The crisis in the real estate sector is likely to deepen with the income tax (IT) department, reportedly, set to levy a tax on unsold apartments, which have been vacant for more than one year. This means that if a real estate company fails to sell an apartment after one year of receiving the occupation certificate (OC), it now has to pay tax on the property, clarified Abhishek Gupta, leader of Corporate and International Tax at PwC. Gupta reiterated that the government’s intention is to reduce real estate prices but to make the sector pay for holding stock-in-trade is unfair and draconian. Moreover, it singles out the housing sector. Developers echo this sentiment. Niranjan Hiranandani, chairman, Hiranandani Developers, said: “A developer will feel dis-incentivised to build because the market is volatile and he might be liable to pay tax should he not be able to sell. The impact on unit launches might be significant in the months to come. In a sense, it defeats the government’s purpose of creating surplus housing.” Rather than increasing supply, such measures will lead to more cautious build-outs and prove counterproductive, argue realtors. There has been no meaningful price rise across the major cities over the past four years, so the question of hoarding to fish for an escalation in prices seems like a goose chase, contend experts. They argue that developers are today genuinely unable to sell because of a lack of demand.
Developers may have to pay a tax equivalent to 30% of the rental value, assuming that the apartment or apartments in question can be rented out. Effectively it might translate to 10% of the property value over a period of time, Gupta estimated. This means, on a projected price of Rs 6 crore, a developer could end up paying about rS 60 lakh as tax. Those building luxury homes might end up paying crores in tax, as such units traditionally have a longer sales cycle. At the end of September, as many as 450,000 units were unsold in the country, said Ashutosh Limaye, Research Head at JLL India, a realty consultant. Of these, approximately 45,000 units could be ready but unsold, which could potentially attract this tax.
That being said, over the past few years, as developers have focused more on execution than new launches, the pressure of unsold inventory has somewhat reduced. A recent Fitch report said, “We expect unsold inventory to fall in 2018 as most developers will focus on completing their projects to comply with RERA”. An indication of the introduction of this tax was made in the union budget earlier this year, when it was proposed that if any house is held as stock-in-trade and such property is not let out during the whole or part of the year, the deemed annual value would be nil for the period up to one year from the end of the financial year in which certificate of completion of construction of property was obtained from the competent authority. The implication was clearly that after the one year period, the property would be taxed.
With further steps being taken in the direction of introducing such a taxation, the industry is clearly nervous and upset. This is more so because the sector isn’t going through the best of times. Buyer interest has been sporadic at best. Sales plummeted to historic lows with demonetisation a year back and until August, they were still more than 20% lower than last November. Without any fresh stimulus, the housing sector has had to deal with a series of disruptions. Implementation of RERA and GST have negatively impacted sales. “Except for tempering mortgage rates there has not been any meaningful trigger for a recovery to kick-start,” said Sharad Mittal, head of Motilal Oswal Real Estate Fund.