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TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS

TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS. Issues concerning the landowner Issues concerning the developer. ISSUES CONCERNING THE LANDOWNER. Capital Gain or Business Income ?.

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TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS

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  1. TAXATION ISSUES IN REAL ESTATE DEVELOPMENT TRANSACTIONS

  2. Issues concerning the landowner • Issues concerning the developer

  3. ISSUES CONCERNING THE LANDOWNER

  4. Capital Gain or Business Income ? • Answer to this question will depend upon the nature of transaction. Even a solitary transaction could result in business income • If a person has lived in a house for 20 years and then gives it for development, it is a clear case of capital gains. • If a builder gives a piece of land held as stock in trade for development it is a clear case of business income.

  5. Development Agreements • What is a Development Agreement • Development Agreement with GPA • Does it require registration ? • Precautions to be taken while drafting the Development Agreement

  6. Development Agreement – an illustration • Total Landarea - 1000 sq yds • Builtup Area – Total Builtup area – 20000 sq ft. Landowner - 40 % i.e. 8,000 sq ft Developer - 60 % i.e. 12,000 sq ft • Date of Development Agreement – 01/01/2008 • Possession handedover to developer on 30/04/2009 ( With/without GPA ) • Building completed & Landowner’s share handedover on 10/05/2009

  7. When is the transfer complete • Date of transfer to decide the year of accrual of capital gain

  8. Definition of transfer under the Income Tax Act • Section 2 (47) (v) of the IT Act reads as under: • Any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in S 53A of the Transfer of Property Act, 1882.

  9. Sec 53A of TP Act – What is part performance • Where any person contracts in writing to transfer any immovable property, and the transferee has, in part performance of the contract, taken possession of the property and has done some act in furtherance of the contract, and is willing to perform his part of the contract then – the transferor shall be debarred from enforcing any right in respect of the property, other than a right expressly provided in the agreement.

  10. Point of accrual of income • Date of execution of Development Agreement • Date of handingover of possession • Handingover of possession coupled with GPA in favour of developer • Date of execution of first sale deed for developer’s share • Date of execution of first sale deed for landowner’s share • Date of handing over of Landowner’s builtup area

  11. Date of execution of Development Agreement • Transfer would not be complete if the agreement is properly drafted and all clauses are kept out of the purview of Section 2 (47) read with Section 53A of the Transfer of Property Act.

  12. Date of handingover of possession of land • Capital gain will not accrue provided possession is handedover to developer purely as a licensee – See R Vijayalakshmi Vs Appu Hotels Ltd ( 2002) 257 ITR 4 – though given in the context of Chapter XXC.

  13. Handingover possession with GPA • Transfer would be complete for IT purposes on the date an irrevocable GPA is given • What happens if GPA is given but possession is not handedover or it is linked to some other event like permission from municipal authorities ?

  14. Chaturbhuj Dwarkadas’s case260 ITR 491 • Original Agreement dated 18/08/1994 • This was a sale agreement with a consideration of Rs 1.86 cr. Court held that this was a development agreement. • Almost entire consideration paid by 31/3/96 • Possession given on 1/4/96 • GPA given on 12/3/99 • Capital gains tax paid for AY 1999-2000 • Dept. said capital gain in A Y 1996-97 • Court held that capital gain arose on 18/8/94 itself.

  15. AAR Ruling in Jasbir Singh’s case294 ITR 196 • Original collaboration agreement – June 2005 • Supplementary Agreement – 15/09/2005 • Provisional License for construction – 8/3/2006 • Final License – 26/5/2006 • Irrevocable GPA – 8/5/2006 • Final Payment – 08/03/2007 • AAR held that capital gain arose when GPA was given on 08/05/2006

  16. Date of execution of First Sale Deed for Developer’s share • Date of execution of First Sale Deed for Landowner’s share • Date on which the Landowner’s share is handedover

  17. Conversion of land into stock-in-trade • U/s 45 (2) if land is converted into stock-in-trade, it shall be taxed in the year of sale. • Market value on the date of conversion would be treated as full value of sale consideration • Balance amount would be taxed as business income

  18. Amount of Income • Registration Value/Market value of proportionate share in land • Cost of construction of builtup area falling to the Landowner’s share • What if the Landowner sells part of his builtup area

  19. Whether any exemptions are available • Exemption U/s 54 Exemption can be claimed for retained residential flat/flats or new purchases & construction • Exemption U/s 54EC Exemption is available for investment in REC & NHAI bonds with an upper limit of Rs 50 lakhs. • Exemption U/s 54F

  20. ISSUES CONCERNING THE DEVELOPER • Year of taxability of income • Computation of income • Deductions available

  21. Year of taxability of income • Year of completion of project • On a year to year basis • Is AS 7 applicable to builders

  22. Computation of income • Computation of income on a year to year basis - Percentage of advances received - Percentage of expenditure during the year - What about tax audit

  23. Computation of income on completion of project • There could be issues when some of the flats or offices spaces are registered in the names of the buyers even before the entire complex is ready • Allowability of interest on borrowed capital – should it form part of project cost or can it be claimed on year to year basis ?

  24. ISSUES IN SERVICE TAX

  25. Threshold exemption and other matters • Threshold exemption of Rs 10 Lakhs from F Y 08-09 • Exemption linked to preceding year’s turnover • Tax payable only on turnover exceeding Rs 10 Lakhs in the first year • Only value of taxable services to be included in arriving at Rs 10 lakhs amount • When new services are brought into tax net in the middle of the year

  26. Due dates of payment • Due Date of Payment is 5th of the month succeeding the month in which the value is realised. • For Individuals, Sole proprietors and Partnership Firms it is 5th of the month succeeding the quarter in which the value is realised. • In all cases, for the month or quarter ended 31st March, the due date is 31st March. • For e-payment the due date is 6th instead of 5th. • The date of deposit of cheque into the bank is deemed to be the date of payment of tax provided the cheque is realised. ( Supreme Court decision in 25 ITR 529 )

  27. Construction Services • Commercial or Industrial construction services • Construction of complex service

  28. Commercial or Industrial construction services • Definition covers : a. construction of a new building or civil structure b. construction of pipeline or conduit c. completion and finishing services like plastering, painting, flooring, carpentry etc d. repair, alteration, renovation etc Building should be used for commercial purposes

  29. What is not covered • construction of building for self-use or for renting out • Developers / builders who construct and sell by executing sale deeds - If construction agreements are entered into, service tax is leviable • However, service tax is leviable on contractors who are engaged by the builder

  30. Abatement of tax • Abatement to the extent of 67 % of gross receipts available subject to conditions like not availing Cenvat credit on inputs or on input services

  31. Construction of complex service • Definition covers : a. construction of a new residential complex or part thereof b. completion and finishing services like plastering, painting, flooring, carpentry etc c. repair, alteration, renovation etc Residential complex means a building having more than 12 residential units with common area or common facilities like lift, water etc

  32. What is not covered • construction of building for self-use or for renting out • Developers / builders who construct and sell by executing sale deeds - If construction agreements are entered into, service tax is leviable • However, service tax is leviable on contractors who are engaged by the builder • Abatement to the extent of 67 % is available

  33. Service Tax under the composition scheme • Builders can opt for payment of service tax at a reduced rate of 2 % ( increased to 4 % in the Finance Act 2008 ) under the composition scheme applicable to all works contracts.

  34. Central Government is planning to introduce Goods and Services Tax (GST) by April 1, 2010.

  35. Thank you

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