Tax Talk: Tax norms on joint land development need a relook

Tax Talk: Tax norms on joint land development need a relook

Landowning corporates should also get capital gain tax deferral benefit

By Vishwas Panjiar

Land prices in tier I and tier II cities have risen considerably in the past couple of decades. This has made Joint Development Agreements (JDA) a preferred mode of developing real estate projects as the land acquisition cost is not front loaded in such an arrangement. Under a typical JDA, a developer takes possession of the land for development and in lieu  delivers a pre-determined area of the constructed premises to the landowner or a monetary consideration or a combination of both.

In a typical JDA, a landowner contributes his land and assigns rights to the developer to guestobtain the mandatory approvals and possession to undertake the construction. As per the JDA, the revenue and/or the constructed area (landowner’s share) is handed over to the landowner in due course. Also, in most cases, the landowner secures a security deposit from the developer.

Capital gains in case of JDA

The capital gain is chargeable to tax in the year in which the transfer of the capital asset takes place. Accordingly, in case of JDA, landowners were subjected to tax on capital gains earned from sale of land in the year of handing over possession of the land whereas the actual consideration is received (in form of revenue from project sale or constructed space) much later.

To minimise genuine hardship in the case of JDA, the government had in 2017 inserted provisions allowing the deferral of capital gain tax in case of individual and Hindu Undivided Family (HUF) from the year in which the possession is handed over to the developer to the year in which the certificate of completion for the whole or part of the project is issued by the competent authority. The beneficial provisions are available when the landowner is an individual or an HUF. Accordingly, benefit of tax deferral cannot be availed if the landowner is an entity such as a company, partnership firm, LLP, etc.

The government has not given any rationale for excluding other forms of entity for the benefit considering that it would be a classic case of unfunded tax liability in case of other taxpayers.

Horizontal equity in tax laws

Equity is an important consideration within a tax policy framework. Horizontal equity suggests that taxpayers in similar circumstances should bear a similar tax burden. The approach adopted by the government to extend benefits to one group (being individual/HUF) of taxpayers and simultaneously exclude other taxpayers in similar circumstances represents a fundamental flaw in the taxation policy framework.

By the government’s own admission, the change in law was necessitated to “minimise the genuine hardship which the owner of land may face”. Accordingly, in order to restore equity in taxation, the government should, in the upcoming Union Budget, extend the benefit of deferral of capital gain tax for landowners, in case of JDA, to other forms of entities as well. This will not only bring the taxation of JDA at par for different types of taxpayers, but would also avoid a situation of unfunded tax liability, thereby reducing unnecessary litigation.

Law of the Land

• In 2017, deferral of capital gain tax was allowed for landowning individuals & HUF from the year when possess-ion is handed over to the developer to the year in which completion certificate is issued

• Exclusion of corporate entities in similar circumstances has led to unfunded tax liability & unnecessary litigation

(Disclaimer: The writer is partner, Nangia Andersen LLP. Inputs from Shubham Jain, manager, Nangia Andersen LLP. Views are personal)