City builders evade tax on unsold flats

Paying income-tax on unsold apartments under ‘notional rent’ is not a practice among builders in Hyderabad. Yet in 2015, the central government directed the I-T department to collect tax on unsold apartments under Section 43- CA of the IT Act, 1961. For most city builders, unsold apartments act like stock and they gain on the delayed purchase as and when the market rises.

The tax is meant to curb builders from storing properties and selling them when the market price rises. Because of this tax, some big builders seek building permission for many apartment blocks but complete construction only after the property is booked or sold. This way the builder avoids paying income-tax on unsold properties under construction.

Shekar Reddy, a builder, said, “An apartment project is said to be completed only when the Greater Hyderabad Municipal Corporation issues an occupancy certificate. Currently, in Hyderabad, the total number of unsold flats is negligible, as most builders, though they get permission for the whole project, complete construction only if there is a booking or purchase. The master plan for construction has been redesigned keeping in mind the risk factor. Also, real estate in Hyderabad has become affordable after the rate of interest dropped. Most builders are not left with stock (unsold flats), thus the practice of income tax on the stock is unscrutinised.”

In the years 2012-2013, political uncertainty caused the real estate business to plummet, as many apartments were left unsold.

“In the core city there are no unsold flats today, and while the market is keeping up in Cybercity, not many builders have stock to save and sell at higher price, and not many pay income tax for such properties,” added Vijay Sen of the Builders’ Association.

But B. Lokanath, a chartered accountant, warns that with the recent amendment to the IT Act section 43CA, the income tax department will begin a rigorous assessment of properties in the coming financial year. Officials in the income-tax department were not willing to speak on the record.