The tax that no one saw coming
Builders across the country are in for a rude shock. They could be soon saddled with a tax burden that few, or probably none, of them have accounted for.
Developers, according to changes in the law that have gone unnoticed so far, will have to pay tax on the entire fair value — based on the ready reckoner rates — of all properties they lease out in 2018-19 and later. If a builder, for instance, leases out unsold properties having a combined fair market value of Rs 300 crore, the person may have to fork out more than Rs 90 crore as income tax. This is over and above the tax the builder has to pay tax on rent earned from the lease.
“The action of the developer to lease out unsold premises would tantamount, under the amended Income Tax Act, to a change in the character of the ‘inventory’ to ‘capital asset’. Perhaps unintended, this would severely impact many builders who should immediately pursue the matter with CBDT,” said senior chartered accountant Dilip Lakhani. Central Board of direct Taxes is the apex income tax authority under the finance ministry.
In the course of finalising the advance tax liability for financial year 2018-19, senior accountants have drawn the attention of some of the large real estate firms to the amendments (in the Income Tax Act) which are applicable from this year. While the amended law is not specific to any industry, the impact would be maximum on developers. According to the law, the ‘fair value’ of inventory’ (unsold properties) would be taxed because leasing them out amounts to conversion or treatment of the inventory as ‘capital assets’.