READY UNSOLD FLATS TO GET CHEAPER

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Recently, it has been ruled by a Court that the unsold flats are liable to be taxed as they are considered as ‘ stock-in-trade’. Based on this ruling if the revenue department asks the builders to pay taxes on their unsold stock of ready flats, the home prices could become cheaper. It is reported that that the income tax department has told the finance ministry that this was one way of generating more revenue to the government.

If the proposal is cleared by the government, it will affect the developers holding unsold completed flats. As per property research firm Liases Foras , around 1,00,000 ready or close to be completed unsold properties are held by the developers in top eight cities across the country. The proposal sent to the government has advised for computing of tax on these properties on the basis of notional annual letting value.

With this proposal by the income tax department, the developers much worried since they will have to either sell these properties soon, by offering discounts or they will have to get into expensive litigations. The builders are saying that the proposal by the income tax department  will have a negative impact and it will be a huge setback on the real estate sector. Further, the builders are arguing that many of them are holding the stock out of compulsion because they are unable to sell the same in a sluggish market.

Mr.Getamber Anand. Managing director of ATS infrastructure has said that the proposal is double  whammy and it may force the builders to shut shop.  He has further said that most builders cannot hold stock  because they have to service their debt, but the sales are slow due to market forces. He has also said that even reducing the prices cannot guarantee sales.

Another reputed Bangalore based sobha developers MD  says that the real estate developers are in the business of constructing and selling homes. In the process if some of them remain unsold it is to be considered as ‘stock –in-trade’ and should not be taxed. Generally, builders say that there is no consistency among different circles of the income tax department, under which various developers fall and this leads to lot of confusion.

This avenue of generating of revenue to the government was on the agenda of meeting  of the chief commissioners of income tax with the finance minister Arun Jaitley last month. Mr.Sunil Jain, partner  of law firm J.Sagar Associate,  has said the move like this would weigh heavily on the  real estate companies. He has also said that, some of the companies are facing extreme liquidity crisis and have to sell their ready inventory at a discount to get out of the situation. 

In a case in 2012 between a builder and the tax authorities in the High Court, the builder has argued that the apartment it held could not be taxed as per the annual letting value method as it was the owner of the property, but for the purpose of  business, to sell. But, the tax authorities said the company has to pay tax based on annual letting value method (ALV) on the unsold flats as it was the owner of the flats and it did not matter whether the properties were rented out or not. The court had ruled in favour  of the income tax authorities.

Mr.Maadhav Poddar, associate director at consulting firm EY, has said this proposal if implemented will lead to an increase in tax litigation in the sector and will add to the stress the builders are already facing.

Real estate companies generally show their completed flats as stock-in-trade and income from these are shown as business income, as in the case of most other businesses. In rising market, several developers hold back some flats with the intention of benefiting from the price appreciation that will accrue in a few years after completion of the projects. A south India based builder has said that in the current market situations most developers are holding the flats because they are unable to sell the same. He further says, under such situations why should a developer be taxed?

For the past two years the real estate market is battered by slow economy with decreasing sales and has put pressure on the finances of the builders. According to the property research firm Liases Foras, the unsold inventory, completed and also under construction projects, has further risen from 765 million square feet or about 7.6 lakh apartments at the end of June from 734million sq.feet or 7.34 lakh apartments at the end of March. 

As per the report of this firm, the April-June quarter slid 9% in the top six cities. The national capital region (NCR) saw a drop of 20% in sales during the quarter, while the drop was down 18% in Chennai and 13% in Hyderabad. Only Bangalore among tier I cities saw a 10% growth in sales in the April – June quarter.

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