Introduction: Taxation whether direct or indirect in real estate sector always been a very critical issue due to different nature of this sector. In the recent past, there has been made lots of various provisions in the different tax laws to bring various activities, income, charges or fee etc. under tax regime. Revenue has also made various kind of provisions in the few recent finance budgets to curb the generation of black money through real estate transaction. However, various tax department has made some clarity in taxation issues in real estate sector, but still there are more ambit for further clarity on many issues related to taxation. Herein, I have tried to pen down taxability of various transactions in real estate sector.
A. Income Tax (All section refer herein relates to Income Tax Act, 1961):
a) Section 50C:
This section states that where an assessee sold an immoveable property (i.e. land or building or both) being capital asset at the sale consideration less than the value (SDV) adopted by the state government for the purpose of stamp duty then such SDV shall be considered as Sales Consideration for the purpose of Capital Gain computation.
For example Mr. A sold a piece of land at Rs. 60 lakh but SDV of that land is Rs, 100 lakh and indexed cost of purchased is rs. 45 lakh. Hence capital gain in this case is rs. 55 (i.e. 100-45).
However this section is not applicable on assesse holding the immoveable property (i.e. land or building or both) as stock in trade (i.e. builder/developer).
b) Section 43CA:
Due to inapplicability of section 50C on the immoveable property (i.e. land or building or both) held as stock in trade, there is modus operandi of selling the immoveable property held as stock in trade at accounted sale value less than SDV and rest sale consideration remain unaccounted, therefore there is loss of revenue to govt.
Eg: Builder sold a flat at Rs. 100 lakh (Rs. 60 lakh accounted sale consideration and rs. 40 lakh unaccounted) and cost of this flat is rs. 40 lakh. Hence he will pay the income tax on rs. 20 lakh (i.e. 60 – 40) subject to various other deductions/allowance as applicable.
Finance Act, 2013, plugged this modus operandi by inserting a new section 43CA, this section is applicable on assesse immoveable property (i.e. land or building or both) as stock in trade.
1. As per this section, where an assesse held immoveable property (i.e. land or building or both) as stock in trade and sold such stock at a sale consideration less than the SDV (Value adopted for stamp duty) then SDV shall be taken as sale consideration for the purpose of computation of Profit or Loss from Business & Profession.
2. SDV shall be taken on the date of registration of such transfer.
3. Where there is difference between date of “Agreement of sale” and date of “registration of transfer” then SDV on the date of “Agreement of sale” shall be taken only if entire sale consideration or part thereof has received on or before the date of “Agreement of sale” by any mode other than cash.
Facts: XYZ Developer Pvt. Ltd. enter into a “agreement of sale” as on 04.06.2014 for sale of a flat at rs. 60 lakh, whereas SDV on this date is rs. 80 lakh. Registration of transfer takes place as on 18.05.2015 and SDV at this date is rs. 95 lakh.
a). XYZ Developer Pvt. Ltd. received rs. 10 lakh on 02.06.2014 by account payee cheque from buyer:-
Actual sale consideration stipulated (i.e. Rs. 60 lakh) shall be compared with SDV on the date of Agreement to sale (i.e. rs. 80 lakh), since assesse received a part (i.e. 10 lakh) of consideration before the date of agreement (i.e. 04.06.2014) by mode other than cash (I.e. account payee cheque).
b). XYZ Developer Pvt. Ltd. received rs. 10 lakh on 02.06.2014 by cash from buyer:-
In this case Actual sale consideration sale be compared with SDV as on date of registration (rs. 95 lakh), since assesse received a part of consideration in cash on or before the date of agreement.
c) Section 56(2)(Vii):
Section 50C is applicable on the seller (holding the capital asset being immoveable property). However, section 56(2)(vii) is applicable on the buyer (being the individual or HUF) buying the capital asset being immoveable property.
1. This section states that where assesse purchase/receive capital asset being immoveable property at the price less than (more than rs. 50,000) SDV of such Immoveable property then difference shall be taxable as Income from Other Source.
2. SDV shall be taken on the date of registration of such transfer.
3. Where there is difference between date of “Agreement of sale” and date of “registration of transfer” then SDV on the date of “Agreement of sale” shall be taken only if entire sale consideration or part thereof has paid on or before the date of “Agreement of sale” by any mode other than cash.
d) Section 269SS and 269T:
In order to curb generation of black money by way of dealings in cash in immovable property transactions Finance Act, 2015 bring amendment in section 269SS and 269T, section 269SS is amended so as to provide that no person shall accept from any person, any loan or deposit or any sum of money, whether as advance or otherwise, in relation to transfer of an immovable property otherwise than by an account payee cheque or account payee bank draft or by electronic clearing system through a bank account, if the amount of such loan or deposit or such specified sum is Rs. 20,000 or more.
Similarly, section 269T also is amended so as to provide that no person shall repay any loan or deposit made with it or any specified advance received by it in relation to transfer of an immovable property whether or not the transfer takes place, otherwise than by an account payee cheque or account payee bank draft or by electronic clearing system through a bank account, if the amount or aggregate amount of loans or deposits or specified advances is Rs. 20,000 or more.
If any person involve in this violation of the provision of these section then 100% of the sum involve in the violation shall be imposed as penalty.
B. SERVICE TAX ISSUES (Section refer herein relates to Finance Act, 1994):
a. Preference Location Charges (PLC):
There can be following two possibilities for recovering PLC from the intending buyer:-
1). Clubbed Consideration:- There is no separate consideration for PLC and a single consideration is charged for the sale of Flat to the intending buyer. In simple words, consideration for PLC has been clubbed with other charged for construction of a flat. In this situation specified abatement i.e. 70% or 75% as the case may be, shall be available to the builder while discharging the service tax liability on that single consideration.
2). Separate consideration:- While rendering the PLC service to the intending buyer, there is no transfer of land or material from the service provider to the service recipient. Abatement in Service Tax is generally granted only in respect of such services where there is transfer of material along with provision of service. Usually, all houses/ floor in a complex or building do not have preference location. Therefore builder may not charger PLC in respect of all the houses/floors. Thus, an interference may be drawn that Construction service does not include the preferential location service. Where separate consideration for PLC is charged then abatement shall not be available.
c. Surrender /Cancellation of Flat before its completion:
Sometimes, buyer at his own will, surrender his flat booking to the builder and builder refunds either full amount or deduct some surrender charges and refund the balance amount. Such deduction is income of builder.
Sometime, builder cancel the flat booking of an intended buyer on account of default in payments or any other failure. In such situation builder refund the entire amount received from buyer after deducting the cancellation chargers.
Such surrender/ cancellation charges fall under the definition of service u/s 665B (44) of Finance Act, 1994, and these charges are also covered under the definition of declared service u/s 66E (e).
Hence, surrender/ cancellation charges also attract Service Tax.
d. Transfer of Flat before its completion:
Usually it happens in real estate sector that a buyer transfer his flat booking to another buyer and this another buyer agree to discharge the balance consideration payable to Builder. In such situation the important question arise is that whether transferor buyer is liable to pay service tax on such transfer?
On carefully examine the relevant provisions of statute it is clear that he is transferring only his interest in the immoveable property, which does not attract service tax. In such situation previous owner does not providing any service to the subsequent owner.
e. Buy-back of flat before completion:
Sometimes, builder buy back the flat booking from customer and pay entire amount (including service tax) received to the customer. In such case builder can make the adjustment of excess service tax paid in accordance with the provisions of rule 6(3) of Service Tax Rule, 1994.
f. Refund to the intended buyer:
In case of surrender, cancellation or buy-back builder has to refund the amount (inclusive of service tax recovered) received from buyer after deducting the relevant charges (if any).
Question arise in such situation is what about service tax paid on such provision of service?
To tackle this type of situation builder can make the adjustment of excess service tax paid on such transaction in accordance with rule 6(3) of service tax rule, 1994.
g. Re-selling of surrender /cancelled/bought back unit:
Where builder resale such unit before obtaining the completion certificate then builder has to discharge the service tax liability. If builder resale such unit after obtaining the completion certificate then there is no provision of service between builder and buyer, hence service tax liability does not arise.
h. Assured Return:
Some builder offers assured return to investor who invest in their project. Most of time these projects are commercial in nature. In assured return option builder agreed to give monthly return to investor on amount paid by them as down payment.
Normally in construction industry the builder receive construction linked payments from their customers and give no assured return to them. When builder want to receive more money they offers assured return. In these kind of transaction, builders are service receiver and investors are service provider. There is no service tax implication on the builder in such kind of transaction. However, there is also no service tax implication on investor who extending the money/loan/advance to builder in term of negative list u/s 66D(n)(i).
i. Administration charges/ Transfer charges/restoration charges:
All these types of charges fall under the definition of service as provided u/s 65B(44) and hence attracts service tax.
VAT stands for Value Added Tax, earlier it is known as Sale Tax. VAT is levied on “transfer of property in goods”.
1. Where builder sale a piece of land then there is no transfer of property in goods as land is not a goods. Hence VAT is not levied
2. Where builder sale the flat after its completion then there is also no transfer of property in goods as Flat is not a goods. Hence VAT is not levied
3. Where builder sale the flat before its completion/ during its construction period then there is transfer of property in goods as this is a works contract as per the article 366(29A) of Constitution of India, Hence VAT is levied.
If a transaction satisfied the all following points, then it is called as works contract: