Taxation of development agreement is most complex issue in recent times because nowdays stamp duty valuations of the development agreements are based on maximum potential FSI. The structure of the development agreement and consideration involves two flows of consideration.
One flow is from devoloper to landowner in form of consideration in kind with the monetary consideration if any and second flow is from landowner to developer in the form of FSI
Earlier the stamp duty valuation was done in following manner:
1. Value of consideration given by developer to landowner in kind with monetary terms if any including valuation of supporting services like alternate accomodation etc
2. Valuation of basic FSI transferred by landowner to the developer
whichever is higher
Whereas now stamp duty valuation is done for the maximum available potential FSI transferred by landowner to developer. such value is much higher than the said earlier value. This value includes notional value of the FSI which is actually not available with the landowner at the time of development agreement but potentially it might be available to developer in future and that too developer have to purchase the same from local sanctioning authorities or from the market at his cost.
At the time of development agreement , FSI available with the landowner is only the basic FSI and the developer can consume maximum potential FSI at later stage after loading the FSI’s/TDR purchased by him from local sanctioning authorities or from the market. It means at the time of development agreement, there is no availability of maximum potential FSI but on which stamp duty valuation is done which is a notional valuation.
As per section 50C of the income tax act, “Special provision for full value of consideration in certain cases.— (1) Where the consideration received or accruing as a result of the transfer by an assessee of a capital asset, being land or building or both, is less than the value adopted or assessed by any authority of a State Government (hereafter in this section referred to as the “stamp valuation authority”) for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall, for the purposes of section 48, be deemed to be the full value of the consideration received or accruing as a result of such transfer”. means stamp duty value should be considered as sale consideration in hands of landowner. same logic is applicable in case of 43CA as follows:
Section 43CA. Special provision for full value of consideration for transfer of assets other than capital assets in certain cases.—(1) Where the consideration received or accruing as a result of the transfer by an assessee of an asset (other than a capital asset), being land or building or both, is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed or assessable shall, for the purposes of computing profits and gains from transfer of such asset, be deemed to be the full value of the consideration received or accruing as a result of such transfer.
Further as per GST act, valuation of development rights is also considered the stamp duty value for paying off the liability of GST on the development rights under reverse charge in the hands of developer.
In effect it is clear that we have to pay off the tax liabilities under Income Tax Act and GST Act on the notional value as per above said stamp duty calculations.
Considering the above scenario, it looks like in most of the cases landowners and developers are end up with the paying relatively higher taxation.
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