There is no new tax that will be applicable on unsold inventories held by real estate developers for over a year. Tax experts say that an amendment to sections 22 and 23 of the Income Tax Act was introduced in the Union Budget 2017.

Media reports on Tuesday said that the Income Tax Department may levy a fresh tax on the unsold inventories in the real estate sector from the next financial year to check hoarding.

Budget 2017 had proposed that if any house property is held as stock in trade and such property is not let during the whole or part of the year, deemed annual value would be Nil for the period up to one year from the end of financial year in which certificate of completion of construction of property obtained from the competent authority. This is now being activated, say tax experts.

Properties held as stock in trade will be taxed at normal slab rate applicable to the taxpayer, i.e. 10, 20 or 30 percent, they say.

Also, the Central Board of Direct Taxes (CBDT) has over the last couple of years, in its Central Action Plan, advised its officers to take action to increase revenues by taxing unsold inventory held by developers, say tax experts.

Explaining the rationale behind the amendment, they say that in the real estate business, properties that have been constructed but are unsold are considered stock in trade for the real estate sector. “Developers are like traders in the business of selling houses. The government has realised that in case of builders who are not facing a cash crunch, there is a tendency to build houses and sell only a few. They then release the next lot into the market after increasing the prices. Such practices all along had led to creation of artificial increase in property prices and this move in an attempt to curb such activity,” says Harpreet Singh, partner, indirect taxes, KPMG in India.

As per provisions of section 22 of the Income Tax Act, if any person is having a house property and such house property is not being used for his self-occupation or business or profession, a deemed annual value to be charged to tax, even such house property is vacant for whole year. Exception to this provision is only for one house for self-occupation and a house property which is being used by assessee in his own business or profession.

As per provisions of section 23(1) of the Act, if a house property is let and it is vacant for whole or part of the year, such vacancy allowance will be available to the assessee. The Act is silent for the case in which a house property was never let. In those cases, a deemed annual value will be charged to tax.

In case of CIT vs Ansal Housing Finance & Leasing Co. Ltd [2016], Delhi High Court had held that provisions of sections 22 and 23 would be applicable and assessee would be liable to pay tax on annual letting value of unsold flats as income from house property. A final decision is yet to be delivered by the apex court, say experts. The case is as old as 2012.

Real estate developers too confirm that the tax proposed is not a fresh one but refers to the amendments introduced in Budget 2017.

“It is an old provision. Properties which have received completion certificate will be taxed at their Annual Lettable Value. It will be deemed that the developer has a deemed rental income from it and he has to pay tax on it. Developers have gone to court against this and lost in Delhi HC. The matter is now in SC. Also, the tax is not on under construction property, which is where most of the unsold inventory is. Only on completed inventory standing on developers books. The Liases Foras report does not give break up, but such inventory is probably less than 10 percent of the total,” says Pankaj Bajaj, MD, Eldeco and president of Credai-NCR.

The amendment was an attempt by the government to ensure that unsold stock lying vacant with developers for more than a year should be taxed and that would help reduce instances of hoarding of constructed units that are left unsold in the hope that they will be sold at a higher price earlier. Some builders even adopt this strategy to create artificial scarcity and inflate prices.

According to Liases Foras, the total unsold inventory across 50 cities is around 11.5 lakh units and will take developers another 44 months to sell this inventory. Will this tax force developers to reduce property prices or will prices correct?

“This tax is much required. We also need vacant land tax and vacant houses tax besides vacant inventory tax to ensure that hoarding of properties does not take place. There is a housing shortage in our country and we cannot afford to hoard housing stock. These taxes will help bring about efficiency in the economy,” says Pankaj Kapoor of Liases Foras.

Going forward, the focus should not be concentrate on increasing sales through price rationalization. Sales should increase by 20 percent to 30 percent. It is not that there are no buyers. To improve market efficiency, at least 11 lakh units should be sold per annum which is to say that sales should go up at least four times. The reality is that house prices have become out of bounds for homebuyers. Prices should become affordable, he says.

Once inventory is offloaded, sales increase, cash flows for developers will improve. This will lead to faster construction of units and increase in the number of loans disbursed by banks. This will have an impact on the overall economy, he says.

For bringing about efficiency in the economy, it is imperative that property prices and land costs are rationalized and also approval costs are reduced, he adds.

Gulam Zia, executive director at Knight Frank India, says that such a tax is likely to lead to a big blow to the real estate market and bring down prices. “The real estate sector is already in doldrums, it is still weathering the blows of Goods and Services Tax. This was lead to bloodshed ahead,” he says, adding data collated by MahaRera clearly indicates that there is over 2 lakh unsold inventory in the Mumbai market. “Unsold inventory was always there but now we have clarity with regard to data with regulators being set up.”

“Also, with RERA coming in, developers will no longer be in a position to hold on to incomplete flats or not take a completion certificate as long as they are not comfortable. With regulations in place, such excuses will no longer be available to them,” he adds.

In the latest joint report by Cushman & Wakefield, leading global property consultancy and Propstack, leading real estate data analytics and workflow solutions firm, the total of number of under construction residential units registered under MahaRERA are estimated at 670,339 across 5,620 projects. Of the total units registered, as many as 350,000 units remain unsold leading to an inventory overhang of 52 percent as of August 31, 2017