HOME & MONEY
Tax benefits must reach the buyer
R.P. DESHPANDE
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Some projects are tax free but builders may not pass on the benefits to purchasers
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Our Union Finance Minister recently announced that profits from housing projects, qualified under section 80IB(10) of the Income Tax Act and approved by a local authority between April 1, 2007 and March 31, 2008 will be tax free, if they are completed before March 31, 2012. The Minister has urged the builders to pass on the benefit to consumers.
The projects that qualify under the said section are required to meet certain conditions. The major ones are:
The project should be having at least one acre land
The project should be within 25 km from local municipal limits
The built-up area of each residential unit should be less than 1,000 sq. ft. in Mumbai and Delhi (1,500 sq. ft. in other places).
But, the big question is: will the tax benefits reach the end user? Recently in the Rajya Sabha, in reply to the debate on tax holiday announced under Sec 80IB (10) of IT Act, the Finance Minister observed “I expect the developers to pass on the benefit of the tax holiday to the home buyers. It should reflect in the prices. Unfortunately, it happens in our country that they (builders) pocket it.” Further, he has expressed his helplessness by saying that if the tax benefit is not passed on to the home buyers, no Finance Minister in the future will provide such tax benefits to residential projects.
The Finance Minister is very powerful in India and, instead of pleading helplessness, should initiate steps to introduce a proper mechanism to ensure that the tax benefit reaches the buyer.
It is necessary to single out builders who might be pocketing the tax savings and encourage the genuine builders.
Less profit
It is also to be observed that the profit range in constructing small houses is much less and hence the genuine builder, who is also helping the noble cause of providing affordable houses, should be compensated properly. It is suggested that instead of asking the builder to pass on the entire tax saving to the purchasers, the builder should be awarded 30 per cent of the tax saved and 70 per cent passed on the home purchaser.
How to arrive at profitability of residential projects?
As the profits made from residential projects depend on so many parameters including land cost, construction cost, labour cost, size of project, other taxes payable, and administrative cost, which vary from one place to another, it would be a daunting task to arrive at the percentage of profit. But standardisation has to be done and for projects under Sec. 80IB (10), the Income Tax Department should be empowered to fix the profit. An expert committee comprising Valuers and Chartered Accountants should be appointed to arrive at the profit for each project. The cost of the committee report should be recovered from the builder/developer.
Let us analyse a project with the following parameters:
Land cost (procured 50,000 sq.ft. @ Rs. 500 per sq.ft): Rs. 250 lakhConstruction cost (150,000 built up @ Rs. 700 per sq.ft. (150 units of 1,000 sq.ft. each): Rs. 1,050 lakh
Administrative and other expenses @ Rs. 150 per sq.ft.: Rs. 225 lakh
Interest on borrowed funds utilised for construction: Rs. 100 lakh
Total expenses: Rs. 1,625 lakh
Realised sale price @ Rs. 1,500 per sq.ft.: Rs. 2,250 lakh
Surplus (profit): Rs. 625 lakh
Percentage of profit: 38
Tax implications: The corporate tax is 30 per cent. Including surcharge and cess, it becomes 33.99 per cent.
In the above example, if profit is Rs. 625 lakh and if it taxable, the tax payable would be Rs. 212.4 lakh. The entire tax is a saving for the builder under Sec 80IB(10) and hence, ideally speaking, Rs. 212.4 lakh should be passed on to home purchasers. Many builders would reduce the sale price to pass on the tax benefit to home purchasers, whereas a few builders usurp the benefit and may not pass it on to the buyers.
Saving
Since there are 150 home buyers with equal built-up area of 1,000 sq.ft., each owner should get a benefit of around Rs. 1.4 lakh (Rs. 212 lakh/150). The saving for the buyer is nearly 10 per cent on the sale price, including registration and other charges. Even if the builder is allowed to retain 30 per cent of the profit and pass on 70 per cent tax saved to the purchasers, each purchaser would stand to save Rs. 1 lakh (i.e. Rs. 100 per sq.ft. on the sale price).
How to ensure the tax benefit reaches the home buyer?
The Finance Ministry and all concerned should evolve a proper control mechanism to ensure that the incentive meant for home buyers reaches them and not the pockets of a few builders. Associations such as CREDAI (Confederation of Real Estate Developers Associations of India) and Builders Association of India (BAI) should help in this regard.
(The author is the Director of Institute of Home Finance and can be contacted at deshpanderp2007@gmail.com)
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