Affordable housing: Why are builders enjoying 100% income tax holiday and not passing on benefits to home-buyers?

Home builders have been enjoying 100 percent tax holiday under section 80-IBA of the Income Tax Act, 1961 (the Act) and earlier under its predecessor section 80-IB (10). This cosseting of builders of residential houses for the poor and middle class started in 1998 but has been kept going in perpetuity thanks to repeated shifting of the deadline.

Budget 2019 has given one more year to builders to seek approval from competent authority for their housing projects, i.e. by 31 March, 2020. The project has to be completed within five years of the approval, failing which the tax holiday would be withdrawn, i.e. the builder will be asked to pay the tax that was exempted. The Act, for good measure, puts conditions to ensure that residential houses aren’t palatial but modest to cater to the LIG and MIG segments of the society.

This is a generous tax exemption to builders but surprisingly comes without strings attached except for the mandate to complete projects within five years at the pain of withdrawal of the tax holiday. Why is it that the builders have not been mandated to pass on the resultant savings to the buyers as is the case under the Goods and Services Tax Act (GST) that kicked in from 1 July, 2017 subsuming the entire gamut of indirect taxes on all products and services save a few?

Representational image. Reuters

Representational image. Reuters

Recently, Hindustan Unilever Ltd (HUL)—the FMCG major, was slapped a notice to cough up Rs 455 crore by the National Anti-profiteering Authority (NAA) constituted under the GST on the ground that it did not pass on the benefits of lower GST to the consumers.

The concept of anti-profiteering is premised on the rationale that when input credit is available under the GST law, i.e. the tax paid on inputs by the earlier sellers in the supply chain is set off against the GST payable by a buyer, he ought to pass on the result savings in tax to the consumers. A point well-taken but difficult to implement as pointed out by HUL in its legal battle against the NAA order. There is no code to determine the cost so much so that it is difficult to prove profiteering.

The germane issue here is: Why is there is no parallel regime under the income tax law, especially in the context of tax holiday, granted to home builders? While buyers of goods and services have relatively very low stakes in retrieving the alleged profiteering, buyers of homes have a huge stake. It is not enough if they are charged GST on the home they have bought after giving credit for the input on cement, paints and other construction materials received by the builder. In addition, he also ought to share income tax holiday with them.

It is nobody’s case that a builder should not make profits or he should share the entire profits with the home-buyers. Everybody has the right to eke out a living and builders too have this right. But when the rationale of the income tax holiday was to make available to the LIG and MIG home buyers flats at reasonable prices, there ought to have been put in place a regime akin to NAA under the GST. In its absence, while the builders are laughing all the way to the bank, buyers are paying through their nose.

Fiscal purists may raise the pedantic defence of direct vs indirect tax. They may say that GST is an indirect tax which is passed on down the supply chain with the ultimate consumer picking up the tabs whereas income tax is an impost that is not capable of being passed onto the consumers. Ergo, when the income tax itself is not passed onto the consumers, any savings therein also ought to belong to the builders. This is a specious argument because when Parliament makes a law with the avowed aim of making houses affordable, it also ought to pin the builders with the responsibility to pass on the income tax savings to home buyers. One reckons the tax holiday would be substantial given the huge margin enjoyed by the builders.

(The author is a senior columnist and tweets @smurlidharan)

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Updated Date: Feb 13, 2019 15:45:46 IST

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