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Tax on Unsold Units: Pros and Cons

Posted by admin on August 6, 2015
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In India, the prices of real estate in the residential complexes did not drop much in spite of depressed demands for last two years. This is mainly because the realtors do not offload their unsold property at a discount rate and create artificial scarcity to keep prices high. Recently there are approximately 6.88 lakh units of unsold homes spread across major metros of India. These inventory need to be released and the hoarding of residential apartments and villas need to be discouraged.

The IT department has decided to tax realtors on estimated annual rentals of unsold units in order to soften the property rates and fill up the coffers of the government as well. If this proposal is accepted by the finance ministry, then builders will have to pay tax as if they were the owner of the flats and it is irrespective of whether the properties were rented out or kept vacant.

This tax possibly be anywhere between 15% and 20%. The proposal is as per the central action plan for 2015-16, under which the IT department can levy tax on any unsold flat by considering it as ‘income from house property’ under Section 43-CA of the IT Act, 1961.

This will affect about 100,000 ready or close to be completed unsold properties measuring a total of 765.03 million square feet in top nine cities – Mumbai, Delhi, Bangalore, Chennai, Kolkata, Hyderabad and Ahmedabad – across India.

According to tax authorities, real estate firms should have to pay tax based on Annual Letting Value (ALV) on unsold flats as they are the owners of the flats. This means inventory of builders will be taxed on the basis of notional ALV — a value on which tax has to be paid on the annual value of house property or the rent actually earned, whichever is higher.

Taxing unsold stocks will bring significant revenue in the government chest and it will force real-estate players to sell their unsold flats at discounted price. The customers will definitely benefitted from this as they will be able to acquire residential apartment at market determined rate. Also, if one chooses to buy a home at the end of the financial year, he can garner more benefit because the developer will certainly try to clear stocks to save taxes.

Further, the builders are supposed to pay tax on ALV – annual letting value is essentially the annual rent at which any home can be reasonably expected to be rented out. Yet, let’s see how the numbers stack up. The rental yield in India is currently anywhere between 2-3 percent. Rental yield is the annual rent that can be earned from a property divided by its market value. The builders will have to pay an income tax on this rental yield. This is actually a negligible amount for builders and they may pass it to customers and hence the cost of property could be increase.

Concluding, as the rate of tax is not fixed and the annual renting value is not finalized, the developers would not be affected much.