Workshop on Tax and Accounting Developments in Indian Real ... Mumbai workshop - 11... · Withholding tax on transfer of immovable properties • a new provision applicable on transfer

Workshop on Tax and Accounting Developments in Indian Real Estate SectorNational Real Estate Development Council11 June 2013 Mumbai

Walker, Chandiok & Co All rights reserved.

Direct tax issues

Vishwas PanjiarDirector, Tax & Regulatory Services

Contents

• Budget proposals

• Some pertinent tax issues


Budget Proposals


Budget Proposals

Agricultural land : A new meaning

• meaning of 'capital asset' being an immovable property changed• classification of a capital asset based on the distance read with population of the area• shortest aerial distance to be considered• area beyond 8 kms is not a capital asset

• earlier notification becomes redundantImpact


• earlier notification becomes redundant• a welcome step for smaller cities / area

Impact

Distance from Municipality limit

Population of the Municipality

Within 2 kms More >10,000 but < 100,000

Within 6 kms more > 100,000 but<10,00,000

Within 8 kms More> 10,00,000

A comparative view

Area Population* Distance as per Notification

Distance as per the Act

Impact of Amendment

Amravati > 10 lakhs 5 Km 8 Km Unfavourable

Aurangabad > 10 lakhs 8 Km 8 Km No Impact

Chandrapur > 10 lakhs 5 Km 8 Km Unfavourable


Yavatmal > 10 lakhs 5 Km 8 Km Unfavourable

Mr. A is in possession of a property in Chandrapur. He contemplates to sell the property and approaches you to guide on the taxability on sale of such property.

Illustration

*Data respect to population is extracted from latest information available in www.censusindia.gov.in

Immovable property being stock-in-trade

• higher of stamp duty value or actual transaction price relevant for tax computation• applicable on the sale of land and/or building held as stock in trade• introduced on lines of section 50C• sale would be taxable as Business Profits• the stamp duty value on the date of agreement applicable based on certain conditions


• additional liability of Income-tax in the hands of LOCsImpact

• interpreting the term 'transfer'• applicability on Transfer of Development rights• applicability where property is not into existence

Issues

Immovable property being stock-in-trade

Developer Co.

Funds Rs.100Sale Price Rs.110Circle rateRs.200

Developer Co.

Funds Rs.100Sale Price Rs.110Circle RateRs.200

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In Year '0'Taxability in the hands of LOCTaxable income = 110-100 i.e. Rs. 10

Taxability in the hands of Developer SP to customer = Rs.400Construction cost = Rs. 100

Taxable income = 400-110-100 i.e. 190 which will be taxed over the period of construction

LOC

In Year '0'Taxability in the hands of LOC, when circle rate = Rs.200Taxable income = 200-100 i.e. Rs. 100

Taxability in the hands of Developer SP to customer = Rs.400Construction cost = Rs. 100

Tax = 400-110-100 i.e. 190 which will be taxed over the period of construction

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Immovable property received for inadequate consideration

• transfer involving inadequate consideration• stamp duty value – sale consideration > Rs. 50,000• differential value taxable in the hands of buyer• where date of agreement = date of registration, value as on the date of agreement to be

considered• transaction should not involve cash


• Widens the scope of Section 56Impact

• Amendment leads to double taxationIssues

Immovable property received for inadequate consideration

Individual buyerCompany A

Sale value


Representative of Company A

Taxed under section 43CA

Taxed under section 56(2)(vii)(b)

Stamp duty value = Rs.5,500,000

Sale valueRs.5,000,000

Withholding tax on transfer of immovable properties

• a new provision applicable on transfer on immovable property• exception – agricultural land• withholding tax @ 1% on the total sum paid as consideration• TDS triggered where the consideration exceeds Rs 50 lakhs• similar provision introduced in last year's budget, but not enacted

- registry of the property is not contingent on TDS • compliance procedures notified


• compliance procedures notified

� compliance burden in the hands of the buyerImpact

• applicable on primary or secondary sale or both?• applicable in case of slump sale/ demerger• whether applicable on payment made by banks on behalf of the

buyer

Issues

Deduction of interest on housing loan

• allowed to individual• additional deduction upto Rs.1 lakh of interest• loan from financial institution• conditions for availing benefit :

- amount of loan <= Rs. 25 lakhs- value of residential property <= Rs. 40 lakhs- no other residential property on date of sanction of loan


- no other residential property on date of sanction of loan- loan taken within FY 13-14

• roll over of deduction to FY 14-15, if not fully utilized

• will witness demand in Tier II and Tier III citiesImpact

• availability of deduction for one year only• availability of the enhanced limit with the falling interest rateIssues

Pertinent Tax Issues


Pertinent Tax Issues

Deduction on payment basis

• deduction of certain expenses allowable on payment basis – section 43B• payment to be made on or before the due date of filing of return• such expenses include PF, tax, duty, interest payable to banks etc.


• disallowance of 43B items where the WIP is transferred to P&Lissues in real estate


contribution to Provident Fund,

Gratuity, interest to bank etc.

overheads.

Profit & Loss A/c

Particulars Amount

Incomes

Sales and other receipts xxxx

Expenses

WIP


overheads.

construction cost

land cost

Expenses

Transferred from WIP (Proportionate cost as per percentage completion method)

xxxx

Net Profit/ Net Loss xxxx

Bank ALoan taken on 1 July 2012

Interest payment due on 31 October 2013

Illustration -

What should be the tax treatment in the converse si tuation? The section 43B expense item has been paid but has not been

charged to the P&L



31 October 2013

• In the example given above, if the interest to the bank is due after the due date of return. Even then in the books of the company, interest will be accrued for the period till March 2013 and such interest will form part of WIP

• On 31 March, the company will charge portion of the WIP to P&L account, which will also include a portion of the interest accrued to the bank, which has not been paid. How to identify such expenses for disallowance?

• Interest allowable as deduction when capital borrowed for the purposes of business.

Bank ALoan of Rs.10 crore CInterest free loan

Illustration -

Interest on loan funds - loan


� What is commercial expediency?

� Is it beneficial to charge interest from group companies?

Issues

• This issue has been originally settled by the Apex Court in case of S A Builders (288 ITR 1)

• Recently in case of Tulip Star Hotels Ltd (21 taxmann.com 97) the SC held that the S.A Builders ruling needs reconsideration

Bank A

Interest

C

Section 36(1)(iii) and Section 14A

Thank You

Vishwas PanjiarDirector, Tax & Regulatory ServicesWalker, Chandiok & Co

M 91 93509 40679E [email protected]


Documents

Workshop on Tax and Accounting Developments in Indian Real ... Mumbai workshop - 11... · Withholding tax on transfer of immovable properties • a new provision applicable on transfer