Joint development a boon for housing sector
Budget 2017 has proposed changing the capital gains tax liability for joint development agreement (JDA) to develop real estate projects. In future if a JDA is signed for the development of a project, the capital gains tax will only be paid in the year of completion of the project and not at the onset, as is currently the case.
This is expected to promote the JDA model as an efficient way of acquiring land parcels in a capital-scarce environment, and will provide a big boost to affordable housing projects.
It is also likely to bring down the cost of such projects, according to real estate experts. According to the proposal, the land owner would be taxed in the year of receipt of certificate of completion for the whole or part of the project. This is a welcome move by the government, as land owners had a tough time paying tax in the year of transfer even though the money was received from buyers when the project was nearing completion. How will this work? If a JDA is signed between the land owner and the developer, for say, Rs 50 crore (assuming that the land was bought for `10 crore a decade ago), and the returns expected from the project after completion is Rs 80 crore, the owner is expected to pay tax at the start of the project based on the future revenue potential. This anomaly has been resolved in the Budget.
“With the grey area done away with, JDAs will now be more acceptable going forward.It’s also expected to bring down additional costs on compliances and legal matters, a benefit likely to be passed on to homebuyers. In that respect this is an enabling step,” says Anckur Srivasttava of GenReal Advisers, a real estate consultant.
This will also ensure construction of more affordable housing projects due to additional land getting unlocked. It will also help minimise developers’ upfront capital requirements, and also optimise owners’ return on equity since there is no upfront tax liability, he added.
By doing away with this grey area, the Budget has finally looked at the entire development chain for affordable housing – right from making land parcels easily available to builders to buyers being able to purchase such units at reasonable prices. But what is still lacking is the single-window clearance for infrastructure projects, including affordable housing.
However, the relaxation has not been provided to corporate and non-corporate entities. Of late, small developers have been going for tie-ups with big builders for projects through the JDA model. “Generally, small developers own land parcels in SPV, partnership or LLP structure. Accordingly, upon entering into JDA for affordable housing projects by such small developers, the ambiguity around the timing of taxation would continue as the above relaxations are not extended to other taxpayers,” says Neeraj Bansal, partner and head, real estate and construction, KPMG in India.
To achieve the objective of promoting affordable housing projects and reducing the tax burden on taxpayers facing genuine hardship, the government should extend the above benefit to all entities, Bansal adds.
While experts foresee more transactions being undertaken under the JDA model in a capital-scarce environment, this tax rule applies only for area-sharing arrangement and not for revenue sharing, Bansal says.
Under a JDA, the land belongs to the owner with the developer doing the construction. Once the developer has performed his obligation and completed the project, the two parties share revenues or the areas in a pre-requisite ratio. To illustrate, if under the revenue-share model the ratio is 25:75 and apartments in a project are sold for Rs 100 crore, out of the total revenue realised, 25% will go into an escrow account as part of the landlord’s share. Under the area-share agreement in the same ratio, 25% apartments may form part of the landlord’s share and the rest will go to the builder.