The Government elected by the citizens is bestowed with the responsibility of nation building and development. In order to fulfil this obligation, there lies an indispensable requirement of funds equipping it to contribute in an efficient manner as expected. Taxes are the largest source of income facilitating the Central and State Governments along with local authorities like municipal corporations to work for the fulfilment of their objectives of socio-economic welfare in terms of infrastructure, education, healthcare and medical facilities, industrial advancement, agricultural growth, employment generation, etc.
Income tax
The taxes are levied on individuals and entities in respect to the income or profits made by them. The provisions of the Income Tax Act, 1961 (hereinafter referred to as the "Act") help in the determination and collection of income tax along with the Finance Act.
Tax on leasing unsold property
Builders, including both Government and private entities, assume the responsibility of developing adequate infrastructures in the form of industries, roads, housing, research hubs, medical centres, etc. thereby contributing significantly for the nation building. The builders deduct tax at source for the purchasers of the built assets in this regard. Many a times builders are unable to sell off the constructed properties to the prospective buyers. However, they continue to retain their ownership and possession.
As a common industry practice, the builders lease out properties either in the absence of buyers or to get a better price at a later stage as large investors and funds betting on commercial real estate prefer rent fetching properties. Payment of tax in this regard, could adversely impact the business in the real estate sector.
Builders would be likely to pay tax in respect of the revenue generated by them in respect of leasing out unsold property.1 This attributable to the fact that the action of the builders to lease out unsold premises would amount to a change in the character of the 'inventory' to 'capital asset'.
An inventory has been defined as assets held for sale in the ordinary course of business as per (Income Computation Disclosure Standards II. According to the Finance Act, 2018, amendments have made to Section 28 of the Act by insertion of a clause (via). The said clause deals with the conversion of an inventory into a capital asset and the procedure to be followed for computation of fair value in the said regard. However, the onus to establish applicability of tax under modified Section 28 shall vest with the authorities. In another scenario, the builders are aware of the applicability of tax on unsold properties not leased out, which can be determined on the notional rental income based on the prevalent rent in a locality in adherence to Section 23(5) of the Act. This has been done in order to prevent hoarding of residential as well as commercial properties.
With increasing Gross Domestic Product real estate has expanded the scope in residential as well as commercial arena. The clarity persists as to the tax imposition in respect of the unsold properties of the builders not leased out. However, ambiguity remains regarding the taxation scheme for the unsold properties leased out.
Footnote
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