CBDT suggests clarity on taxing real estate: Here are details

Releases draft rules on levying tax on under construction and completed projects

The income tax department has proposed to clear ambiguity over taxing real estate projects.

In its draft Income Computation and Disclosure Standards for real estate, the Central Board of Direct Taxes (CBDT) has suggested conditions where taxes will be levied on under construction real estate projects and where these will be imposed on constructed projects.

The draft says that in most projects such as townships, commercial projects, infrastructure projects etc, tax will be levied on under construction projects once three conditions are met. These conditions are: expenditure incurred on construction and development touches at least 25 per cent of total such costs, at least 25 per cent of the saleable project area is secured by contracts or agreements with buyers, and at least ten per cent of the total revenue as per the agreements of sale are realised in respect of each of the contracts.

In technical jargon, this method will come up where the economic substance of projects is similar to construction contracts.

However, where this is not so, such as the construction of a single house for the purpose of sale, tax will only be levied when it is constructed.

Explaining the draft norms, Gaurav Karnik, tax partner & real estate practice leader, Ernst & Young, said that they seek to bring clarity with regard to recognition of real estate revenues for tax purposes.

Currently, he said, there are no mandatory norms, instead, there is only a guidance note by the Institute of Chartered Accountants of India. These norms are based on that note.

Karnik also said that, currently, listed companies follow percentage of completion method, while some unlisted companies adhere to completed construction method.