Taxing unsold flats: May not lower prices but will help fill govt's coffers

In a bid to fill up government coffers, the income tax department may soon start taxing ready, but unsold, flats held by builders, which may result in softening home prices or expensive litigation. If the finance ministry accepts this proposal, then builders will have to pay tax as if they were the owner of the flats and it will not matter whether the properties were rented out or not.

The Economic Times reported today: “On the basis of a court order, which held that ready unsold flats held by builders as stockin-trade are liable to be taxed as “income from house property” even if they are not rented out, the income tax department last week suggested the finance ministry that this was one way of garnering more taxes.”

According to the CIT v. Ansal Housing Finance & Leasing Co. Ltd case in 2012, the real estate developer was engaged in developing mini townships, residential properties, commercial and shop complexes.

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The Assessing Officer assessed the annual letting value (ALV) of flats which the builder had constructed but were lying unsold, under the head “Income from House Property”. Ansal Housing contended that the said flats were its stock-in-trade. The High Court, however, held that the builder was liable to pay income tax on the ALV of the unsold flats.

So if at the end of a financial year, one or more constructed units remain unsold, then according to a October 2012 decision rendered by the Delhi High Court, the ‘annual letting value’ of such housing units would be liable to be taxed as income from house property in the hands of the developer.

Currently, there are about 100,000 ready or close to be completed unsold properties measuring a total of 765.03 million square feet in top eight cities - Mumbai, Delhi, Bangalore, Chennai, Kolkata and Hyderabad- across India, according to data provided by real estate consultancy firm Liases Foras.

According to the research firm, home sales in the April-June quarter slid 9 percent in the top six cities. Mumbai Metropolitan Region (MMR) alone has an unsold inventory of 168 million sq ft. These apartments will take 45 months to sell, a large time lag considering it should not take more than eight months to a year.

“Currently, property market is inflated and over-stretched. No one, including end-users and investors, wants to invest money. and that has resulted in decline in property sales,” Pankaj Kapoor, MD, Liases Foras, said.

While the I-T department’s move is welcome, implementation will be tough and the proposal to tax unsold inventory is likely to result in further litigation. If a flat is held for an unreasonably long period, then it makes sense to tax the builder on the ALV for such a flat.

Builders usually hoard property in the hope of selling it at a higher price later. But it is desirable that he should be granted certain specified period of time for selling out the flat after the same is ready for some builders may genuinely find it difficult to find buyers in a slowing market.