Realtors grim, buyers rejoice as 'unsold' units face the tax wrath

Are developers resorting to unfair means by hoarding 'unsold' flats, creating an artificial scarcity of units, only to sell them later at higher prices?

Atleast that's what the country's Income-Tax department seems to think. In a concerted bid to put an end to this practice which they suspect has been going on for nearly a decade now, the IT department now plans to tax realtors' pan-India on estimated annual rentals.

Slated to be anywhere between 15-20 percent, the new tax will be levied on any 'unsold flat' by treating it as 'income from house property' under Section 43-CA of the IT Act, 1961. The move is as per the central action plan for 2015-16.

With this, developers will now have to pay tax calculated on the basis of the Annual Letting Value (ALV) of their unsold flats regardless of whether the units in question have been rented out or not. Until recently, developers were exempted from paying income-tax on unsold projects under the 'stock-in-trade' category.
  
According to informed sources, the new tax on unsold realty stocks is not only expected to generate a substantial amount of revenue for the IT department, but also force realtors to either sell or rent their unsold units at market prices,  thereby increasing the supply of housing units across the country.

According to industry estimates, 'unsold' units across the country have touched a high of approx 6.89 lakh units in the first quarter of this year driven by the ongoing slump in realty sales.

It's further estimated that while Mumbai is sitting on unsold stocks sufficient for approx 46 months, developers in the Delhi-NCR belt, among the worst hit by the current slowdown, will take upto 72 months to clear their unsold inventory.

Expectedly the new tax is likely to have huge implications for the beleaguered realty industry already reeling from the current slowdown. With the increasing stocks of unsold real estate inventory now touching stratospheric levels across the country, realtors are already staring at the bottom of the barrel with high interest costs, scarcity of funds, high input costs and no takers for ready units worth thousands of crore.

The new tax, if implemented is likely to be akin to the final nail in the realty coffin, with developers and property investors now being virtually forced to declare their 'hidden assets' and offer them to buyers at market rates, or risk paying a hefty amount to the IT authorities.

However on a more positive note, the move is also likely to deter developers from deriving undue monetary advantage by hoarding such properties in their bid to offload them on completion of a project when prices are on the upswing.

Clearly this sudden twist in the realty tale is likely to bring about a huge smile on the collective faces of anxious property buyers who are now faced with the rare prospect of a win-win situation.

While the increased supply is most likely to bring about a price correction in some markets, the opportunity to set the terms of the property deal in the face of more amenable developers and investors now is also likely to give added meaning to the term - Customer is King.
    
Interestingly, it may be recalled that this is the second attempt to tax unsold inventory held by developers, with a similar move attempted a few years earlier coming undone when developers moved court against it.

However the latest attempt to bring such properties under the tax net is likely to bear fruit, with the court having delivered a judgment in favour of the IT department three years ago (2012).

In its judgment on the issue, the court had validated the department's stand that developers will have to pay tax calculated on the ALV format, regardless of the rental status of such properties.

Having now got the required clearance from the Finance Ministry, the IT department is said to be going ahead with implementing this new tax uniformly across the country.