John F. Clark 
The once-booming real property zone, which contributed to India’s monetary increase in the last couple of long times, has been experiencing an economic slowdown in current years. Though such a slowdown is a result of a couple of economic elements, there have been some vital tax & regulatory issues in the course of the beyond three hundred and sixty-five days, which also impacted the actual estate area. Some of the key taxation developments which impacted the actual property are mentioned hereunder.
Direct taxes
Before FY 2018-19, on the sale of immovable assets, profits from capital profits, business earnings, and other resources changed into taxed on higher sale attention as in step with settlement and stamp duty fee. From FY 2018-19 onwards, the agreement fee has been considered a sale consideration as long as the difference between stamp responsibility price and agreement fee isn’t always greater than five% of the contract fee.
While this became a welcome step to assist reduce trouble in case of true transactions within the actual estate zone, where variation might also arise in recognize of similar properties inside the same place, the tolerance band of five% may not be enough seeing that real deviation between circle rates and marketplace quotes in some areas is as high as 30%.
Another pertinent trade at some point of the yr became on inventory tax. Since 1985, conversion of capital assets into stock-in-exchange has been taxable as capital profits in the year while the converted item is offered. For this purpose, the Fair Market Value (FMV) changed into deemed the sale attention on the date of conversion, even though the actual sale may also arise in the end.
According to the Memorandum to Finance Bill 2018, the absence of taxing conversion of stock-in-trade into a capital asset was the main to asymmetrical remedy and tax deferment. Despite more than 30 years of having no particular guidelines in this issue, the Income Tax Law was amended to treat FMV on the conversion of inventory into a capital asset as business profits of the taxpayer in the yr of conversion (not on eventual sale).
Instead of bringing symmetry, the modification results in a few lop-sided effects. For example, not like the conversion of a capital asset to stock where ‘income’ is taxable, the inventory tax provisions appear to tax the complete fee of FMV through in particular deeming FMV on conversion to be earnings. A more regular technique might be to clarify (with the aid of way of around) that inventory-associated fees might be deductible in opposition to the FMV on conversion.
Additionally, the distinction in the timing of taxing asset-transformed-to-inventory (in a year of sale) and inventory-transformed-to-asset (in the year of the conversion) creates inconsistency and consequences in a direct tax outgo notional profits.
The stated alternate has impacted actual estate players in the case wherein they’ve determined to monetize unsold flats/workplaces with the aid of allowing them to out because this will be construed as the conversion of inventory to a capital asset. With no clean steering on whilst inventory could be considered to have been transformed, elements consisting of the period for which such unsold flats/workplaces are let out and tenancy termination clauses might also play a prime function. For instance, it isn’t always clear whether or not residences set free for even some months with the builder having a quick word to terminate tenancy would be treated on an extraordinary footing compared to fixed long-time period tenancy contracts with no longer tenancy termination rights with the builder.
Another query that has perplexed the realty business is whether or not sales within the books of real estate builders need to be recognized on the percentage of completion method or project crowning glory approach (prescribed underneath Ind AS one hundred fifteen as properly) completed agreement technique.
Budget 2018 delivered Section 43CB within the Income-tax Act to offer that commercial enterprise earnings in case of construction agreement and provider contracts in distinct cases shall be decided on the premise of percentage completion technique, which is consistent with the provisions of Income Computation and Disclosure Standard (‘ICDS’).
Indirect taxes
The Government issued miles wanted Press Release reiterating that GST shall not be the relevant sale of the complicated/ building and ready to move-in apartments where the sale takes area after the trouble of entirety certificate by way of the in a position authority. The said Press Release helped clear doubts, if any, inside the shoppers’ minds, which emanated from the fact that some developers were traumatic GST even if consideration was paid after issuance completion certificates.
The Press launch also explained through an example that the general tax charges have not gone up and have perhaps decreased due to the availability of extra enter tax credit.
Further, a vital ruling concerning anti-profiteering underneath GST became stated inside the latter half of-of year using National Anti-profiteering Authority. In the stated case, the Applicants had filed an anti-profiteering grievance towards the developers at the floor that the benefit of entering tax credit score (to be had to the builder underneath GST regime) was greater than the output tax liability. Thus, the builder should have reduced the prices as a consequence of the availability of credit score. The Hon’ble authority held that the builder should reduce the fee to be realized from the customers of the residences as according to the advantage of ITC acquired via him.
Though the stated ruling has been challenged before High Court, it’s miles clear that the Government intends the builders to pass on the advantage to the consumers due to multiplied input tax credit.
Joint Development Agreements (JDAs) are a common function in which the land proprietor transfers the land to the real estate developer for creation. The builder/developer receives attention for the construction provider furnished by way of him through land improvement rights (from landowners) and coins (by different buyers) and deposits GST with the treasury, anyplace applicable.
A notification becomes issued by way of the Government on the taxability of JDAs. In terms of the said notification GST is to be collected from the landowners to transfer land improvement rights to the developers. Given that the notification is going towards the essence of the GST framework that excludes the sale of land and building from its ambit, the arena has challenged its constitutional validity. The problem is presently sub-judice before High Court.
Conclusion
From a taxation point of view, 2018 turned into a blended bag for the realty area. While the Government’s intention to provide alleviation to the world cannot be questioned, issuance of timely clarifications to deal with real problems confronted by way of taxpayers and taking an extra pragmatic method to tax issues are two areas wherein the Government may additionally appearance to enhance within the coming 12 months.
