Budget Expectations for Transformation of the Real Estate Sector
Authored by Vishal Gada is Partner, Tejas Mehta, and Shrujal Parikh are Senior Associates at Dhruva Advisors LLP
In the last few years India has witnessed remarkable movement in the real estate space. Private equity funding in the real estate sector has also seen a monumental surge. Furthermore, with the government campaign of Housing for All by 2022, the real estate sector is bound to gain more traction. To further achieve this objective, this article captures some of the expectations from the maiden budget of the new Finance Minister.
Scrapping the tax on notional income from unsold inventory
Today, a real estate developer is required to pay tax on notional rent on any unsold inventory held for more than two years from the end of the financial year in which the certificate of completion was obtained. This has led to burdensome charge on the cash strapped real estate sector pressuring them to dispose of their inventory at any give-away price which has dampened their profitability. In some scenarios, developers have also resorted to load this extra tax cost in the prices of the units which has defeated the objective of the government to provide affordable housing.
In the current scenario, where slowdown in economy has badly impacted the real estate sector, such provision should be scrapped retrospectively to provide some respite to the real estate developers and home buyers.
Expanding the applicability of deferred taxation in the case of JDAs to all categories of taxpayers
Taxation of Joint Development Agreement (‘JDA’) has remained a vexatious issue for the real estate sector. Therefore, to address the genuine hardship being faced by landowners, an amendment was brought in Finance Act 2017 to defer taxability in the case of JDA arrangement until the year in which certificate of completion is obtained. However, such amendment was applicable only to individual and HUFs and not to other categories of taxpayers.
Accordingly, extending the coverage of this amendment to other categories of taxpayers, e.g. companies, LLPs, co-operative societies, etc., would put an end to long drawn litigation in this matter.
Extending the sunset clause for affordable housing projects
Currently, 100% of profit earned from affordable housing project is exempt from tax provided such project is approved by the competent authority before 31 March 2020.
In order to fulfil the government’s objective of ‘Housing for All’ by 2022, sunset period for such approval should be extended to 31 March 2022. Furthermore, such profit should also be exempted from the ambit of MAT to bring tax parity and to provide much required impetus to the real estate industry.
Eliminating the inconsistency in revenue recognition under Ind AS and tax provisions
For a taxpayer, it is essential to have parity in recognition of any particular income under Accounting Standards and Income Tax provisions. In the case of the real estate sector, recognition of income under the provisions of the Income Tax Act, 1961 (‘the Act’) and accounting standards have created lots of litigation with no clear way forward to date, resulting in unnecessary hassles and litigation for real estate players. Under the new Accounting Standards (i.e. Ind AS), revenue is recognised in the books under Project Completion Method (‘PCM’), i.e. recognition of revenue is deferred till the time construction is fully completed, in relation to the units sold to home buyers. However, draft Income Computation and Disclosure Standard (‘ICDS’) advocates Percentage of Completion Method (‘POCM’) which provides for revenue recognition in proportion to construction completed by the developer. As a result, real estate developers would be required to offer tax on their income as per POCM which would result in a dichotomy with revenue recorded in the books.
Therefore, it is indeed need of an hour to provide clarity on this aspect by making appropriate amendment either in the Act or in ICDS thereby bridging the gap between treatment under accounting standard and tax provisions.
Expectations of home buyers
- Section 54 and 54F of the Act are benevolent provisions enacted to provide relief to the taxpayers from capital gain tax upon reinvestment of sale proceeds in residential houses. Therefore, relaxation provided in Section 54 of the Act in relation to reinvestment of sale proceeds in two residential houses should also be extended to Section 54F of the Act, thereby bringing parity in benevolent provisions.
- In the case of let out properties, entire interest expense on home loan is eligible for deduction while in case of self-occupied property, such deduction is restricted to Rs. 2 lakhs only and excess amount is lapsed in the hands of the home buyers. Thus, this is creating disparity between home buyers who are buying to earn rental income versus those who are buying for their own residence purpose. In the current scenario, where prices of residential houses are soaring, home buyers are required to borrow more funds and are required to pay heavy interest on the same. Accordingly, such restriction should be removed to so that home
- No stamp duty should be levied on direct transfer of real estate properties to Real Estate Investment Trusts (‘REITs’). This shall also require amendment in Stamp Duty laws of respective states.
- Losses of special purpose vehicles should not lapse merely due to transfer of its shareholding to REITs.
- REITs should be accorded complete tax pass-through status thereby shifting the entire tax levy in the hands of unit holders instead of REITs.
Vishal Gada is Partner, Tejas Mehta, and Shrujal Parikh are Senior Associates at Dhruva Advisors LLP. Views expressed are personal.