Developers apprehensive over tax on unsold flats

The government initiative to tax developers, forcing them from hoarding inventories in anticipation of hardening prices, is likely to have far reaching impact on the real estate sector.

The income tax (I-T) department is all set to impose tax on unsold flats lying with developers for more than one year, in an effort to nudge them to offload stocks.

According to experts, the proposed tax is an anti-hoarding initiative to discourage developers from holding stocks, thereby artificially keeping flat prices at elevated levels.

An amendment to Sections 22 and 23 of the Income Tax Act was introduced in the Union Budget 2017, which proposed that if any house property is held as ‘stock in trade’ and such property was not let out during the whole or part of the year, the deemed annual value would be nil for the period up to one year from the end of the financial year in which the certificate of completion of construction of property was obtained from the competent authority.

According to reports this change has now being activated and will impact real estate prices across the country. It is estimated that there are around 10 lakh unsold flats in the top eight metropolitan cities.

Despite this number, developers have shown no inclination to reduce prices to offload the stocks.

Says VK Vijayakumar, chief investment strategist at Geojit Financial Services, ‘’the proposed tax, if implemented, will help bring down the price of flats.  Already, flats and apartments prices have shown a declining trend in many markets. The unsold inventories, particularly of recently-launched and completed flats, are on the rise.”

According to Vijayakumar, “The legal implications of the proposed tax are unclear. It is debatable whether taxing 'the stock in trade' is tenable under law. If the proposed tax materialises, it will be advantageous to potential buyers, but will impact developers who are already reeling under the stringent provisions of the Real Estate (Regulation and Development) Act, 2016  or Rera.”

The tax would be levied on property that is held under `stock in trade’ by developers. The tax rate could be anywhere between 8 and 10 per cent of the total value of the property.

The Central Board of Direct Taxes (CBDT) has already sent internal guidelines to I-T officials across the country in this regard. The government is of the view that real estate developers artificially keep prices high by holding on to their stocks.

According to tax experts, builders are able to show their property at the cost, which is lower than the price that they can realise by selling it. Because of this gap, any fluctuation in the price of the property is not reflected in the books of the builders.

It is said that officials are likely to use the provision under Section 22 of the Income Tax Act, which means the annual value of property shall be chargeable to income-tax under the head `Income from house property’.  This will compel developers to get rid of unsold flats or pay taxes on it.

Points out Khushboo Shah, lawyer, MDP & Partners: “The amendment has twofold benefits. First, from the builders’ lobby perspective, it gives them the certainty that tax on notional rental income would be calculated only after one year from the end of the year in which completion certificate is received. Second, it benefits the buyers, since this amendment would demotivate the builders from holding inventory in anticipation of a higher selling price, which should commensurate the possibility of a notional tax liability that would arise after a year is completed since the issuance of the completion certificate.”

Sector experts say smaller builders have now started selling some of their inventory at 25-30 per cent discount. The big beneficiary of the government move is consumer, who will benefit from falling prices and lower home rate regime.

But not everyone is impressed. Says Vijay Singhania, founder, Trade Smart Online: “We believe that the crisis in the real estate sector is likely to deepen with the income tax department, reportedly, set to levy a tax on unsold apartments, which have been vacant for more than one year. This means that if a real estate company fails to sell an apartment after one year of receiving the occupation certificate (OC), it now has to pay tax on the property. Though the government’s intention is to reduce real estate prices, but to make the sector pay for holding stock-in-trade is unfair and draconian. With this move, the developer will feel dis-incentivised to build because the market is volatile and he might be liable to pay tax should he not be able to sell. This will impact unit launches in the months to come.”

Ashwin J Punnen