Income Tax Implications on Joint Development Agreements ...€¦ · Unlisted share of a company,...

Income Tax Implications on Joint Development Agreements &

FDI in Real Estate

CA. Divakar Vijayasarathy

DVS Advisors LLPIndia-Singapore-London-Dubai-Malaysia-Africa

www.dvsca.com

Presentation Schema

What is a JDAWhen does CG

arise – Sec 45(1) What is a Capital

AssetWhat is Transfer

Taxation of JDATaxation of JDA-Revised Position

– 45(5A)

Case Studies (1 to 4)

Caveats

Practical IssuesDeduction of Profits from

Housing Projects

FDI in Real Estate

What is a JDA

What is a JDA

.

Land Owner

JDADevelopment of Flats/Property

Property Developer

Consideration = Cash/Building

Understanding Joint Development Agreement

• Owner of a Land and a Builder developing real estate project

• Agreement between them wherein owner contributes the land and builder develops the project on it

• Resultant flats developed in the project are shared between the builder and land-owner in a pre-agreed

proportion

• Along with resultant flats, land-owner may additionally receive monetary consideration

• Considering the above, there is a possibility of only capital gains tax implications under Income Tax Act, 1961

(“the Act”)

When does CG arise – Sec 45(1)

When does CG arise – Sec 45(1)

• Capital asset

• Should be transferred

• During the previous year

• Shall not be exempted under Section 54 to Section 54GB of the Act

Note: Receipt of consideration is not a pre-requisite for charging capital gains tax

What is a Capital Asset

Capital Asset – Sec 2(14)

• Property of any kind including management or control rights

• Prescribed securities under Securities and Exchange Board of India (“SEBI”) held by Foreign Institutional

Investors (FIIs)

Exclusions:-

- Stock-in-trade, raw materials or consumables for business purpose

- Personal effects not including jewellery, drawings, archaeological collections or any other work of art

- Agricultural land situated in India

- Specified Gold Bonds or Notified Gold Deposit Bonds or Special Bearer Bonds

What is Transfer

Transfer – Sec 2(47)

• Sale, exchange or relinquishment

• Extinguishment of any rights

• Compulsory Acquisition under any law

• Conversion of capital asset into stock in trade

• Maturity or redemption of Zero Coupon Bonds (“ZCBs”)

• Allowing possession of immovable property in part performance of contract referred in Section 53A ofTransfer of Property Act, 1882

• Any transaction which has effect of transferring or enabling the enjoyment of immovable property (becomingmember or acquiring shares of co-operative society or company, etc.)

• Transfer shall always be deemed to include disposing or parting with an asset or any interest in asset orcreating interest in any asset

Types of Capital Asset

• Short Term Capital Asset (“STCA”) and Long Term Capital Asset (“LTCA”)

• Type of Assets When STCA

Listed securities (other than units), listed shares, unitsof equity oriented fund, specified units of the UnitTrust of India (“UTI”), ZCBs

Held for 1 day to 12 months

Unlisted share of a company, land and/or building Held for 1 day to 24 months

Other capital assets Held for 1 day to 36 months

Note- LTCA shall be any capital asset not being STCA- Date of sale shall not be considered for calculating the period of holding of the asset

Taxation of JDA

Regular Provision

• The moment JDA is executed and possession is transferred – its becomes an event of transfer

• Such transfer gives rise to Capital Gains on the date of transfer

• Hence land owners would end up being liable for tax on the date of the agreement

• This was putting them in to severe hardships especially where the consideration was payable in the form of

buildings/property

Taxation of JDA- Revised Position – 45(5A)

Section 45(5A)

Notwithstanding anything contained in sub-section (1), where the capital gain arises to an assessee, being an individual or a Hinduundivided family, from the transfer of a capital asset, being land or building or both, under a specified agreement, the capital gainsshall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of theproject is issued by the competent authority; and for the purposes of section 48, the stamp duty value, on the date of issue of thesaid certificate, of his share, being land or building or both in the project, as increased by the consideration received in cash, if any,shall be deemed to be the full value of the consideration received or accruing as a result of the transfer of the capital asset :

Provided that the provisions of this sub-section shall not apply where the assessee transfers his share in the project on or before thedate of issue of the said certificate of completion, and the capital gains shall be deemed to be the income of the previous year inwhich such transfer takes place and the provisions of this Act, other than the provisions of this sub-section, shall apply for thepurpose of determination of full value of consideration received or accruing as a result of such transfer.

Explanation.—For the purposes of this sub-section, the expression—

(i) "competent authority" means the authority empowered to approve the building plan by or under any law for the time being in force;

(ii) "specified agreement" means a registered agreement in which a person owning land or building or both, agrees to allow anotherperson to develop a real estate project on such land or building or both, in consideration of a share, being land or building or both insuch project, whether with or without payment of part of the consideration in cash;

(iii) "stamp duty value" means the value adopted or assessed or assessable by any authority of the Government for the purpose ofpayment of stamp duty in respect of an immovable property being land or building or both.]

Issues

Taxation of JDA- 45(5A)

Particulars Implications

Applicability Individual/HUF

Eligible Income Capital gains arising from transfer of land and/or building under a JDA

Year of taxation Previous year in which the certificate of completion for the whole or part of theproject is issued by the competent authority and not the year of transfer

Sale consideration Stamp duty value on the date of issue of said certificate of assessee’s share in landand/or building in the project (+) consideration received in cash.

Cost of acquisition incase flats acquired aresubsequently sold

Full value of consideration as mentioned above

Event of violation Transfer of share in project prior to issue of completion certificate (earlier provisionsshall apply)

Consequence ofviolation

Capital gains for JDA as well as transfer of share is chargeable in the year of transferof such share - regular computation provisions, other than stated above, shall applyfor the purpose of calculating capital gains

Case Study 1

A Ltd

Land owner – 2 grounds – GV 130 lacs

ICOA- 50 lacs (19-20)

B Developer

JDA- 4 flats- 2 flats each- construction cost

30 lacs each

01.04.19

Possession transferred on JDA

18 months to complete 4 flats-30-09-20

ICOA- Land – 60 lacs(20-21) (for A ltd)

FMV – 75 lacs each

Construction cost – 40 lacs each

Case Study 1

• Provisions of Section 45(5A) shall not apply as the transferor is a company

• General provisions shall apply and as the transferred asset is a land; according to Section 50C of the Act,

construction cost or guideline value (50%) whichever is higher shall be regarded as sale consideration

• Capital gains shall arise and be taxable in the year in which the JDA is signed i.e. F Y 2019-20 in spite of the

fact that A Ltd actually realises the consideration only by 30.09.2020 on the date of issue of completion

certificate

Computation of Capital Gains of A Ltd for the year ending 31st March 2020

Particulars Rs in lakhs

Sale consideration (stamp duty value being higher than total construction of 2 flats) * 50% 65

Less: Indexed cost of acquisition (50% of Rs 50 lakhs) – as on 01.04.2019 25

Taxable long term capital gains 40

Case Study - 2

• Provisions of Section 45(5A) shall be applicable

• Capital gains shall be arising in the year of issue of completion certificate and not when the capital asset is

getting transferred

• Further, the full value of consideration shall be the stamp duty value of assessee’s share in the land and

building.

Computation of Capital Gains of Mr. A for the year ending 31st March 2021


Sale Consideration (stamp duty value of land and constructed components as on date of issue of completion certificate) 150

Less: Indexed Cost of Acquisition (50% of Rs 60 lakhs) – since only 50% of land is getting transferred - as on date of completion

certificate 30


Assume in Case Study 1- its Mr A instead of A Ltd

Case Study - 3

• Proviso to Section 45(5A) shall be applicable i.e. normal computational provisions shall prevail



Long term capital gains on JDA (Working Note 1) 35

Long term capital gains on sale of land value (Working Note 2) 15

Short term capital gains on sale of constructed component (Working Note 3) 15

Total 65

Assume in Case Study 2 Mr A had to sell one of the completed flats on 01 04-2020 (before issue of date of completion) wherein stamp duty value of land being Rs. 30 lakhs and that of flat being Rs. 45 lakhs

Case Study 3Working Note 1 (CG on JDA)


Sale consideration (stamp duty value

considered as on date of first transfer)

(50% of Rs. 1.3 crores or building value of

flats received whichever in higher) 65

Less: Indexed Cost of Acquisition (50% of

Rs 60 lakhs) (as of 01.04.2020) 30


Working Note 2 (UDS component)


Sale consideration (being stamp duty value of

land on date of second transfer) 30

Less: Indexed Cost of Acquisition (25% of Rs

60 lakhs) (as on 50% of land, 2 flats were

constructed, hence for 1 flat, 25%) 15


Working Note 3 (Building component)


Sale Consideration (being stamp duty value of constructed component) 45

Construction Cost 30

Taxable short term capital gains (Period of holding for STCG may to be

considered from entering JDA upto date of actual sale) 15

Case Study 4



Long term capital gains on JDA (Working Note 1) 120

Short term capital gain on sale of flats (Working Note 2) 10

Total 130

In Case study 2, Mr A had sold both the flats @ Rs 80 lakhs each on 1st of December 2020 after

completion (assume stamp duty value is less than Rs. 80 lakhs for both the flats)

Case Study 4Working Note 1 (on JDA)


Sale consideration (stamp duty of land as well as constructed component

on date of completion certificate) (Rs. 70 lakhs + Rs.40 lakhs *2) 150

Indexed cost of acquisition (50% of Rs 60 lakhs) 30


Working Note 2 (on Flat sale)


Sale Consideration (Rs. 80 lakhs * 2) 160

Cost of acquisition (as per Working Note 1) 150

Taxable short term capital gains 10

Caveats

Available to NR: Benefit of JDA provisions is available for non-resident individuals

Ownership is mandatory: Mere possession of capital asset shall not suffice – ownership is pre-requisite for claiming benefit

In case of violation - FMV on JDA date: In case of constructed components or rights in it are being sold subsequently before issuing of certificate of completion, the stamp duty value for the purpose of land, if considered, shall be as of date of entering JDA and not the date of subsequent sale of constructed components

Change in base for FMV: If the constructed components or rights in it are being sold subsequently before issuing of certificate of completion, there would be requirement of different stamp duty value for land as well as constructed component as the chargeability shall differ (Case study 3)

Practical Issues

Inclusion of UDS in full value of consideration

Certificate of completion issued for whole or part of project

Even part of the sale of share in the project

Period of holding of flats subsequently sold

Period of holding of flats subsequently sold before issue of certificate of completion

Deduction of TDS under Section 194-IC of the Act for resident

Case for commercial land / building

Building demolished by developer

Time period for exemption

Act

Deduction of Profits from Housing Projects –80IBA• 100% deduction available for assessee engaged in business of developing and building housing projects in relation to

income derived from such business - Works contract not eligible for deduction

• Project should be approved by competent authority on or before 31.03.2020

• Project should be completed within 5 years from the date of approval – if not, the deduction claimed in any of the

previous years shall be income in the year in which period of completion expires

• Unit once allotted to an individual, no other unit shall be allotted to the same individual or spouse or minor children

• Deduction claimed once under this Section, no deduction allowed elsewhere

• Particulars Cities of Chennai, Delhi, Kolkata or Mumbai Other Place

Plot of land Not less than 1000 sq mts Not less than 2000 sq mts

Carpet area of residential unit Not exceeding 30 sq mts Not exceeding 60 sq mts

Usage of floor area Not less than 90% Not less than 80%

Carpet area of commercial establishments Should not exceed 3% of the aggregate carpet area

FDI in Real Estate

Permitted Activities

• FDI is prohibited in:

• real estate business,

• construction of farm houses and

• trading in transferable development rights

• Real estate business means dealing in land and immovable property with a view to earning profit or earning

income therefrom and does not include development of townships, construction of residential / commercial

premises, roads or bridges, educational institutions, recreational facilities, city and regional level

infrastructure, townships.

• It shall be noted that earning rental income on leasing of property is allowed for the purpose of FDI

• 100% FDI under automatic route is allowed in real estate sector analysed above

Applicable Conditions

• No minimum capitalisation requirement

• Each phase of a project shall be considered as a separate project for the purpose of FDI

• No minimum area requirement and no requirement of procuring empanelled architect by investee company

• Investee Company is permitted to sell only developed plots and is responsible for obtaining all approvals,

payment of charges and compliance with local government laws

• Project should comply with land use requirements, provision of common facilities and community amenities

as per applicable laws

• Investment is allowed both in new as well as existing projects

Lock-in Period Conditions

• Lock-in period of 3 years – not applicable to hotels & tourist resorts, hospitals, Special Economic Zones

(“SEZs”), educational institutions, old age homes and investment by non-resident Indians (NRIs)

• Transfer of stake by non-resident investor to another non-resident investor on non-repatriation basis not

subject to lock-in period

• Transfer of control from resident to non-resident is permitted subject to lock-in period

• Investment in completed assets or completed projects is allowed subject to restriction on transfer during the

lock-in period

Investment by Non-residents

• Restrictions and conditions mentioned previously does not apply for investment by NRI provided he must

invest in his or her individual capacity

• No restrictions shall be applied for investments by Foreign Institutional Investor (“FIIs”) in listed companies

engaged in real estate development

• No restriction on FII investing in Initial Public Offerings (IPOs) and pre-IPO placements by real estate

companies; however, there would be 3 year lock-in period for investments in pre-IPO placements by real

estate companies

• Venture Capital Funds (“VCFs”) and Foreign Venture Capital Funds (“FVCFs”) can invest in Venture Capital

Undertakings (“VCUs”) engaged in real estate activities subject to specified conditions and regulations of SEBI

Thank YouDVS Advisors LLP

India-Singapore-London-Dubai-Malaysia-Africa

www.dvsca.com

Research Credits – Kavitha Divakar & CA Jugal Gala

Copyrights © 2019 DVS Advisors LLP

Credits and AcknowledgmentsJugal Gala

DVS Research Team

http://www.dvsca.com/

Income Tax Implications on Joint Development Agreements ...€¦ · Unlisted share of a company,...

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