How Justified is Paying Taxes For The Inventory?
With an objective to make housing affordable for the common man, the Centre inserted Section 22 in the Income Tax (I-T) Act. Introduced in 1995, Section 22 of the I-T Act makes owners liable to pay tax on house property, even if it is lying vacant. The tax is imposed on either the actual rent received or the notional annual letting value, whichever is higher. A person can have only one self-occupied housing property and if he has more than one then other properties would be under the ambit of Section 22 of the Income Tax Act. Section 22 does not cover the property, which is being used for the purpose of business or profession.
Such properties would be liable to tax under the head of "Income from Business and Profession". There is a distinction between capital asset and business asset or stock in trade. A confusion over this has led to many legal tussles.
In 2013, the Delhi High Court in the CIT versus Ansal Housing Finance & Leasing Co Ltd case (354 ITR 180-Del) passed an order that the vacant property with builder was to be treated in the same manner as if lying with the ultimate property-owner. In 2014, in the case of New Delhi Hotels Limited versus ACIT (360 ITR 187), the same court decided that the notional rental income derived by the developer from the unsold flats shown as stock in trade would be assessed to tax under the head “Income from House Property” and not under the head of “Income from Business And Profession”.
Last year, changes were made in the tax law to impose two new taxes on real estate developers on the unsold stock. By inserting Section 23 (5) in the I-T Act last year, the Central Board of Direct Taxes (CBDT) made it mandatory for developers to pay tax on the unsold stock based on their notional rental income if the stock is older than one year.
By inserting Section 28 (via), on the other hand, the government has imposed 30 per cent tax on the fair value of the unsold stock which a developers leases. This is over and above that tax, the developer will be paying on the annual rental income. Under this Section, unsold inventory which is leased would be treated as a capital asset from the tax point of view.
Section 22 of the I-T Act was introduced with the basic objective of releasing property in the market and restrict underutilisation of available residential space. The clause was to ensure that properties are rented out and do not remain vacant. The rationale was that many people invest in real estate to reap higher benefits in the future. Such investments in the housing sector result in an indiscriminate increase in prices, making it unaffordable for the common man. This may lead to a situation where people would not have a place to live while the houses remained vacant. Section 23 (5) was added in the Act with a similar objective. Apart from addressing the same problem, Section 25 (via) has been brought in to ensure tax evasion by real estate developers.
Cutting both ways?
While the basic objective of Section 22 and Section 23 (5) is to make housing more affordable, it is, in fact, producing opposite results.
For the inventory for which they have received completion certificates, developers are supposed to pay taxes based on the notional annual letting value (ALV) of the property. Hit by a slump in a real estate sector, coupled with a credit crunch, developers are sitting on a huge pile of inventory. Paying taxes for the same is only adding up to their worries. In order to minimise losses, this has led to distress sale of their properties by developers. To save on this tax liability, developers delay the completion of the project until all the flats in a project are sold. This too adds to buyers' woes.
The move to levy tax on leased unsold stock has also come as a bolt from the blue for commercial real estate developers, who invested huge amounts in property to earn rents.
With inputs from Sunita Mishra