Will tax benefits reach the end user?
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Mechanism should ensure that the buyers get their share, writes R.P.Deshpande
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Photo: K. Murali Kumar
Vital question: Steps needed to ensure that tax benefits reach the end user.
The Union Finance Minister has recently announced that profits from housing projects, qualified under section 80IB(10) of the Income Tax Act and approved by the local authority between April 1, 2007 and March 31, 2008 will be tax free, if they are completed before March 31, 2012. In order to qualify for this tax exemption, the projects are required to meet certain conditions. But, the big question is how to ensure that this tax benefits will reach the end user or buyer of
housing units.
The profits made from residential projects depend on so many parameters such as land cost, construction cost and other taxes payable, which vary from one place to another, and it would be a daunting task to arrive at a uniform percentage of profit across areas. However, some element of standardization has to be adopted and for projects under Sec 80IB(10), the Income Tax department should be empowered to fix the profit of such projects. Let us analyse a project with the following parameters in order to understand the scale of benefits involved.
If the Land cost (50,000 sft @ Rs. 1,000 per sft) is Rs. 500 lakh. The construction cost of 125,000 sq.ft (Rs. 1,000 per sft , 125 units of 1,000 sft each) will be Rs. 1,250 lakh. If you include administrative and other expenses (Rs. 150 per sft) of Rs. 187.5 lakh and interest on borrowed funds utilized for construction of Rs. 150 lakh, the total Expenses would be Rs. 2,087.5 lakh.
The realised Sale price at Rs. 2,500 per sft would be Rs. 3,125 lakh and the Profit would be say Rs.1037 lakh
The Corporate Tax payable is 30% and including surcharge and cess, it becomes 33.99%.
In the above example, if profit is Rs. 1037 lakh and if it is taxable, the tax payable would be about 352 lakh. The entire tax is a saving for the Builder under Sec 80IB(10) and hence ideally speaking Rs. 352 lakh should be passed on to home purchasers. Since there are 125 home buyers with equal built up area of 1,000 sft, each owner should get a benefit of Rs. 2.8 lakh, apx. (352 lakh/125), which would be substantial saving for the home buyer. Even if the builder decides to retain 30% of the profit and pass on 70% tax saved to the home purchasers, each purchaser would stand to save Rs. 1.96 lakh.
The large sums involved explains why it is important to ensure that the Government incentives meant for thousands of lower income group citizens reach the target group.
The author is the Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail.com.
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