Just before the festive season, builders across the country are in a rude shock over a new tax. It seems that they could soon be saddled with a tax burden which they didn’t see it coming or have accounted for.
According to recently amended Income Tax Act, developers might have to pay tax on the entire fair value, based on the ready reckoner rates, of all properties they lease out in 2018-19 and later, ET reported. This tax is over and above the builder pays as a tax on rent earned from the lease.
For instance, if a builder leases out unsold properties having a combined fair market value of Rs 300 crore, the person may have to fork out more than a whopping Rs 90 crore as income tax.
According to the amendment, the ‘fair value’ of inventory’ (unsold properties) would be taxed because leasing them out amounts to conversion or treatment of the inventory as ‘capital assets’. While the act is not specific to the real estate industry, it seems that it will affect this sector the most.
The tax was brought notice by senior accountants, who in the course of finalizing the advance tax liability for the financial year 2018-19, have drawn the attention of some of the large real estate firms to the amendments (in the Income Tax Act) which are applicable from this year.
“The action of the developer to lease out unsold premises would tantamount, under the amended Income Tax Act, to a change in the character of the ‘inventory’ to ‘capital asset,’ ET quoted senior chartered accountant Dilip Lakhani as saying. “Perhaps unintended, this would severely impact many builders who should immediately pursue the matter with CBDT.”
Lakhani also revealed that beginning this year, Section 28 (via) brought conversion or treatment of inventory into capital asset under the tax net. Since ICDS – II (Income Computation Disclosure Standards) defines inventory as ‘assets held for sale in the ordinary course of business,’ the action of the developer to lease out the unsold premises might be viewed as conversion of inventory into a capital asset.