I-T dept moves against hoarders: Unsold realty inventory may be taxed

The fresh tax would be applicable on such inventories from the next financial year, according to a senior I-T official

In a bid to curb hoarding of unsold inventories by real estate developers, the income-tax (I-T) department is set to tax unsold flats that have been lying with developers for more than a year.

According to a senior I-T official, the fresh tax would be applicable on such inventories from the next financial year. The move would reduce developers’ strategy of hoarding constructed property in anticipation of price escalation in future.  

The tax would be levied on the property that is held under “stock in trade” by the developers. The tax rate could be anywhere between 8 per cent and 10 per cent of the total value of the property, said an official in know. The Central Board of Direct Taxes has already sent the internal guidelines to I-T officials across the country. 

At present, Section 22 of the I-T Act says the annual value of the property of which the assessee is the owner…the profit made out of it are chargeable to income tax under the “income from house property”.

The said section would be extended to the property held as stock in trade in accordance with the books of the accounts of the developers, explained the official cited above. 

Sources say that the valuation of property would be identified/calculated on the basis of deemed annual value of the property.  In I-T terms, the deemed value of any property shall be the sum for which the property might reasonably be expected to be sold or let out from year to year. 

Tax officials are of the view that real estate developers, especially the big ones, create cartelisation and show artificial shortage in the market. So far, they have been evading the tax by classifying unsold stocks as stock in trade under the Act.

“We are assessing the pan-Indian real estate data of unsold flats, which have been kept for more than a year. The tax department is taking the stocks of state-wise unsold inventories, which could fall under the new tax regime,” said an official cited above.

According to him, the inventories are stagnant despite a fall in the property prices, which is not a good sign for the economy. 

The latest data compiled by real estate consultant Liases Foras suggests that in the top eight cities, which indicate the broader health of the real estate market, there is total unsold inventory of nearly 1000,000 units. However, data for 50 cities has 1150,000 unsold properties. This is when the real estate market is witnessing a slump despite a 20 per cent price correction in the past two years. 

According to real estate consultants, developers would take at least 44 months to sell these inventories in current pace of sales. “Taxing stocks in trade will increase burden on the real estate developers, especially when they are finding it difficult to sell stocks at the current market price. However, this will induce developers to sell property at competitive price,” said Pankaj Kapoor, founder and managing director of Liases Foras.

The government’s move to clamp down on black money hoarders through note ban has showed positive effect on the residential market in the country. Post demonetisation, many developers seen to have reduced prices. But at the same time, developers at cities such as Mumbai, Chennai and Bengluru are reluctant on lowering prices, citing reasons like high construction cost arising from liquidity issues and delay in obtaining approvals from several authorities.