Taxing Inventory Will Burden Builders Further

Data available with PropTiger.com show inventory overhang at the end of the first quarter of the current financial year stood at 37 months. At the current sales rate, it would take about three years for real estate developers in the nine major cities of the country to sell the existing housing stock.

Their inability to sell projects has been hard enough. However, the increased tax burden would nothing but make matters worse for India’s real estate developers, who are still reeling under the impact of the over four-year-long slowdown in the market.

From this financial year, real estate developers, who are holding an unsold unit for over a year, will have to pay 8-10 per cent of the property value as tax. So far, developers do not pay any tax on property that they hold as stock-in-trade. Developers will also have to pay 30 per cent of the fair value of the property as tax if they lease their unsold units after April this year after Section 28 (via) was introduced in the Income Tax (I-T) Act. According to this Section, unsold inventory would be treated as the capital asset from the tax point of view. 

This new levy is over and above the amount, developers will have to pay on the rent they earn through leasing properties.

The little tweak

According to the income tax laws, properties, including flats, shops, office space, factory sheds, agricultural land and farmhouses are “house property”, and their annual worth is taxed under the head “Income from House Property”.

Under Section 22, the I-T Act imposes the tax on house property that is not occupied by the owner – the tax has to be paid whether the house is rented out or is lying vacant. The tax is imposed on higher of either the actual rent received or the notional letting value.

However, Section 22 does not cover the property which is being used for the purpose of business or profession. Such properties are liable to be taxed under the head of "Income from Business and Profession". There is a distinction between capital asset and business asset or stock in trade. To tax the housing inventory, stock-in-trade will not be brought under the head Income from House Property.

“We are assessing the pan-Indian real estate data of unsold flats, which have been kept for more than a year. The tax department is taking the stocks of state-wise unsold inventories, which could fall under the new tax regime,” a report published in Business Standard quoted an I-T official as saying last year.

The likely impact of the two moves

Tax on unsold inventory: The conspicuous aim of the added tax burden on developers is to force them to end the artificial shortage created in the housing market. Sitting on an unsold stock is also a method to escape taxes, too. Because they will have to pay taxes for holding housing stock, developers would now put all their might to sell off their existing stock. For a homebuyer, this means more options to pick from, at more reasonable rates.

However, there is another way to look at it. Developers who have not been able to sell their projects owing to genuine reasons will also have to suffer. The added tax liability to keep the stock may force real estate developers to go for distress sale, something that will cause a major dent in their already depleting finances. On the other hand, this burden would certainly be passed on to buyers, making properties more unaffordable for them in future.

Tax on leasing of unsold inventory: Large investors who invest in commercial properties to earn handsome rent would have to take a hit on their earnings as a 30 percent levy over and above the standard tax would significantly make a dent in their earnings. Someone earning Rs 100 crore as lease, for instance, will have to pay Rs 30 crore as tax.