Developers reasons on Property Prices correction not possible beyond 10% as per rules.

Dr Niranjan Hiranandani- President- Assocham and Naredco

Sale at price 10 per cent or more below ready reckoner rates results in additional tax burden on both, buyer and builder.”

When reducing price of a home more than 10 per cent below ready reckoner rates results in additional tax burden on both, buyer and builder, it is not a solution that works. Representations on this have been made by real estate over a period of time, and we await a positive response to the same.

The COVID-19 pandemic has brought to the fore various economic challenges across industries; residential real estate has been grappling with the impact of economic, taxation and industry reforms. The impact, demonetization onwards, has been reflected among other aspects, in lower sales. In the series of webinars which have been held post the lockdown, various leading personalities have suggested a solution to ‘unsold inventory’.

From HDFC Chairman Deepak Parekh to Hon’ble Ministers, the solution suggested is simple: unsold inventory results in holding and interest costs; rather than bear this burden, it makes sense for the developer to sell. And, if price points which are in existence since last three or more years of unsold inventories are not resulting in sales, the price point needs rationalization.

The logic is not flawed; most players in the industry acknowledge this. Why this has not happened so far is a technical problem, which is rooted in taxation and a limitation based on circle rates/ ready reckoner (RR) rates. If a developer reduces price of a home by more than 10 per cent below circle rates/ ready reckoner (RR) rates; both seller and buyer have to pay additional amount as tax.

Section 43CA of Income Tax Act, 1961 states that  any developer selling his inventory at a discount of more than 10 per cent of the ready reckoner valuation of the said property, will have to pay tax on the discount allowed.

So, when the sale price is lower than ready reckoner price by more than 10 per cent, then the ready reckoner price must be considered to be the sale price and tax paid on the said notional value.

This impacts the developer, there’s another aspect which impacts home buyers. This difference between the sale price – i.e. the discounted purchase price for the buyer and ready reckoner price, this is taxable as income in the hands of the buyer under Section 56 (2)(x) of Income Tax Act, 1961.

This results in double taxation of the same amount, first time in hands of developer as a tax on notional income, and then in hands of buyer as tax on discount earned presumed to be an income.

The way out, which Indian real estate has been mentioning in representations to authorities, has been either reduction in circle rates/ ready reckoner (RR) rates or removing Section 43CA and 56 (2)(x) of Income Tax Act, 1961. What the Hon’ble Ministers and leading personalities have said in terms of rationalize price points and sell is something that the provisions of the Income Tax Act block; and industry bodies like NAREDCO have been making representations about this since long.

If our representations are accepted; and due amendments carried out, we will see this problem getting resolved.