The Real Estate sector has been a key driver to India’s economic growth trajectory. The tax incentives offered to companies operating in this sector have provided them an edge in today’s fiercely competitive market. As such, continuation of these tax incentives to new SEZ units under the DTC, though under a restrictive grandfathering clause, is still a positive step. The grandfathering provisions would provide some relief to the SEZ developers, not just vis-à-vis the tax benefit availed by such developers, but also vis-à-vis the business case for setting up a unit in SEZ, which is so integrally linked to the tax benefit bestowed on the unit.
Lease income to be considered as income from house property
Current Situation:
Currently, lease rentals earned from letting out of property, other than the property occupied for the purposes of any business or profession carried, taxed under the head income from house property.
Hence, if the owner of the property himself uses the property for the purpose of carrying on his business or profession, is not taxed as under the head income from house property.
However the classification of lease rentals, as income from House Property or Business income, has remained a matter of litigation where the taxpayer is engaged in the business of leasing out properties.
DTC Proposals: The Direct tax Bill, 2009 provided that the income from any house property shall be computed under this head notwithstanding that the letting, if any, of the property is in the nature of trade, commerce or business. While DTC retains this position, income from house property which is used as a hospital, hotel, special economic zone, convention centre or cold storage and house property which is not ready for use during the financial year has been excluded. Hence income from such sources/ situation shall be taxed as business income.
Our Comments:
Under the head Income from House Property, the assessee will only be allowed a standard deduction at the rate of 20 percent of annual value. This is true even in case of an assessee who is letting the property in the nature of trade, commerce or business (other than hospital, hotel, special economic zone, convention centre or cold storage) and has spent more than 20 percent of annual value on expenditure in relation to earning the income. Not allowing the actual expenditure incurred for earning the rental income in excess of 20 percent could cause significant disadvantage to certain taxpayers.
However by way of such provision, the long lasting controversy of treatment/ classification of lease income (i.e. as income from house property or business income) has been resolved under DTC.
Further, property which is not ‘ready to use’ will be taxable under the head “income from Profits and Gains of business and profession” However the term “Ready to use” has not been defined.
Classification of Assets held for carrying on business
Current situation: Currently, the Act does not classify the assets held for the purposes of business as business trading asset or business capital asset.
DTC Proposals: Under DTC, definition of capital assets have been modified and the concept of investment asset and business capital asset has been introduced, wherein the latter on sale would attract taxation under business income. Investment asset does not include business assets like self generated assets, right to manufacture and other capital asset connected with the business. The term business asset has been classified into business trading asset and business capital asset. Under DTC, land connected with or used for the purposes of any business shall not be treated as a business capital asset. In other words, such land shall be considered as business trading asset. Hence sale of such land shall be treated as business income.
Investment assets would continue to be taxed as capital gains.
Our Comments:
By virtue of introduction of this distinction between business assets and investment assets, the taxation of land and property developed will be dependent upon the manner of its classification and claim by the developer as a business asset or an investment asset.
Deduction of payment of service tax while computing income from house property
Current situation: Currently, while computing the income from house property only certain specified deductions are allowed ie municipal / local taxes paid, statutory deduction (of 30 percent of net lease rentals) and interest on funds borrowed.
DTC Proposals: Under revised discussion paper, apart from municipal taxes, tax on services was also allowed to be reduced while computing income from house property. However the same has been removed under DTC.
Our Comments: No deduction of service tax amount while computing income from house property would result in higher taxable income.
Surely, the DTC 2010 has provided more favorable tax provisions than its previous version. However, the real question is, are the relaxations from the previous version enough to keep the interest alive for the SEZ Developer and Units in the most discussed scheme of the Current Indian Government. The SEZ Developer and Units would certainly look to exemption from the applicability of MAT to provide them with meaningful tax benefits.
