Thank You FM for the Income Tax Relief to the Real Estate Sector BUT enlargement of scope of Relief is necessary

On the occasion of Dhanteras, FM has announced an Atmanirbhar Bharat Package 3 for over Rs. 2.65 lakh crores. A Demand Booster has been announced for the Real Estate Sector by giving Tax relief for the Developers & Home Buyers under the Income Tax Act. Henceforth, the sale of real estate lower than the applicable circle rate would be exempt from Income Tax. The Government realised that the current market rates of real estate in the current scenario due to Covid-19 pandemic is actually much lesser than the prevailing Circle Rates. Realising this anomaly, the FM has increased the Harbour Limits (Differential between the Circle rates & Declared Sales Consideration of Land & Buildings) from 10% to 20% u/s 43CA and section 56(2)(x) of the Income Tax Act, for the period from the date of announcement to 30th June 2021 only for the primary sale of residential units of value up to Rs 2 crores. However, no official notification/ordinance giving full details of the relief announced has been issued so far and is expected to be issued shortly.

Before discussing the shortcomings of this limited relief, it would be trite to discuss the menace of arbitrary, inflated, ill-founded circle rates issued by the District Authorities with a view to enhance the stamp duty revenues. It is worthwhile to mention that the Apex Court has categorically held that the circle rates are mere guidelines and have no legal sanctity (R.C.Bansal v. DM AIR 1999 SC 2126 & State of Punjab v. Mohabir Singh AIR 1996 SC 2994). Conversely the Income Tax Act places sole reliance on the Circle Rates in force. It is a matter of common knowledge that writ petitions challenging the arbitrariness of circle rates have been filed in the past in different High Courts, wherein at several occasions the circle rates have ab- initio been quashed. In fact, the process of preparing the circle rates is unscientific and not based on exemplar deeds, data or evidence but based on here-say, conjectures & surmises. The District Authorities generally periodically increase the circle rates by a fixed percentage say 10% annually without actually making a proper survey. A uniform circle rate is fixed for an entire locality or a colony, which is commercially & practically absurd. In this background escalated by acute recession & cash crunch, the demand of real estate properties have fallen drastically and limited real estate transactions are taking place these days. The real estate sector has been vehemently demanding either for reduction of  the prevailing circle rates or for increasing  the differential between the existing circle rate and the actual consideration by 20-25% to save the seller & buyer from the mischief of Section 43CA & 56(2)(x) of the Income Tax Act.

Income Tax Relief to Real Estate Sector

It is pertinent that the Real Estate Sector is not just construction & sale of residential unit’s i.e. multi-storeyed apartments, row housing, independent floors, villas & bungalows but plots of colonies, townships, commercial properties like malls, multiplexes, street markets, office complexes, IT & Data centres are all necessary products of the real estate sector. The areas of concern where the scope of this benevolent & liberal relief is much needed but has missed the attention of the FM are as under:

Commercial Properties: Land and building method is not employed for working of valuation for the market price of the commercial buildings while fixing the circle rates. Instead the government has fixed rental values for different areas arbitrarily by applying different multiples of notional rent to arrive at the market valuations. It will not be out of place to mention that due to the onslaught of covid-19 pandemic, companies like IT or data management have stopped working from their office premises but their employees are working from their homes. The insurance companies have also advised their employees and agents to work from home. The street market is not responding due to fear of covid-19 pandemic and online shopping has become the order of the day. Online players like Amazon, Flipkart, Myntra, Snapdeal, Big basket etc. are seeing surge in their orders and sales. As a result of this the rental of the commercial and office buildings have sharply fallen down. The prevalent circle rates of commercial properties based on the rentals fixed by the government have become redundant and impractical. By denying benefit of increase in harbour limits, the Government is discriminating and this act of the Government is clearly hit by Article 14 of the Constitution.

Plots of land: Real estate sector does not only imply construction of residential houses or apartments only but in maximum number of cities the developers resort to colonization. They develop colonies or townships. The market price of the plots has also fallen down drastically due to covid-19 pandemic and the selling rates have gone down considerably due to poor demand and poor economic scenario. Due to cash crunch, the developers are forced to sell the plots in colonies or township at a price lower than the prevailing circle rates. These Developers/Colonisers are not benefited by the announcements made by the FM. This is also discriminatory and hit by article 14 of the constitution. It is noteworthy that that valuation of any apartment or a residential unit is calculated under land and building method meaning thereby that the value of the land and the value of the construction is added together to form the value of the complete residential unit. How it is possible that the benefit could be availed as per the announcement of the FM when there is a complete unit and without reducing down the value of its main component that is the land. It is therefore incumbent it upon the FM to grant similar benefit on the sale of lots of land on the same analogy. How can the government differentiate between houses for residential units built by the developer or and sale of residential plots and construction wherein construction is carried out by the purchaser himself according to his own specifications & requirements as per his sweet will.

Large chunks of Land: The scheme should also be made applicable to the large chunk of lands so as to attract the developers to purchase large chunks of land for their future real estate projects. It is pertinent that real estate projects not only contributes to the exchequer in the form of GST, income tax and also promote production of steel, cement, sanitary ware and other building material. Moreover, there is no rationale in denying the benefit announced by the FM on sale purchase of large chunks of land. It is noteworthy that the land owners are constrained to sell their large holdings for commercial expediency to meet their timely financial requirements. Denying the benefit to such transactions would be highly discriminatory.

Secondary Real Estate Market: The relief ex facia appears to be applicable to the primary market and that too only for residential units with a capping of Rs. 2 crores. As such, it seems that the benefit announced by the FM is not applicable to the secondary sale and consequential benefit in the computation of capital gain u/s 50C of the Income Tax Act is not available. Moreover, the real estate market does not only comprise of the primary market that is the sales between the builder or developer and the intending purchaser. It is customary that investors book the apartments for decent returns. They are also an active part of the real estate sector and because of the impractical circle rates they are not able to offload their investments as a result of this the units booked by these investors lie vacant and unused. Such a discrimination between a private person and the builder in the sale of a residential unit is clearly hit by article 14 of the constitution as it is a case of discrimination in the same class. Let’s take an example of a unit number 504 which is owned by the builder and he sells it with the difference of 20% and takes advantage of this new exemption scheme whereas unit number 503 is owned by an investor and he sells it with the sale difference of 20% then he will be booked under section 50C and the purchaser would be taxed under section 56(2)(x). This is illogical, inequitable & discriminatory.   

Capping of 2 crores: There appears no nexus or rationale behind capping of Rs. 2 crores. This capping should be scrapped forthwith.

Distress sale: It is common knowledge that a lot of traders and industries are defaulting in payments to the banks, financial institutions, and suppliers due to the unprecedented recession brought in by the COVID-19 Pandemic. They are forced to sell their individual residential, commercial properties as well as their running industrial units. As explained above, the circle rate value of these properties is much more than the actual &actual & prevalent value of these properties which they would fetch in the open market under ‘distress sale’. It is in the interest of the government that they extend the benefit, as announced by the FM, to all real estate transactions irrespective of their class. This will also help the banking sector to realise their loans and prevent doubtful loans from being converted into NPAs.

Duration of Scheme to be extended: The scheme is slated to be over on 30th June, 2021. Considering the economic scenario and also the fact that COVID-19 is there to stay and affect the fiscal markets, the scheme should be made applicable till 31st December 2021. Since there are confusions in regard to the said benefits announced by the FM, it is requested that due notifications/ ordinances be issued by the Ministry of Finance at the earliest. If the FM restrains the benefits, as announced, the very purpose of bringing relief to the real estate sector would be illusionary.

The extension of the scheme to all types of real estate transactions is in the interest of the revenue of the Central & the State Governments. Those transactions which have not been matured due to vast difference in their actual transaction value and the circle rate value will mature yielding stamp duty & GST to the state exchequer and Income Tax to the Central Government and also infuse liquidity to the dull fiscal market.

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  1. CA. M. Lakshmanan says:

    In many areas the Guideline (Circle) Rates are very less than the market rates and hence the presense of Black Money is very high in real estate transactions. In a way the measures will help the rotation of Balck Money to a very great extenet. ‘Whether the Government has taken any survey to ascertain the real situation in majority of the areas before indulging in such a move ?’ is a big question to be answered.

  2. Anand Vidyarthi says:

    I totally agree with your views, rather my views are the same as yours. Circle Rates, which were fixed arbitrarily must be lowered on one side.
    On the Other Side, taxation rates must also be lowered, that would be the real relief and not the relief in disguise. Due to stuck up inventories, the Costs have already gone up. One major cost is interest cost.
    The Pandemic COVID-19 demands ” Tax Holiday” for certain period of time.

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January 2021