exclude the applicability of either of these provisions in a given transaction.
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There are rulings wherein some relaxation was given from the applicability of deeming provisions in case of sellers where there was not much difference in the actual consideration received and the circle rates. This relaxation is now proposed to be codified and no upward revision of consideration shall be made where the difference between the circle rates and the actual sales consideration is 5%, thus providing for a small buffer.
Conversion of ‘stock in trade’ into ‘capital assets’ brought under the tax net
While there is a provision dealing with conversion of capital asset into stock in trade and related tax levy, there was no provision to address the taxation of a reverse situation.
The Budget addresses this and proposes to tax any gain arising from the conversion of stock in trade into a capital asset, as business income. As is the case in conversion of capital asset into stock in trade, one will need to value the asset on the date of conversion and tax will be levied on the transfer of such converted asset in two parts- one being business income on the difference between the purchase price and fair value of the asset on the date of conversion and the second being a tax on capital gains on the appreciation after conversion.
‘Project Completion Method’ withdrawn
The Budget has proposed a provision that mandates that the profits arising from a construction contract or services contract will need to be ascertained on the basis of ‘percentage of completion method’ in accordance with the Income Computation and Disclosure Standards (ICDS). This means withdrawal of the other alternative presently followed in real estate projects i.e., ‘project completion method’ under which one could defer payment of taxes until completion of the entire project.
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What could have been covered
The Union Budget has not touched upon several grey areas in real estate taxation as well as expectations of taxpayers. Some of the misses from the Budget are:
# Deferral of tax arising on joint development agreements which was introduced for the benefit of individuals and Hindu Undivided Families in last budget has not been extended to other tax payers (corporates, partnerships, etc);
# Home buyers have received no respite from the Budget and the loss from house property for a tax payer remains capped at Rs 2 lakh;
# Builders and developers continue to be saddled with tax on their unsold inventory (owing to tax on deemed rent for inventory lying for more than one year);
# No relaxation from applicability of tax for contribution of immovable property into Real Estate Investment Trusts.
(By Ashish Mehta, Principal Associate, and Krutika Chitra, Associate at Khaitan & Co)