The calamity in the real estate sector is likely to deepen with the IT department, set to charge a tax on unsold apartments, which have been vacant for more than 1 year. This means that if real estate organizations fail to sell an apartment after one year of receiving the OC, it now has to pay tax on the house. The government’s intention is to reduce real estate prices but to make the sector pay for holding stock-in-trade is draconian and unfair. Moreover, it singles out housing sector.
A developer will feel less motivated to build properties because the market is volatile and he/she may be liable to pay tax which he/she would not be able to sell. The impact on unit launches might be major in the months to come. In a sense, it defeats the government’s purpose of creating excess housing. Rather than increasing supply, such moves will lead to more cautious build-outs and prove counterproductive.
Developers may have to pay a tax equivalent to 30 percent of the rental value, assuming that the house or houses in question can be rented out. Effectively it might translate to 10 percent of the property value over a period of time. This means, on a projected price of Rs 6 cr, a developer could end up paying about 60 L as tax. Those real estate developers building luxury apartments may end up paying crores in tax, as such units traditionally have a longer sales cycle. At the end of Sep, as many as 450,000 units were unsold in the country. Of these, approximately 45 thousand units could be ready but unsold, which could potentially draw this tax.
An indication of the beginning of this tax was made in the union budget earlier this year, when it was proposed that if any unit is held as stock-in-trade and such property is not let out during the whole or part of the year, the deemed annual rate would be nil for the period up to 1 year from the end of financial year in which certificate of completion of construction of the unit was obtained from the competent authority. The implication was clear that after the 1 year period, the property would be taxed.
With further moves being taken in the direction of introducing such taxation, the industry is clearly upset and nervous. This is more so because the sector isn’t going through the best of its time. Buyer interest has been irregular at best. Sales plummeted to remarkable lows with demonetization a year back and until August, they were still more than 20 percent lower than last November. Without any fresh spur, the housing sector has had to deal with a series of disruptions. Implementation of GST has proved to be the major hindrance to sales and RERA implementation took more than 2 quarters which yet again was a setback for companies and have negatively impacted sales. Barring a few policies changes that announced this budget like affordable housing obtaining industry status and lowering interest rates, there has not been any significant trigger for a recovery to kick-start.
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