Real Estate Sector In India - Certain Tax and Regulatory Aspects (2013) - RSM India publication

| Real Estate Sector In India

REAL ESTATE SECTOR IN INDIA- Certain Tax And Regulatory Aspects

ØThe Real Estate (Regulation and Development) Bill, 2013

ØAccounting Standards (including Guidance Note issued by ICAI)

ØForeign Investment Guidelines in Real Estate Sector

ØDirect Tax (including impact of recent changes)

ØIndirect Tax (including Service Tax Amnesty Scheme)

Includes

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CHAPTER 1 : BACKGROUND 1

CHAPTER 2 : PROPOSED REGULATORY BILL FOR REAL ESTATE SECTOR 7

CHAPTER 3 : COMPLIANCE CALENDAR 11

CHAPTER 4 : INCOME TAX & WEALTH TAX 19

CHAPTER 5 : SERVICE TAX REGULATIONS 35

CHAPTER 6 : VAT AND WORKS CONTRACT REGULATIONS 53

CHAPTER 7 : STAMP DUTY REGULATIONS 67

CHAPTER 8 : FOREIGN INVESTMENT REGULATIONS 69

CHAPTER 9 : FINANCIAL REPORTING STANDARDS 77

CHAPTER 10 : CERTAIN PROPERTY RELATED LAWS 94

ABBREVIATIONS 102

REAL ESTATE SECTOR IN INDIA- Certain Tax And Regulatory Aspects

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CONTENTS

1.1 Real Estate Industry In India

The sustained growth of the Indian economy in the past few years has resulted in a phenomenal growth of the real estate sector in India as evident from the changing skylines of all Indian cities and townships. The hub of industrial parks, high-rise residential complexes, sprawling malls, huge commercial complexes and brightly colored cranes, rubble,construction and hordes of workers scurrying up and down the toweringskyscrapers, are the testimony of the explosion of real estate sector in India.

Currently, contribution of realty sector to Indian GDP is about 5% and its market size is expected to touch US$ 180 billion by 2020. The demand of affordable housing by lower income group was estimated at 19 million households in 2012 and expected to reach 900 million by 2050. As such, it is expected that residential real estate sector will witness a steady demand rise in future.

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CHAPTER 1: BACKGROUND

Real Estate Sector In IndiaRSM Astute Consulting

15685

12062

1842

847 109692

0

2000

4000

6000

8000

10000

12000

14000

16000

USA Eurozone India

GDP

Real Estate Mkt Size

(*5.4%)

* Represents % of GDP (Source: Trading Economics, OECD, IBEF & useconomyabout.com. Data for YE Dec '12)

GDP and Real Estate Contribution

(*9.1%)

(*5%)

US$

in B

illio

ns

2 | Real Estate Sector In India

The real estate sector is the second largest employer in the country next only to agriculture. The growth in demand has resulted in emergence of several organized real estate developers and intermediaries. In certain segments of real estate, there is an influx of investments by private equity firms, overseas investors, domestic financial institutions and speculators, which is adding to the hype and frenzy created in the concrete world of real estate in India.

Flying high on the wings of booming real estate, property in India has become a dream for every potential investor looking forward to earn profits.

The relaxed FDI guidelines have invited more foreign investors, and accordingly real estate in India is seemingly the most lucrative ground at present. The revised investor-friendly policies allowed foreigners to own property and dropped the minimum size for housing estates built with foreign capital to 25 acres (10 hectares) from 100 acres (40 hectares). The overseas investors can now develop real estate projects as long as the project surpasses 50,000 square meters (538,200 square feet) of floor space. Recently, the government has announced its intention to reduce this limit to 25,000 square meters.

The organized reta i l pro ject completion rate will witness more than 100% rise in year-on-year basis in 2013. 9.5 million square feet of additional mall space will be added in 2013. Of the total mall space absorption in the country, Mumbai, Delhi NCR, Chennai and Bangalore will have the major share, around 70%. Other cities like Hyderabad, Kolkata and Pune will absorb the rest 30%.

Government’s approval of FDI into multi-brand retail is set to be the most influencing factor on the retail scenario of the country. As per recent reports, India has replaced USA as the second most-preferred FDI destination in the world. The relaxation of FDI will open up portals to major MNC retail brands in India, which will be instrumental in increasing the retail space absorption in the country.

1.2 Regulatory Framework

1.2.1 Foreign investment



Government policy now permits FDI of up to 51% into multi-brand retail, which will invite products, practices and technologies to Indian retail sector. Along with it, 50% of total FDI will be directed towards infrastructural facilities like warehousing and logistics, which will further boost the retail growth in the long run. Recently, the Union Cabinet has approved certain relaxation in the conditions attached to the opening of FDI in multi-brand retail trading.


1.2.2 The proposed real estate regulatory bill

Realty sector in India has seen an unprecedented growth after liberalization in 1991. However, there was no direct regulatory supervision on real estate sector by any authority similar to Telecom Regulatory Authority of India or Insurance Regulatory & Development Authority. To overcome this, the Government has proposed ‘The Real Estate (Regulation and Development) Bill 2013’, which provides certain protection to customers and helps real estate sector to grow in an orderly way. However, this would be effective only upon passing of the Bill in Parliament.

(Source: DIPP)

FDI vis-à-vis Real Estate Sector in India

37.7

34.9

46.6

36.9

2.9 1.2

3.11.3

0

10

20

30

40

50

2009 -10 2010 -11 2011 -12 2012 -13

Total FDI Recd. by India

FDI Equity Recd. ByReal Estate Sector (%age of total FDI recd.)

(7.8%)(3.5%) (6.7%)

(3.6%)

US$

in B

illio

ns


1.2.3 Levy of service tax

1.2.4 Levy of VAT

Service tax was introduced in Indian tax regime in the year 1994. Further, subsequent amendment brought construction activity in service tax regime. However, there was a controversy between service tax administration authority and real estate developers as to the applicability of service tax to real estate developers. This has been settled by introducing amendment in service tax law from 1 July 2010 by amending the definition of services under ‘construction or industrial construction’ and ‘construction of complex.’ Further, under negative-based taxation approach from 1 July 2012, certain services, which include construction of complex, works contract and renting of immovable property, have been covered under declared services. This has brought real estate developers into service tax net. Service tax law provides option to real estate developers to choose abatement method to arrive at service tax liability on 25% or 30% of accrued revenue depending upon the value and area of real estate transaction as the case may be.

Recently, service tax law has provided a scheme called ‘Service Tax Voluntary Compliance Encouragement Scheme.’ Under this Scheme, the assesse can declare service tax liability for the period October 2007 to 31 December 2012 and submit a declaration before 31 December 2013 and pay service tax liability in installments i.e. 50% before 31 December 2013 and 50% before 30 June 2014. This will enable waiver of interest and penalty under service tax law.

Levy of VAT is a State subject. The majority of states in India levy VAT on transfer of property involved in the execution of works contract. There has been a controversy whether activity of real estate developers attracts VAT and whether State has power to levy tax on real estate developers. This controversy has been settled by the constitutional amendment empowering states to levy works contract tax (WCT). Further, the issue relating to levy of VAT on sale of a unit under construction has been upheld by the Honourable Bombay High Court in a writ petition filed by the Maharashtra Chamber of Housing Industry. While the issue is to be finally settled by the Honourable Supreme Court, presently, VAT is collected



by the State Governments on the transfer of goods involved in the execution of works contract. The different States have different rates of VAT on goods involved in execution of works contract. As the determination of VAT in real estate transaction is a complex issue, the VAT law provides option to the assesse to choose composition method.

The direct tax law regulations have been recently amended to provide for more stringent regulations for real estate transactions. The measures taken by the government in this regard include levy of withholding tax at 1% on certain real estate transactions of Rs.50 lakhs or more, taxation on the differential amount in case of transfer of real estate at a value below stamp duty valuation, levy of withholding tax on renting of immovable property for a rent exceeding certain limit, etc. Hence, the Government of India expects a rise in collection of revenue from real estate transactions in future.

There was no uniformity within the accounting fraternity in respect of accounting of income in case of real estate developers. It was a controversy whether ‘Project Completion Method’ or ‘Percentage Completion Method’ is to be considered as a valid method of accounting. The Accounting Standards i.e. AS-7 or AS-9 issued by the ICAI in the past provided limited guidance on this aspect. In the year 2012, the ICAI has issued a guidance note on ‘Accounting for Real Estate Transactions,’ which is intended to apply to enterprises dealing in real estate as sellers or developers. This would be applicable in case of real estate projects commencing on or after 1 April 2012. This will bring uniformity in accounting of income on certain parameters such as receipt of minimum revenue, execution of sale of real estate up to a certain level, incurring of construction expenses upto a certain level, etc. This will help in booking of revenue in advance or deferring of revenue to subsequent accounting periods.

Going forward, while the real estate sector will continue to grow, there will be

1.2.5 Widening of direct tax ambit

1.2.6 Financial reporting framework

1.3 Real Estate – Going Forward



greater focus on transparency and improved governance. There will be a much higher level of overview by the regulatory authorities (after the enactment of Real Estate Regulatory Bill) and greater ability for foreign investors and NRIs to invest in the Indian real estate. The compliances with service tax, VAT and the income-tax authorities will result in substantially higher level of tax incidence and exposure.


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CHAPTER 2: PROPOSED REGULATORY BILL FOR REAL ESTATE SECTOR

2.1 Background

2.2 Applicability Of The Bill

2.3 Key Highlights Of The Bill

The Rea l Es ta te (Regu la t ion and Development) Bill, 2013 (‘the Bill’) approved by the Union Cabinet on 4 June 2013, is an initiative to protect the interest of consumers, to promote fair play in real estate transactions and to ensure timely execution of projects. Currently, the real estate and housing sector is largely unregulated and opaque, and consumers are often unable to procure complete information or enforce accountability against builders and developers in the absence of effective regulation. This Bill seeks to create a regulator for the real estate sector to protect interests of buyers by providing a uniform regulatory environment. The Bill necessitates establishment of one or more ‘Real Estate Regulatory Authorities’ in every State/UT, to oversee real estate transactions. The Bill is also expected to promote regulated and orderly growth through efficiency, professionalism and standardization. It seeks to ensure consumer protection, without adding another stage in the procedure for sanctions. However, the Bill will be effective upon passing of the Bill in Parliament and subsequent notification in Gazette.

The proposed Bill is limited in its applicability to residential real estate i.e. housing and any other independent use ancillary to housing.

ØThe Bill directs developers to sell their properties only on a 'carpet area'

basis, thus doing away with all other concepts prevalent in the market at present. Carpet area is the actual net usable floor area of a residential unit and does not include the area covered by walls and common area.

ØMandatory registration of real estate projects and real estate agents who

intend to sell any immovable property, with the ‘Real Estate Regulatory Authority’. The Bill proposes that all residential projects with plot areas of


8 | RSM Astute ConsultingReal Estate Sector In India

4,000 square meters or more need to be registered with a regulator, which will be possible after the developer submits all necessary clearances. Each project and phase has to be registered separately and non-compliance of this provision is a penal offence.

ØThe Bill seeks to safeguard buyers against misleading

advertisements, pertaining to the quality of services or amenities proposed that the developer has not secured. Buyers are entitled to get refund with interest or compensation in case it is found that the advertisements and promotions were false or misleading.

ØThe Bill mandates that ‘70% or such lesser percentage, as notified by the

appropriate state government’ of the money raised for a project should be deposited in a separate account. By ensuring that developers do not divert funds meant for a particular project to their other projects, the Bill seeks to curb delays in project completion, due to shortage of funds. The Bill also protects buyers against project delays by requiring that developers refund the amount paid along with interest in the event of a delay. Both these factors are expected to ensure timely completion and handover of projects to the buyers.

ØPunitive provisions including de-registration of the project and penalties in

case of contravention of the provisions of the Bill or the orders of the Authority or the Tribunal.

ØMandatory public disclosure norms for all registered projects, including

details of the promoters, project, layout plan, plan of development works, land status, carpet area and number of the apartments booked, status of the statutory approvals and disclosure of proforma agreements, names and addresses of the real estate agents, contractors, architect, structural engineer, etc. All these details will be maintained in a public database which can be assessed by general public. The system is very similar to what we have at present in case of Registrar of Companies.

ØThe Bill also mandates registration of real estate agents with the authority,

to ensure that agents only facilitate sale of registered properties. Functions

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of Real estate agents: Real estate agents not to facilitate the sale of immovable properties, which are not registered with the Authority required under the provisions of the Act, obligation to keep, maintain and preserve books of accounts, records and documents, obligation to not involve in any unfair trade practices, obligation to facilitate the possession of documents to allottees as entitled at the time of booking, and to comply with such other functions as specified by rules made in that regard.

ØDuty of promoters towards disclosure of all relevant information and

adherence to approved plans and project specifications, obligations regarding veracity of the advertisement for sale or prospectus, responsibility to rectify structural defects, and to refund moneys in cases of default. No amount can be received by the promoter without first entering into a written agreement.

ØEstablishment of one or more ‘Real Estate Regulatory Authority’ in each

State/UT, or one Authority for two or more States/UT, by the Appropriate Government, with specified functions, powers, and responsibilities to exercise oversight of real estate transactions, to appoint adjudicating officers to settle disputes between parties, and to impose penalty and interest. The regulatory authority shall have extensive powers under the Act and can interfere with the project at any stage if the rules and regulations are not complied with the promoter.

ØIt provides for establishment of fast-track dispute resolution mechanisms

for settlement of disputes, through adjudicating officers and Appellate Tribunal. Further, Civil Courts will have no jurisdiction in such matters.

ØEstablishment of Central Advisory Council to advise the Central

Government on matters concerning implementation of the Act, with a mandate to make recommendations on major questions of policy, protection of consumer interest and to foster growth and development of the real estate sector.

ØAppropriate Government to have powers to make rules over subjects



specified in the Bill.

The Bill, when enacted by the Parliament, will bring about standardization in the sector leading to healthy and orderly growth of the industry through introduction of definitions such as ‘apartment’, ‘common areas’, ‘carpet area’, ‘advertisement’, ‘real estate project’, ‘prospectus,’ etc.

2.4 Conclusion

3.1 Background

This chapter deals with compliances under certain laws. In India, there are numerous laws enacted, which provide compliances on regular basis. Below is the list of significant compliances under Income-Tax Act, FEMA, Service Tax, VAT, etc.

CHAPTER 3: COMPLIANCE CALENDAR

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Sr. Particulars Due DateNo

3.1.1 FEMA compliances:

3.1.2 Income tax compliances:

i. Annual performance report in 30 June every yearForm APR

ii. Annual return of foreign liabilities and 15 July every yearassets (FLA) in Form FLA

iii. ECB returns in Form ECB -2 7 days from the close of the month

iv. FDI in Advance Reporting Form 30 days of receipt of money

v. Non-resident person acquiring 90 days from the date of acquisitionproperty in India in IPI Form of immovable property

A TDS/ TCS compliance

i. Return cum challan in Form 26QB for 7 days from end of the month in1% TDS on transfer of immovable which deduction is madeproperty under section 194 – IA

ii. TDS/TCS statements for other 15 days from the end of quarter forpayments in Form 24Q/ 26Q/ 27Q/ 27EQ 1st, 2nd and 3rd quarter of the year

and 15 May for the last quarter ofthe year

iii. Issue of TDS/TCS certificate in • Form 16 – by 31 May annually

• Form 16B - 15 days from the due date for furnishing the challan-cum-statement

• Form 16A/27D- 15 days from the due date of furnishing of TDS/TCS statement


Form 16/16A/16B/27D

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iv. Filing in Form 15G/ 15H/ 15I for 7 days from the date of receipt non deduction of tax at source

B Return of Income / Return of Wealth / Tax Audit Report / Transfer Pricing Report

i. Person covered under tax audit 30 September(other than those to whom transfer pricing is applicable)

ii. Person covered under Transfer pricing 30 November(including those covered by domestic transfer pricing)

iii Other persons Corporate assesse - 30 SeptemberOthers - 31 July

C Annual information return

i. Annual information return in case of 31 August of the following year certain specific transactions to be reported under section 285BA by specified persons

i. Payment of service tax under Rule 6(1) 5th of the month (6th in case of of the Service Tax Rules, 1994, in e-payment) subsequent to theGAR – 7 Challan month/quarter for which the tax is

to be paid. (For the month/quarterending March, the due date is 31 March)

ii. Half yearly service tax return under • For the period April to September -Rule 7(2) of the Service Tax Rules, 1994, 25 Octoberin Form ST-3

• For the period October to March - 25 April

A Maharashtra

i. MVAT return (in Forms 231-235) / CST 21 days from the end of the monthReturns ( in form IIE)

ii. MVAT audit in Form 704 15 January of succeeding year

3.1.3 Service tax compliances:

3.1.4 VAT compliances:

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13 | Real Estate Sector In IndiaRSM Astute Consulting


iii. Profession tax return:

a If tax liability during P.Y. > Rs.50,000

PTRC return in Form III B Last day of next month

PTRC payment in Form MTR 6 30 days from end of the month

b If tax liability during P.Y. < Rs.50,000

PTRC return in Form III B 31 March of succeeding year

PTRC payment in Form MTR 6 31 March of succeeding year

iv. WCT TDS return in Form 424 30 June of that year

WCT TDS payment in Form MTR 6 21 days from the end of the month

B Gujarat

i. GVAT return (in Forms 201, 201A, 201B, 30 days from the end of the month201C ) to which return relates

ii. GVAT audit in Form 217 9 months from the end of the yeari.e. 31 December

iii. Annual return in Form 205 , 205A 30 June of succeeding year

iv. TDS return in Form 704 30 days from the end of the quarter

v. Profession tax return:

PTRC in Form 5 15th of the next month/ quarter,depends on periodicity

Profession tax return PTEC (payment 30 September of that yearto be made online)

C Delhi

i. DVAT return in Form DVAT 16 21 days from the end of the month

VAT / CST Payment in Form DVAT 20 28 days from the end of the taxperiod

ii. TDS certificate in Form DVAT 43 15 days after the end of the monthin which the deduction is made

iii. Profession tax return Not applicable

iv. DVAT audit in Form AR-I 7.5 months from the end of the yeari.e. 15 November

D Tamil Nadu

i. TNVAT return in Form I and Form L Before 20th of the succeeding month

ii. TVAT audit in Form WW 7 months from end of the year i.e. 31 October

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iii. TDS payment in Forms R and 20 day of the succeeding month inTDS certificate in Form S which the deduction was made

iv. Profession Tax Return PTRC and PTEC in Half yearly April to September andForm 2 for October to March, return should

be filed on first day of the half yearE Karnataka

i. KVAT return in Form 100ii. TDS certificate in Form 156, 20 days after the end of the

Monthly statement in Form VAT 125 and relevant monthPayment in Form 152 or 153-Challan

iii. Profession Tax ReturnPTRC a) in, Form 5A 20 days from the end of the month

in which deduction was madeb) in, Form 5 30 days of subsequent yeara) PTEC in Form 4-A in respect of a person who stands

enrolled before the commencementof a year – 30 April of that year

b) PTEC in Form 25-Certificate in respect of a person who isenrolled after the commencementof a year – within 1 month fromthe date of enrolment

iv. KVAT Audit in Form 240 9 months from end of the year i.e. 31 December

F West Bengal

i. WBVAT return under Rule 34(1) in Within the next English calendarForms 14 and 15 month from the date of end of each

quarterWB VAT Audit in Form 22 , Form 23 31 December of succeeding year

ii. TDS:TDS certificate of payment of tax in 25 days from the end of Englishrespect of works contract in Form 18 calendar month during which

deduction is madeTDS Payment in Form 19 45 days from the date immediately

after the date of end of the calendarmonth reckoned according to theEnglish calendar during which suchdeduction is made




iii. Profession Tax Return

PTRC in Form III 30 days from end of each quarter

Tax payable:

a) for first 2 months of eachquarter within 21 days from theexpiry of each month

b) last month of quarter – beforefiling of the return

PTEC under section 8 in Form III On or before 31 July of that year

G Andhra Pradesh

i. APVAT return in Forms 200, 200A, 200B 20 days after the end of the taxand CST VI period

ii. TDS Return in Form 501A 15 days after the end of the monthin which the deduction is made

iii. Profession Tax Return

PTRC in Form V 10 days of the month succeeding themonth for which the return has tobe filed

PTRC in Form V 30 June of the year

Sr. Particulars Relevant Relevant Due DateNo. Provision Form

i. Annual return under Building Rule 242 Form XXV On or before And Other Construction of The Building 15 FebruaryWorkers (Regulation Of and Other Employment and Conditions Constructionof Service) Act, 1996. Workers‘

(Regulation of Employment and Conditions of Service)Central Rules, 1998

3.1.5 Labour law compliances:

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ii. Every occupier of an establishment shall maintain a register in respect of children employed or permitted to work, in Form under The Child Labour (Prohibition And Regulation) Act, 1986.

iii. Under the Inter State Migrant Section 23 As may Continual basisWorkmen (Regulation of be Employment and Conditions prescrib-of Service) Act, 1979 every edprincipal employer and every contractor shall maintain such registers and keep exhibited in such a manner as may be prescribed within the premises of the establishment where the inter-state migrant workmen are employed, notices in the prescribed form containing particulars about the hours or work, nature of duty and such other information as may be prescribed.

iv. Annual return under the Rule 5 Form D 30 days after thePayment of Bonus Act, 1965 expiry of the time

limit i.e. within aperiod of 8 monthsfrom the close ofthe accounting year

v. Nomination form under the Rule 6 (1) & (2) Form F Within 30 days ofGratuity Act completion of 1 year

of services

Section 16 Form A Continual basis




vi. Annual return by principal employer Contract XXV (in February following

Labour duplicate) the end of the year(Regulation & to which it relatesAbolition) Central Rules, 1971

vii. Under Employee’s Provident Para 36(2)(a), Form ECR Within 30 days ofFunds and Miscellaneous Para 10(1A)(a) (filed close of each monthProvisions Act, 1952 every of EDLI online)employer shall send to the Commissioner, return of consolidated EPS & EPF, employee qualifying to become members of the fund for the first time along with declaration in the Form 2, resigning during the preceding month.

Payment of provident fund 15 days of every contribution into the account. succeeding month

(plus grace period of5 days)

viii. Maharashtra Shops And Sec 7 (2-A) & Form B Not less than 15 Establishment Act, 1948 (2-B) days before the date

of expiry of the registrationcertificate

Renewal of Registration Rule 5Certificate:

A registration certificate is generally valid up to the end of the year for which it is granted. However, the same may, at the option of the employer, be granted or renewed for a period of 3 years at a time, on payment of the fees for that period.

Reg 82(2) of Form On or before 15th

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An application for the renewal of a registration certificate should be submitted accompanied by such fees in such form, as may be prescribed.

If the application for the renewal of a registration certificate is submitted after the expiry of the specified period but within 30 days after the dale of expiry of the registration certificate, such application shall be accompanied by an additional fee as late fee equal to half the fee payable for the renewal of a registration certificate.

ix. Employees State Insurance Rule 51 As may Within 21 days of theAct, 1948 be month following, in

prescrib- which the wagesed fall due

Rates of Contribution

Employer 4.75%

Employee 1.75%

Of wage payable to employee

x. Under Equal Remuneration Section 8 Form D Continual basisAct, 1976, Register of male and female workers

xi. Under Maternity Benefit Act, Section 20 Form 10 Continual basis1961, Register of female workers who have taken benefit under the Maternity Benefit Act

xii. Register of wages under the Sec 22A Form X Before the date onMinimum Wages Act which the wages for

such wage-periodfall due


4.1 Background

4.2 Revenue Recognition

Income-tax regulations play a very crucial role in any business scenario, real estate being no exception to it. The real estate sector has unique business characteristics or business practices from accounting and tax regulatory perspective. For example, real estate projects extending beyond one financial year could result in option to opt either project completion method or percentage completion method. Further, tax implication may vary depending upon the use of estimates for revenue / expenditure, cost incurred for land / FSI available at different point of time including transferrable development rights, arrangement on joint development agreements, uncertainty of receipt of sale proceeds over a period of time, execution of agreement for sale, cancellation of sale agreements, components of sale proceeds not in align with activity, claim of certain expenditure as a period cost, claim of certain incentive, character of certain income as capital gain or business income, etc.

Further, in case of an individual assessee, there are different sets of taxation issues on capital gains, exemptions, deductions, etc.

In this Chapter, we have attempted to cover recognition of revenue, incentives, deductions / exemptions and recent judicial pronouncements relating to the real estate sector.

4.2.1 AS-7(old) had provided two methods of accounting i.e. project (contract) completion method and percentage completion method, and further it did not differentiate between the applicability in case of real estate developers and construction contractor. In project completion method, revenue is recognized only when entire project is completed thereby helping businessman to defer the accounting of income in books resulting in postponement of payment of tax. However, in percentage completion method, the income is recognized in each year based on percentage of work completed. It has always been debated by the tax

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CHAPTER 4: INCOME TAX & WEALTH TAX



authorities that completed contract method shall not be adopted as it results in deferring of tax liability to future period rather than on year-on-year basis. However, based on the AS-7(old), certain real estate developers adopted project completion method and the same had been accepted in certain judicial decisions. However, in case of Champion Construction Co. Vs. ITO (1983) 5 ITD 495, the Honorable Tribunal held partially against the assessee stating that when the work was substantially complete, the assessee cannot postpone recognition of revenue.

The revised AS-7 applicable in case of a construction contractor provides for percentage completion method. Hence, the issue arose that in absence of AS-7(old), whether project completion method is still valid method of accounting for tax purposes. The Guidance Note on ‘Accounting of real estate transactions’ discussed in Chapter 9 (Accounting Aspects) recommends that the percentage completion method will be appropriate in the accounting of real estate transactions where the project is having attributes or character of construction contract. AS-9 provides for recognition of revenue only when substantial risk and rewards are transferred to the buyer of the property.

4.2.2 The Guidance Note referred above provides for its applicability in respect of revenue recognition for a real estate project which commences on or after 1 April 2012. It is pertinent to note that the Guidance Note emphasises that percentage completion method will be applicable in the accounting of all real estate transactions where the economic substance is similar to construction contracts.

ØThe indicators which decide whether a transaction is a construction

contract are as under:

lThe period of the project is in excess of 12 months.

lMost features of the project are common to construction contract i.e. land development, structural engineering, architectural design, construction etc.

lIndividual units in the project are dependent upon or interrelated to completion of common facilities/amenities,

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lThe construction and development activities form significant proportion of the project activity.

‘The Group follows the percentage completion method for its projects. The revenue recognition policy is as under:

ØProject for which revenue is recognized for the first time on or after 1 April

2012

lThe ICAI has issued a Guidance Note on Accounting for Real Estate Transactions (Revised 2012) in connection with the revenue recognition for a real estate project which commences on or after April 1, 2012 and also to real estate projects which have already commenced but where revenue is being recognized for the first time on or after 1 April 2012.

lIn this scenario, the Group recognizes revenue in proportion to the actual project cost incurred (including land cost) as against the total estimated project cost (including land cost) as well as area sold, in line with the Guidance Note and depending upon the type of project.

ØProject for which revenue recognition has commenced prior to 1 April 2012

lIn this scenario, the Group recognizes revenue in proportion to the actual project cost incurred (excluding land cost) as against the total estimated project cost (excluding land cost) subject to completion of construction work to a certain level depending on the type of project.

lRevenue is recognized net of indirect taxes and on execution of either of agreement or letter of allotment.

ØThe estimates relating to percentage of completion, costs to completion,

area available for sale, etc. being of a technical nature are reviewed and revised periodically by the management and are considered as change in estimates and accordingly, the effect of such changes in estimates is

4.2.3 The notes attached to the audited accounts of a leading real estate developer is reproduced below, for reference purpose:


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recognized prospectively in the period in which such changes are determined.

ØLand cost includes the cost of land, land related development rights and

premium.

ØThe construction work in progress is valued at lower of cost or net

realizable value. Cost includes cost of land, development rights, rates and taxes, construction costs, other direct expenditure, allocated overheads and other incidental expenses’.

4.2.4 It is observed that generally, accounting method followed is also considered for tax purposes to compute taxable income although there is no legal bar in following one method for accounting and another method for tax purpose. However, in such a case, litigation from tax authorities cannot be ruled out.

ØTDR is issued by the local authority in the form of a certificate called

‘Development Right Certificate’ granting to the holder of the certificate the right to certain area of construction on a plot of land. The Guidance Note issued by ICAI (detailed discussion in Chapter 9) does not recommend any accounting entry when TDR is received from the local authority. The accounting entry is passed on sale of TDR and cost thereof is determined based on actual cost of land area given up. However, if the entire land cost is already claimed as deduction then, the issue arises whether receipt of TDR is to be recorded at the time of receipt of TDR certificate or at the time of sale of TDR or use of TDR in another project.

ØIn case of a slum redevelopment project, the issue arises whether TDR

received against free construction is to be accounted on completion of free construction area or on sale of area constructed on the basis of TDR received.

ØFinance Act, 2013, introduced a

4.3 Transferable Development Rights (TDR)

4.4 Deemed Consideration On Transfer Of Asset (Other Than Capital Asset) Being Land Or Building Or Both



new section 43CA in the Income Tax Act, 1961 (‘the Act’) with a view to consider deemed sales consideration in respect of transfer of assets (other than those held as capital assets) being land or building or both if actual consideration received or accrued is less than the value adopted or assessed or assessable by any authority of a State Government for the purpose of stamp duty in respect of such transfer. In such case, the deemed sales consideration shall be the value adopted or assessed or assessable for stamp duty by any authority of a State Government for the purpose of computing income from business or profession..

ØThe following points are relevant to consider the impact on taxable income:

lIn case of distress sale also, the above provisions will be covered, since no specific exceptions have been provided in the Act.

lThe section does not have mention about the tolerance limits which can be permitted. Hence even a minor variation would invoke provisions of section 43CA.

lThe above section will be applicable in all cases even if the sale of land or building is not registered with the government authorities.

lIf advance is received against property and agreement is registered at a later date, then as per provisions of section 43CA (3), the stamp duty value as on the date of agreement be considered as deemed consideration. However, this would be applicable only where the amount of consideration or a part thereof has been received by any mode other than cash on or before the date of agreement.

lTransfer defined under section 2(47) of the Act does not apply to this section. Accordingly, reference to the term transfer has to be understood as provided in Transfer of Property Act, 1882.

ØSection 56(2) (vii) of the Act provides for taxation of deemed income under

the head ‘Income from Other sources’ in the hands of individual or HUF who receives immovable property. In case receipt of Immovable property is

4.5 Deemed Income In Case Of Individual Or HUF On Transfer Of Immovable Property For A Consideration Less Than Stamp Duty Value

24 |

without consideration, the stamp duty value of which exceeds Rs.50,000,

the stamp duty value of such property is treated as deemed income.

ØIn case, receipt of immovable property is for inadequate consideration

which is less than stamp duty value of the property by an amount

exceeding Rs.50,000, the stamp duty value of such property as exceeds

such consideration is treated as deemed income. However, this section also

provides for certain exceptions which include transaction with relatives,

property received under a will or by way of inheritance, on the occasion of

marriage, etc.

ØSection 50C of the Act provides that in case the consideration received or

accrued as a result of the transfer of a capital asset being land or building

or both, is less than the value adopted or assessed or assessable by any

authority of a State Government for the purpose of payment of stamp duty,

the value adopted or assessed or assessable shall be deemed to be full

value of the consideration received or accruing as a result of such transfer.

ØCertain relevant judicial pronouncements are provided hereunder for

ready reference:

lIt has been held that the provision of section 50C of the Act would

also be applicable to depreciable assets for computing gain under

section 50 of the Act.

lIt has been held that provisions of section 50C of the Act are not

applicable on grant of leasehold rights.

lSection 50C of the Act will not be applicable in case of a transfer of

shares of a company having immovable property in its balance

sheet.

lSection 50C of the Act would be applicable in case of a

development agreement whereby land owner transfers

development rights to real estate developer.

4.6 Deemed Consideration In Case Of A Transfer Of A Capital Asset Being Land Or

Building Or Both



lSection 50C of the Act will be applicable even if exemption is claimed to the extent of actual sales consideration received.

Section 50 of the Act provides for computation of capital gain as under:

4.7 Deemed Short-Term Gain On Transfer Of Depreciable Asset

Sr. No Particulars Amount

A Full value of consideration received or accruing as a result of transfer or transfers of asset falling within the concerned block of assets during the previous year less expenditureincurred

B Less: Actual cost of any asset falling within the concerned bblock of assets acquired during the year

C Less: Opening written down value of the block of assets c

Resultant Figure (see note below) a-b-c

a

ØCertain relevant judicial pronouncements are provided hereunder for

ready reference:

lIf the resultant figure is positive, the same is chargeable as deemed short term capital gain under section 50 of the Act.

lIf the resultant figure is negative and the entire block of assets ceases to exist as such, the resultant figure indicates deemed short term capital loss. However, if the resultant figure is negative and the block continues to exist (for the reason that at least one asset in the block continues to be owned by the assesse) then there will be no gains or losses and the assesse will be entitled to claim depreciation on the resultant figure.

ØSection 50B of the Act provides

that profit arising on slump sale of one or more undertakings would be chargeable to tax as long-term capital gain in the year of transfer if such undertakings

4.8 Capital Gain In Case Of Slump Sale

26 |

have been owned and held by the assesse for more than 36 months or as short-term capital gain if held upto 36 months.

ØThe net worth of the undertaking would be regarded as the cost of

acquisition and improvement. The net worth shall be the aggregate value of total assets of the undertaking or division as reduced by the value of liabilities of such undertaking or division as per books of account. For computing the value of assets in case of depreciable assets, the written down value of the block of assets shall be as per the Income-tax Act i.e. sub-item (C) of section 43(6) (c) (i) of the Act.

ØThe profits or gain arising from the transfer of a capital asset effected in

the previous year shall be chargeable to income-tax under the head ‘Capital Gain’ and shall be deemed to be the income of the previous year in which the transfer took place. Hence, the incidence of gain is dependent upon the transfer.

ØThe term ‘transfer’ as defined in section 2(47) of the Act includes :

lthe sale, exchange or relinquishment of the asset ; or

lthe extinguishment of any rights therein; or

lthe compulsory acquisition thereof under any law; or

lin a case where the asset is converted by the owner thereof into, or is treated by him as, stock-in-trade of a business carried on by him, such conversion or treatment; or

lany transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882 (4 of 1882) ; or

lany transaction (whether by way of becoming a member of, or acquiring shares in, a co-operative society, company or other association of persons or by way of any agreement or any arrangement or in any other manner whatsoever) which has the

4.9 Incidence Of Gain On Transfer Of A Capital Asset



effect of transferring, or enabling the enjoyment of, any immovable property.

lWhether joint development agreement results in transfer of land from the owner to real estate developer?

lAt what point of time is the joint development agreement liable to tax under the Act?

lAt what point of time is the compulsory acquisition of asset liable to tax under the Act?

From the definition of term ‘transfer,’ it is necessary to examine the arrangement / agreements to ascertain whether it is a sale or exchange or relinquishment of any rights in asset or possession given to developer in part performance of agreement under the Transfer of Property Act, 1882 or arrangement has effect of transferring, or enabling the enjoyment of, the immovable property. There are various judicial verdicts based on the facts of each case.

ØGain arising from sale of agricultural land situated in a rural area in India is not taxable under the provisions of the Act. From the assessment year 2014-15, the meaning of rural area has been amended. After modification, the rural area means any area which is outside the jurisdiction of a municipality or cantonment board having a population of 10,000 or more and also which does not fall within distance (measured aerially) given below-

4.9.1 The issues arising from the above definition of term ‘transfer’ are as follows:

4.9.2 Gain arising from sale of rural agricultural land-not taxable:

2 kilometers from the local limits If the population of the municipalitymunicipality /cantonment board /cantonment board is more than

10,000 but not exceeding 1,00,000

6 kilometers from the local limits of If the population of the municipality municipality /cantonment board /cantonment board is more than

1,00,000 not exceeding 10,00,000

8 kilometers from the local limits of If the population of the municipality municipality/cantonment board /cantonment board is more than

10,00,000


4.10 Income From House Property

4.11 Property Owned By Co-Owners

4.12 Component Of Cost To Be Considered For Work In Progress

ØThe annual value of property (as defined in

section 23 of the Act) consisting of any building or lands appurtenant thereto owned by the assesse other than such portions of such property used for business carried on by him shall be chargeable to income tax under the head ‘Income from House Property’ after reducing certain deduction as provided in section 24 of the Act. The annual value of one house which is in the occupation of owner for the purpose of his own residence is considered as nil. If assesse owns more than one residential house, then one house according to assessee’s choice is treated as self occupied and annual value of another house is to be calculated considering it deemed to be let out. Deduction for municipal taxes levied by any local authority and paid by the assessee would be made while determining annual value.

ØFurther, income chargeable under the head ‘Income from house property’

shall be computed after making following deductions:

l30% of annual value (this is irrespective of whether actual expenditure is incurred or not)

lInterest on borrowed capital where the property has been acquired, constructed, etc. with borrowed capital.

ØWhere the buildings or building and land appurtenant thereto is owned by

two or more persons and their respective shares are definite and ascertainable, then the share of each such person in the income from the property as computed shall be included in his total income.

ØIn real estate sector, the controversial issue is regarding what component

of cost to be considered for valuation of work in progress. In normal scenario, the real estate developer incurs various expenditures such as interest cost, selling and marketing cost, general administration and


overhead cost, research and development, depreciation of idle plant, cost incurred in securing the contract, cost such as material set aside but not used and applied, etc.

ØThe question arises as to whether above costs are to be considered as a

period cost and charged to profit and loss account and claimed as expenses for tax purpose or the same to be capitalized as part of project cost in various scenarios such as when revenue is not recognized or when revenue is recognized on percentage completion method. The Guidance Note issued by ICAI for real estate transactions provides that above cost (excluding interest cost) should not be considered as part of construction costs and development costs if they are material.

ØIn terms of section 145(2) of the Act, the CBDT has issued a discussion paper

on Tax Accounting Standard (TAS) in respect of accounting for construction contracts. It is relevant to note that this TAS is applicable in case of a construction contractor and not to the real estate developers.

ØSome of the points of TAS are as under:

l‘Construction contract’ is a contract specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.

lDuring the early stage of a contract, where the outcome of the contract cannot be estimated reliably, contract revenue is recognized only to the extent of costs incurred. The early stage of a contract shall not exceed beyond 25% of the stage of completion.

lContract revenue shall comprise of i) the initial amount of revenue agreed in the contract, including retentions; and ii) variations in contract work, claims and incentive payments. Where contract revenue already recognized as income is subsequently written off in the books as uncollectible, the same shall be recognized as an expense and not as an adjustment of the amount of contract

4.13 Tax Accounting Standard On Construction Contracts (Discussion PaperProposed)

30 |

revenue. The taxation of retention money is in contradiction to charging section 4 of the Act and several judicial decisions.

The above TAS is still at discussion stage and will be effective only on its notification.

The taxation laws provide for certain exemptions / deductions as incentives to corporate or other specified entities i.e. Individual, HUF, etc. Some of the exemptions / deductions are mentioned briefly as under:

4.14.1 Section 35AD of the Act provides for deduction of capital expenditure incurred for the purpose of specified businesses. The specified businesses include a) developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central or State Government in accordance with the guidelines prescribed and; b) developing and building a housing project under a scheme for affordable housing framed by the Central Government or State Government in accordance with the guidelines prescribed. It is provided in this section that capital expenditure shall not include any expenditure incurred on the acquisition of any land or goodwill or financial instrument.

4.14.2 Section 54G of the Act provides for exemption in respect of a capital gain arising from transfer of assets (being machinery or building or land) in cases of shifting of industrial undertaking from urban area if the assesse fulfills certain conditions, which include the reinvestment of capital gain in similar assets or incurs expenses on shifting of original assets within 1 year before or 3 years after the date of transfer of assets.

4.14.3 Section 54GA of the Act provides for exemption in respect of a capital gain arising from transfer of assets (being machinery or building or land) in cases of shifting of industrial undertaking from urban area to any specified economic zone if the assesse fulfills certain conditions which include the reinvestment of capital gain in similar assets or incurs expenses on shifting of original assets within 1 year before or 3 years after the date of transfer of assets.

4.14 Tax Incentives:



4.14.4 Section 80-IB(10) of the Act provides for deduction in respect of a profit of an undertaking developing and building a housing project approved by a local authority after 1 October 1998 but before 31 March 2008 subject to certain conditions as mentioned below :

lsuch undertaking completes such construction within 5 years from the end of the financial year in a case where the housing project has been approved on or after 1 April 2005 (within 4 years if project is approved on or after 1 April 2004 but before 31 March 2005) and before 31 March 2008 in other cases;

lthe project is on the size of a plot of land which has minimum area of 1 acre;

lthe residential unit has a maximum built-up area of 1,000 square feet where such residential unit is situated within the city of Delhi or Mumbai or within 25 kilometers from the municipal limits of these cities and 1,500 square feet at any other place;

lthe built-up area of the shops and other commercial establishments included in the housing project does not exceed 3% of the aggregate built-up area of the housing project or 500 square feet, whichever is higher;

lnot more than 1 residential unit in the housing project is allotted to any person not being an individual; and

lin a case where a residential unit in the housing project is allotted to a person being an individual, no other residential unit in such housing project is allotted to any of the following persons, namely:—

}the individual or the spouse or the minor children of such

individual,

}the HUF in which such individual is the karta,

}any person representing such individual, the spouse or the

minor children of such individual or the HUF in which such individual is the karta.

32 |

4.14.5 Section 54D of the Act provides for exemption in respect of a capital gain arising from compulsory acquisition of land or building forming part of an industrial undertaking subject to certain conditions, which include that the assesse has purchased any other land or building within a period of 3 years.

4.14.6 Section 54GB of the Act provides for exemption in respect of a capital gain arising from a transfer of a long-term capital asset being a residential property (a house or a plot of land) if the assesse (individual or a HUF) fulfills certain conditions, which, inter-alia, include utilizing the net consideration for subscription in the equity shares of an eligible company.

4.14.7 Section 54 of the Act provides for exemption in respect of capital gain arising from transfer of a long-term capital asset being a residential house if the assesse (individual or HUF) fulfills certain conditions which include utilization of capital gain for purchase of a residential house. In this scenario, the controversy arises as to whether investment in more than one residential house (which are adjacent to each other) is eligible for deduction or not. Similarly, Section 54F of the Act provides for exemption in respect of a transfer of a long term capital asset (other than residential house) if the assesse (individual or HUF) fulfills certain conditions which include utilization of net consideration for purchase of a residential house.

4.14.8 Section 80EE of the Act provides an additional benefit for first-time home buyers by allowing an additional deduction up to Rs. 1,00,000 in respect of interest on loans obtained up to Rs. 25,00,000 for the acquiring residential house property. This additional deduction is to be claimed in AY 2014-15 and if the limit is not exhausted, the balance may be claimed in AY 2015-16.

4.14.9 Section 24 of the Act provides for deduction of interest on borrowed funds (from a specified person) utilized for purchase of an immovable property. However, in respect a self-occupied residential property, the deduction is restricted to Rs. 1,50,000. Interest of pre-construction period is deductible in 5 equal installments.

ØThere are no standard rules for selecting the form of entities for acquiring

real estate properties. The option to select form of entities namely individual or HUF or Trust or a Company or association of persons depends upon the intention of a person and long-term needs of perpetual

4.15 Form Of Entities:



succession, purpose of acquiring assets, etc. Generally, immovable property like residential house is purchased in the name of an individual.

ØHowever, in certain cases, the residential property is purchased in the

name of Private Trust so as to provide perpetual succession. Further, business premises are purchased in the name of either a partnership firm or a company so as to claim depreciation on cost of a property.

ØSection 194-IA of the Act provides the obligation to deduct tax at source on

all buyers, whether resident or non-resident, and includes firm, company, etc. in case of transfer of immovable property if consideration amount is Rs. 50,00,000 or more and paid to a resident transferor. The term ‘immovable property’ means land or building or both but excluding certain agriculture land. The rate of TDS shall be 1% of amount paid or credited and shall be deposited before 7th of next month. It is relevant to note that in case of seller being a non-resident, the purchaser has to consider TDS under section 195 of the Act.

Wealth-tax is applicable in case of individuals, HUFs and all companies in respect of value of those assets as specified in section 2(ea) of the Wealth Tax Act after reducing therefrom the debts incurred in relation to such assets. The taxable wealth (assets) includes the following:

ØAny building or land appurtenant thereto, residential or commercial but

excluding

lHouse (residential or commercial) held as stock in trade,

lHouse occupied for the purpose of business/ profession carried on by the assesse,

lResidential property let out for at least 300 days in a previous year,

4.16 TDS On Transfer Of Immovable Properties

4.17 Wealth Tax

34 |

lCommercial establishment or complexes,

lIn case of a company, a house meant exclusively for residential purpose and allotted to an employee, officer or a whole time director whose gross annual salary is less than Rs. 10,00,000 (1 million),

lLand on which construction is not permissible.

ØUrban Land as defined but excludes the following:

lUnused land held for industrial purpose for a period of 2 years from the date of acquisition,

lLand held as stock in trade for a period of 10 years from the date of acquisition,

lLand occupied by any building constructed with the approval of appropriate authority,

lLand classified as agriculture land in the record of the Government and used for agriculture purposes.

Urban land means land which is not situated in a rural area. The meaning of ‘rural area’ has been discussed in para no.4.9.2

lIn case of an individual or HUF - One house or part of a house or a plot of land not exceeding 500 square metres belonging to the individual or HUF.

lAssets brought within 1 year prior to return/ at any time after return to India by a returning NRI for 7 successive assessment years.

lBalances in NRE account on the date of return and assets purchased therefrom 1 year prior to return/ at any time within 7 successive assessment years.

lAny assets held by public charitable trust.

4.17.1 Exemption Of Assets From Wealth-tax Includes The Following:



5.1 Background

The Government of India, vide the

Finance Act, 1994 introduced service tax

with effect from 1 July 1994. The ambit of

services which were covered under the

tax net was increasing year on year. The

real estate sector was brought into the

service tax net for first time on 10 September 2004 by introducing a category titled

‘Commercial Services’. Thereafter, the coverage was extended vide introduction of

several other categories such as ‘Construction of Complex Services,’ ‘Works

Contract Services,’ ‘Preferential Services provided by Builder to Prospective

Buyers’.

35 |

CHAPTER 5: SERVICE TAX REGULATIONS

Real Estate Sector In India

Date

10 September 2004 Category ‘Construction Services’ was introduced

16 June 2005 Category ‘Construction Services’ was omitted and new categories ‘Commercial or Industrial Construction Services’ and a new category ‘Construction of Complex Services’ were introduced

1 June 2007 New categories ‘Renting of Immovable Property Services’ and ‘Works Contract Services’ were introduced

1 July 2010 The explanation was inserted to the definition of taxable services ‘Construction or Industrial Construction’ and ‘Construction of Complex’ so as to bring sale of flats by builders under service tax net

Various Developments and Changes in the Service Tax Law

With effect from 1 July 2012, the Government of India has adopted the negative list-

based taxation approach as against the positive list approach which was prevailing

since the introduction of service tax. In this Chapter, the implication of service tax

on real estate sector under the negative list regime is discussed.

36 |

5.2 Service Tax Vis-À-Vis Real Estate

ØThe broad framework of applicability of service tax can be explained

through the below diagram:

ØDefinition of Service

(A) SERVICE MEANS

Whether activity coveredwithin a definition of service ?

NotTaxable

No

No

Yes

Yes

Yes

Yes

No

No

Whether Provided inTaxable Territory ?

Whether coveredunder negative list ?

WhetherExemped ?

Taxable

Any ActivityCarried out bya person for

another

For aConsideration


RSM Astute Consulting 37 | Real Estate Sector In India

(B) SERVICE INCLUDES

lService includes declared services. The list of services covered

under declared services is provided in section 66E of the Act.

Section 66E(_)

(a) Renting of immovable property service

(b) Construction of a complex, building, civil structure or a part thereof (including additions, alterations, replacement or remodeling of an existing civil structure), including a complex or building intended for sale to a buyer wholly or partly except where the entire consideration is received after issuance of completion certificate by the competent authority.

The term ‘competent authority’ means the government or any authority authorized to issue completion certificate under any law for the time being in force. In case of non requirement of such certificate from such authority, any of the following –

(a) architect registered with the Council of Architecture constituted under the Architects Act, 1972; or

(b) chartered engineer registered with the Institution of Engineers (India); or

(c) licensed surveyor of the respective local body of the city or town or village or development or planning authority.

(h) Service portion in execution of a works contract

‘Works Contract’ is defined under section 65B(54) of the Act to mean a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

Declared Services

Mere transfer of title in goods or immovable property, by way of sale/gift or any

other manner

Deemed sales under

article 366(29A)of

the constitution

of India

Mere transaction in money

or actionable

claim

Service by an employee

to his employer, in relation to

employment

Fees taken

by court/

tribunal


ØIssues that arise from the definition of services:

lHow the service tax liability is to be determined in case of joint

development agreements?

lHow the consideration is to be determined in case of barter

transaction, i.e. sale of flats against receipt of development rights

on land?

lWhether service tax liability arises on various charges collected by

builders such as society maintenance charges, recreation facility

charges (both one time and recurring), legal charges, water

charges, etc.

ØIt is essential to determine the nature of services which are provided since

the applicability of various provisions, exemptions, abatement, etc.

depends upon the nature of services provided.

lGeneral rule – The reference to main service shall not include a

service which is used for providing main service.

lIf the services provided are capable of differential treatment for

5.3 Principle Of Interpretation Of Service (Nature Of Service)

(C) SERVICE EXCLUDES

Any activity which constitutes


Exclusions from the definition of Service


any purpose – Most-specific description would be preferred over

and above the general description.

lBundled Services - ‘Bundled Service’ means a bundle of provision

of various services wherein an element of provision of one service

is combined with an element or elements of provision of any other

service or services.

5.4 Exemptions

ØExemption has been granted from the

whole of Service Tax on providing of

certain services vide notification no.

25/2012 – ST dated 20 June 2012, as

amended from time to time. The list of

exemptions in relation to real estate sector is given in the following table:

Interpretation of Bundled Services

ClauseNo.

Exempted Services Remarks

12 Services provided to the Government

or local authority by way of erection,

construction, maintenance, repair,

alteration, renovation or restoration

of -

l‘Governmental Authority’

means a board, or an

authority or any other body

established with 90% or

more participation by way of

Bundled Services

Services that are naturally bundled

Services that are not naturally bundled

Service which attracts the highest amount

of Service Tax

Single Service basedon its essential

character



ClauseNo.


(a) a civil structure or any other

o r i g i n a l w o r k s m e a n t

predominantly for use other than

for commerce, industry or any

other business or profession;

(b) a h i s t o r i c a l m o n u m e n t ,

archaeological site or remains of

n a t i o n a l i m p o r t a n c e ,

archaeological excavation, or

antiquity specified under Ancient

Monuments and Archaeological

Sites and Remains Act, 1958;

(c) a structure meant predominantly

for use as (i) an educational, (ii) a

clinical, or (iii) an art or cultural

establishment;

(d) canal, dam or other irrigation

works;

(e) pipeline, conduit or plant for (i)

water supply (ii) water treatment,

or (iii) sewerage treatment or

disposal; or

(f) a r e s i d e n t i a l c o m p l e x

predominantly meant for self-use

or the use of their employees or

other persons specified in the

Explanation 1 to section 65B(44)

of the said Act

equ i ty o r cont ro l by

Government and set up by

an Act of the Parliament or a

State Legislature to carry

out any function entrusted

to a municipality under

a r t i c l e 24 3 W o f t h e

Constitution.

l‘Residential Complex’ means

any complex comprising of a

building or buildings, having

more than one single

residential unit.

lConstruction of hospitals

and educational institutions

for Government or local

a u t h o r i t y a r e o n l y

exempted. In case the same

are constructed for others,

there is no exemption.

l‘Original Works’ has the

meaning assigned to it in

Rule 2A of the Service Tax

(Determination of Value)

Rules, 2006.



ClauseNo.


13 Services provided by way of

c o n s t r u c t i o n , e r e c t i o n ,

co m m i ss i o n i n g , i n s ta l l a t i o n ,

completion, fitting out, repair,

m a i n te n a n ce , re n ova t i o n o r

alteration of -

(a) a road, bridge, tunnel, or terminal

for road transportation for use by

general public;

(b) a civil structure or any other

original works pertaining to a

scheme under Jawaharlal Nehru

National Urban Renewal Mission

or Rajiv Awas Yojana;

(c) a building owned by an entity

registered under Section 12AA of

the Income tax Act, 1961 and

meant predominant ly for

religious use by general public;

(d) a pollution control or effluent

treatment plant, except located

as a part of a factory; or

(e) A structure meant for funeral,

burial or cremation of deceased.

l‘General Public’ means the

body of people at large

sufficiently defined by some

common quality of public or

impersonal nature.

14 Services by way of construction,

e re c t i o n , co m m i s s i o n i n g o r

installation of original works

pertaining to -

l‘Single Residential Unit’

means a self-contained

residential unit which is

designed for use, wholly or

principally for residential

purposes for one family.



ClauseNo.


(a) an airport, port or railways,

including monorail or metro;

(b) single residential unit otherwise

as a part of a residential complex;

(c) low-cost houses up to a carpet

area of 60 square meters per

house in a housing project

approved by competent authority

empowered under the ‘Scheme of

A f f o r d a b l e H o u s i n g i n

Partnership’ framed by the

MHUPA, Government of India;

(d) p o s t - h a r v e s t s t o r a g e

infrastructure for agricultural

produce including cold storages

for such purposes; or

(e) mechanized food grain handling

system, machinery or equipment

for units processing agricultural

produce as food stuff excluding

alcoholic beverages.

l‘agr icu l tura l produce’

means any produce of

agriculture on which either

no further processing is

done or such processing is

done as is usually done by a

cultivator or producer which

does not alter its essential

characteristics but makes it

marketable for primary

market.

lNo exemption is granted to

repair, maintenance of

airports, ports and railways.

29 Services by the following persons in

respective capacities –

(h) sub – contractor providing

services by way of works contract

to another contractor providing

works contract services which are

exempt



Rule No.

Nature of Services

Determination of Place of Provision

5 Related to

immovable

property

Services provided by experts and

estate agents, provision of hotel

accommodation by a hotel, inn,

guest house, club or campsite, by

whatever, name called, grant of

rights to use immovable property,

services for carrying out or

coordination of construction

work, including architects or

interior decorators

Types of Services / Remarks

P lace where the

immovable property

is located or intended

to be located


5.5 Place Of Provision Of Services Rules, 2012 (Where The Services Are

Rendered)

ØAs per charging section, section 66B of the Act, only those services which

are deemed to be provided in the taxable territory, by one person to

another are liable to service tax.

ØPlace of Provision of Services Rules, 2012 (‘PPSR, 2012’) has been notified

under section 66C of the Act to determine the place where the services are

deemed to be provided.

ØRule 14 of the PPSR, 2012 provides that notwithstanding anything stated in

any rule, where the provision of service is ‘prima facie’ determinable in

terms of more than one rule, it shall be determined in accordance with the

rule that occurs later among the rules that merit equal consideration.

lGeneral rule - The place of provision of a service shall be the

location of the service receiver. In case the location of the service

receiver is not available in the ordinary course of business, the

place of provision shall be the location of the service provider. (Rule

3 of PPSR)

lSpecific Rules:


5.6 Point Of Taxation (When The Services Are Rendered)

Point of Taxation Rules, 2011 (‘POTR, 2011’) is notified to determine the point of

taxation (POT) of service. Point of Taxation means the point in time when a service

shall be deemed to have been provided.

Determining point of taxation of any service is essential as relevant exemption

notifications, rules, etc. as applicable on that date, will be made applicable. Further,

the due date for payment of service tax is also aligned to the point of taxation

rules.

Rule No.

Nature of Services

Determination of Place of Provision

7 Services

referred to in

Rule 5 and

provided at

more than one

location

Any service referred to in rules 4,

5, or 6 is provided at more than

one location, including a location

in the taxable territory

Types of Services / Remarks

The location in the

taxab le terr i tory

where the greatest

portion of the service

is provided

8 Service

provider and

receiver both

are located in

taxable

territory

Any service other than listed in

negative list or specifically

excluded

Location of service

receiver

Overview of Point of Taxation Rules, 2011

Point of Taxation

In case of liability under

Reverse Charge

Mechanism (Rule 7)

In case of services taxed for first time (Rule 5)

In case of change in

effective rate of Service

Tax (Rule 4)

GeneralRule

(Rule 3)

Copyright Services (Rule 8)



5.6.1 General rule

In case of continuous supply of services, (i.e. any service which is provided

continuously or on recurrent basis, under a contract for a period exceeding 3

months with the obligation for payment periodically, or from time to time) the date

of completion of each event which requires the service receiver to make any

payment to service provider, shall be deemed to be the date of completion of

service.

In case the advance receipt is up to Rs. 1,000/-, in excess of the amount indicated in

the invoice, the service provider is having option to determine point of taxation to

the extent of such excess amount as and when the invoice is raised within the time

prescribed or completion of service, as the case may be.

In case of change in effective rate of tax in between the

date of provision of service, issuance of invoice or

receipt of payment, point of taxation is required to be

determined as per Rule 4 of POTR, 2011.

5.6.2 Change in effective rate of tax

Yes

Yes

No

No

Advance receipt

POT will be date of receipt of advance

POT will be date of issuance of Invoice

Invoice raised within time

prescribed in Rule 4A of STR, 1994

POT will be Completion of Service


The General Rule of Point of Taxation - Rule 3 of POTR, 2011


Change in effective rate of tax also includes a change in the portion of value on

which tax is payable in terms of a notification.

The summary of Rule 4 is given here below:

Provision of Service Issue of Invoice Payment

Before

change

of rate

After change of rate Date of invoice or

payment, whichever is

earlier (new rate)

Point of Taxation

After change of rate

Before change of rate Date of invoice (old rate)After change of rate

After change of rate Date of payment (old

rate)

Before change of

rate

After

change

of rate

Before change of rate Date of payment (new

rate)

After change of rate

Before change of rate Date of invoice or

payment, whichever is

earlier (old rate)

Before change of

rate

After change of rate Date of invoice (new rate)Before change of

rate

5.6.3 Services taxed for the first time

5.6.4 Liability under reverse charge mechanism

When a service is taxed for the first time, Point of Taxation is required to be

determined as per Rule 5 of POTR, 2011. In view of Rule 5, no tax is required to be

charged/paid in case of following scenarios:

ØWhere invoice as well as payment is received against such invoice before

such service became taxable.

ØWhere payment is received before such service became taxable and the

service provider has issued invoice within the period of 14 days from the

date when the service is taxed for the first time.

ØIn view of Rule 7 of POTR, 2011, in respect of services on which person is



required to pay tax as recipient of service (Reverse Charge Mechanism),

point of taxation shall be the date on which payment is made by service

receiver to service provider.

ØIf such payment is not made within a period of 6 months of the date of

invoice, the point of taxation shall be determined as per rule 3, 4, 5 or 8 as

applicable.

ØIn case of ‘Associated Enterprises’, where the service provider is located

outside India, the point of taxation shall be the date of debit in the books of

accounts of service receiver or date of making payment, whichever is

earlier.

Ø‘Associated Enterprises’ shall have the meaning as assigned to it in section

92A of the Income-Tax Act, 1961.

ØGenerally, the person who provides the

taxable service (service provider) is

responsible for paying the service tax

to the Government. Service provider

has an option of charging and

collecting service tax from the service receiver.

ØHowever, in respect of certain notified taxable services, service tax is

required to be paid to the Government, by such person as may be notified.

In general parlance, the said services are said to be services liable under

Reverse Charge Mechanism (‘RCM’).

ØNotification No. 30/2012-ST dated 20 June, 2012, as amended from time to

time, read with section 68(2) of the Act and Rule 2(1)(d) of STR, 1994

provides for RCM in the following scenarios:

5.7 Person Liable To Pay Tax



Sr. No.

Description of Service % Payable by Service Provider

1 By an insurance agent to any person carrying on the insurance business

100%

% Payable by Service

Receiver

NIL

2 Good transport agency services in respect of transportation of goods by road, where the person liable to pay freight is notified person

100%NIL

3 Sponsorship services to any body-corporate or partnership firm located in the taxable territory

100%NIL

4 By director of the company to the said company

100%NIL

5 Services provided to any business entity:-

5.1 By an Arbitral tribunal 100%NIL

5.2 Legal Services by an advocate or firm of advocates

100%NIL

5.3 Support services by Government except renting of immovable property and services specified in 66D(a)(i) to (iii)

100%NIL

6 Services provided by any individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons, located in the taxable territory to a business entity registered as body corporate, located in the taxable territory:

6.1 Renting of motor vehicle designed to carry passengers to any person who is not in similar line of business

At Abated

value: 100%

At Abated

value: NIL

At Non Abated

value:40%

At Non Abated

value: 60%

6.2 Supply of manpower for any purpose 75%25%

6.3 Security services 75%25%

6.4 Service portion in execution of Works Contract

50%50%



Ø‘Business Entity’ is defined under section 65B (17) of the Act to mean any

person ordinarily carrying out any activity relating to industry, commerce or any other business or profession.

Ø‘Legal Services’ is defined under rule 2(cca) of the STR, 1994 to mean any

service provided in relation to advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.

Ø‘Supply of Manpower’ is defined under rule 2(1)(g) of STR, 1994 to mean

supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.

Ø‘Security Services’ is defined under rule 2(1)(d)(FA) of STR, 1994 to mean

services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity.

Ø‘Works Contract’ is defined under section 65B(54) of the Act to mean a

contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property.

ØService tax is payable on the value of all services (i.e. taxable services). The

’Value of Taxable Service’ means, the gross amount charged by the service provider for the taxable service provided or to be provided by him. Taxable value has to be determined as per the provisions under section 67 of the

5.8 Value Of Taxable Service


Sr. No.

Description of Service % Payable by Service Provider

7 Services provided by any person located outside the taxable territory to any person located in the taxable territory

100%

% Payable by Service

Receiver

NIL


ØWhen the gross amount is inclusive of service tax payable,

Value of taxable service =

The term ‘consideration’, ‘money’ and ‘gross amount charged’ are defined for the purpose of valuation of taxable services.

ØWhen certain expenditure or costs are incurred by the service provider in

the course of providing taxable services, all such expenditure or costs shall be treated as consideration for taxable service provided.

ØAs per Rule 5 (2) of Valuation Rules, expenditure or cost that a service

provider incurs, as ‘pure agent’ of client shall be excluded from value, if service provider satisfies certain specified conditions. The term ‘pure

5.8.1 Inclusion / exclusion of certain expenditure or cost

Gross Amount Charged * 100

100 + rate of Service Tax

Value of Taxable Service:

Where consideration for

service is

Wholly inMoney

Not Wholly / Partly

in Money

Notascertainable

TheGross

AmountCharged

SuchAmountin Money

Add Service Tax

Charged

Gross amount chargedto provde similar

service to any person

If cannot be determinedin accordance with

above, then, equivalentmoney value of suchconsideration which

shall, be at least equal tothe cost of provision of

such taxable service


Act, read with Service Tax (Determination of Value) Rules, 2006 (‘Valuation Rules’). The valuation provisions can be summarized as follows:


Sr. No.

Conditions Abate-ment (%)

12 Construction of a complex, building, civil structure or a p a r t t h e r e o f , intended for a sale to a buyer, wholly or partly except where entire consideration is received after i s s u a n c e o f c o m p l e t i o n certificate by the c o m p e t e n t authority,-

(i) for residential unit having carpet area up to 2000 square feet or where the amount charged is less than rupees one crore;

(ii) for other than the (i) above.

--

Tax-able (%)

(i) No CENVAT credit on inputs to be availed.

(ii) The value of land is included in the amount charged from the service receiver.

(iii) The amount charged shall be the sum total of the amount charged for the service including the fair market value of all goods and services supplied by the recipient’s in or in relation to the service, whether or not supplied under the same contract or any other contract, after deducting -

(a) the amount charged for such goods or services supplied to the service provider, if any; and

(b) the value added tax or sales tax, if any, levied thereon:

Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles.

Description of Taxable Service

--

2575

3070


agent’ is defined in explanation 1 to rule 5(2) of Valuation Rules.

ØRule 6 of Valuation Rules provides for certain specific items for inclusion

and exclusion in the value of taxable services.

For certain services, a specified percentage of abatement is allowed from the gross amount charged for providing the services. The said abatements and conditions thereto are provided under notification no. 26/2012-ST dated 20 June 2012. The gists of the same are given here below:

5.8.2 Abatements

5.8.3 Valuation in the case of Works Contract

Service:

ØIn view of Rule 2A of Valuation Rules, the

value of service portion in execution of

works contract services is required to

be ascertained as follows:-

lIt shall be gross amount charged less value of property in goods.

(the value of property in goods adopted for payment of VAT shall be

taken as value of property in goods)

lIn case the value has not been determined as above then the

service portion in works contract to be calculated as given below:


ØNo CENVAT credit on inputs is eligible. However CENVAT credit on input

services and capital goods can be availed.

Nature of Works Contract % of Contract as ‘Service Portion’

Execution of :-

1. all new constructions

2. all types of additions and alterations to

abandoned or damaged structures on land that

are required to make them workable

3. erection, commissioning or installation of plant,

machinery or equipment or structures, whether

pre-fabricated or otherwise

40%

Maintenance or repair or reconditioning or

restoration or servicing of any goods

70%

In case of other works contract not covered above

including maintenance, repair, completion and

finishing services such as glazing, plastering, floor

and wall tiling, installation of electrical fittings of

immovable property

60%


6.1 Position In The State Of

Maharashtra

6.1.1 Background

6.1.2 Facts of the case

6.1.3 Ratio of the judgment

The levy of VAT on Builders and

Developers came in light with

the decision of the Honourable

Supreme Court in the case of

K. Raheja Development Corporation Vs. State of Karnataka, [(2005) 141 STC

298 (S.C.)]

ØTwo separate contracts entered (i) sale of right in land and (ii) construction

of buildings.

ØThere was an arrangement to sell an undivided fractional share, right, title

and interest to the intended buyer.

ØThe developer, not being the owners of the land, had lien over the land and

building until the intended buyers pay the full consideration with regard to

both land as well as construction activity.

Ø‘The Honourable Supreme Court has held that, ‘works contract’ has an

inclusive definition which includes any agreement for carrying out building

for construction activity for cash, deferred payment or other valuable

consideration - hence appellants are owner to the extent that they have

entered into agreements to carry out construction activity on behalf of

somebody else for cash, deferred payment or other valuable consideration

- they would be carrying out a ‘works contract’ and would become liable to

pay turnover tax on the transfer of property in the goods involved in such

works contract.’

53 |

CHAPTER 6: VAT AND WORKS CONTRACT REGULATIONS


ØThe appellants are undertaking to build as developers for the prospective

purchaser on payment of a price. Therefore it remains works contract as

defined under the Act.

ØIf the agreement is entered into after completion of construction of flats,

there would not be works contract. In case agreement is entered into

before construction is completed, it would be works contract and liable to

VAT.

On the basis of decision of Honourable Supreme Court in the case of M/s K. Raheja

Development Corporation (141 STC 298 (SC), Maharashtra Government amended

definition of Sale with effect from 20 June 2006. According to amended definition,

building construction contract was included in the definition of sale.

Prior to 20 June 2006

Section 2(24) of the MVAT, defines the term ‘sale’ to mean ‘a sale of goods made

within the State for cash or deferred payment or other valuable consideration, but

does not include a mortgage, hypothecation, charge or pledge; and the words

‘sell’, ‘buy’ and ‘purchase’, with all their grammatical variations and cognate

expressions, shall be construed accordingly.’

With effect from 20 June 2006

New amended definition is as follows:

ØClause (b) (ii) of the explanation to Sec 2(24) was introduced.

l‘(ii) the transfer of property in goods (whether as goods or in some

other form) involved in the execution of a works contract including,

an agreement for carrying out for cash, deferred payment or other

valuable consideration, the building, construction, manufacture,

processing, fabrication, erection, installation, fitting out,

improvement, modification, repair or commissioning of any

movable or immovable property;’

lIn pursuance to this definition the building and construction of an

6.2 Consequent Amendment In MVAT

54 | Real Estate Sector In India RSM Astute Consulting

immovable property was brought within the ambit of MVAT though

the indivisible contracts included charges towards land and labour

which are out of the ambit of VAT Law.

ØOn the basis of judgment of K. Raheja, Trade circular is issued by

Maharashtra Sales Tax Department on 7 February 2007.

ØIt clarifies that any transfer of property after 20 June 2006, irrespective of

whether an agreement was signed prior to that date, would be governed by

the amended definition of sale.

ØTri-partite agreements between land-owners, developers and prospective

buyers would be covered by the amended definition of sale.

ØIf the agreement is entered into after the flat or unit is already constructed,

then there would be no works contract, but so long as an agreement is

entered into before the construction is complete, it would constitute a

works contract.

ØOn 9 July 2010, the Government of Maharashtra provided for a composition

scheme.

ØIt was made applicable to registered dealers who undertake construction

of flats, dwellings, buildings or premises and transfer them in pursuance of

an agreement along with land or interest underlying the land.

ØComposition amount prescribed at 1% of the agreement amount or the

value specified for the purpose of Stamp Duty under the Bombay Stamp

Act, 1958, whichever is higher. For the contracts entered into a particular

calendar year, the ready reckoner value as on 1 January of that year has to

be taken in consideration.

6.3 Trade Circular Dated 7 February 2007

6.4 Introduction Of Composition Scheme

6.5 Maharashtra Chamber Of Housing Industry And Ors Vs. State Of Maharashtra

And Ors [2012-VIL-35-BOM]


56 |

The constitutional validity of the amended definition of

‘sale’, the Trade Circular dated 7 February. 2007 and 1%

Composition Scheme introduced with effect from 9 July

2010, was challenged in a spate of writ petitions.

On the behalf of the petitioner, it was contended as

under:

ØThe amendment was beyond the scope of the State’s power to tax under Sl.

No. 54 of List II of the Seventh Schedule to the condition.

ØAs per article 366(9A) (b), Contract would, inter-alia, involve a transfer

of property in goods and immovable property does not constitute goods.

ØConsequent to the 46th Amendment to the Constitution, only a transfer of

property in goods involved in the execution of a works contract is taxable

and a contract for the sale of immovable property is not a works contract.

Thus, legal fiction created by Article 366(29A) would not apply.

ØThe purpose underlying the enactment of deeming fiction in Article

366(29A) was to override the imitated definition of the expression ‘sale’ in

the Sale of Goods Act, 1930 and to isolate the sale of goods element

involved, inter alia, in a contract which is a works contract. The amended

definition of ‘sale’ falls within the compass of Article 366(29A).

ØIn an agreement which is governed by the MOFA, a conveyance of the

interest in the flat or at any rate an interest therein is created at the stage

of the execution of an agreement.

ØThe doctrine of accretion is always subject to a contract to the contrary.

The provisions of the MOFA contain a statutory stipulation to the contrary

where the accretion to the property ensures to the benefit of the flat

purchaser; and the Trade Circular and the deduction schemes are only

clarificatory in nature.

ØWorks contracts have numerous variations and it is not possible to accept

the contention either as a matter of principle or as a matter of

6.5.1 Ratio Of The Judgment

Real Estate Sector In India RSM Astute Consulting

57 |

interpretation that a contract for work in the course of which title is

transferred to the flat purchaser would cease to be a works contract.

ØThe effect of the amendment to Section 2(24) is to clarify the legislative

intent that a transfer of property in goods involved in the execution of

works contract including an agreement for building and construction of

immovable property would fall within the description of a sale of goods

within the meaning of the provision.

ØThe constitutional validity of the provisions of the MVAT Act, 2002, as

amended, is not contingent upon any other statutory regulation of

apartments under cognate legislation in the State of Maharashtra.

ØHaving regard to this statutory scheme, it is not possible to accept the

submission that a contract involving an agreement to sell a flat within the

purview of the MOFA is an agreement for sale of immovable property

simplicitor.

ØThe Constitutional validity of the amended definition of ‘sale’, the Trade

Circular dated February 2007 was upheld.

ØHence, it is liable for VAT.

ØIt was issued in pursuance to the decision of the Honourable Bombay High

Court in Maharashtra Chamber of Housing Industry case.

ØAccordingly, it made developers liable to pay MVAT Act w.e.f. 20 June 2006.

ØIt provided facilities for obtaining registration, granted administrative

relief for unregistered period and filing of returns from 20 June 2006.

Option 1: Deduction of actual expenses on labour

Option 2: Standard deduction method

6.6 Trade Circular No. 14t Of 2012 Dated 6 August 2012

6.7 Options For Computing Works Contract Liability

6.7.1 From the period 20 June 2006 onwards:


6.7.2 From 1 April 2010

Option 3: Composition Scheme

Option 1: Deduction of actual expenses on labour

ØThe deduction for labour and service charges is available on actual basis.

ØDeduction for land is available.

ØSet off is available (subject to Rule 53 and 54) in respect of materials

transferred to customers.

Option 2: Standard deduction method

ØStandard deduction of 30% is available for labour from total contract

value.

ØDeduction for land is available.

ØSet off is available (subject to Rule 53 and 54) in respect of materials

transferred to customers.

For Option 1 and Option 2, deduction towards cost of land shall not exceed 70% of

the agreement value.

Option 3: Composition scheme

ØVAT payable is @5% on agreement value.

ØDeduction for Land is not available.

ØInput tax credit is available subject to reduction of 4% of purchase price.

Option 4: Composition scheme @ 1%

Introduction of one more option under Section 42(2A) read with Notification

No. VAT 1510/CR-65/Taxation – 1 dated 9 July 2010.

Conditions:

ØAgreements should be registered on or after 1 April 2010.


ØVAT is payable @ 1% of total agreement value.

ØDeduction for Land is not available.

ØInput tax credit is not available. (If input tax credit is already claimed in

respect of these flats, the same has to be reversed.)

ØA dealer (contractor) has an option to choose any of the above mentioned

options.

For availing deduction of VAT liability discharged by subcontractor from total

contract value, certain forms are required to be maintained by principal

contractor and sub-contractor.

In the Interim order of the SC dated 28 August

2012 in case of SLP filed by Promoters and

Builders Assn. and Ors. Vs. State of Maharashtra,

(17709/2012), it is mentioned in para 3(iii) ‘The

payment of tax by the developers shall be subject

to the final decision in the matter before this

court.’

So, if it is ultimately held by Honourable SC that VAT is not payable on development

agreements, the VAT paid by builders and developers will be refundable.

ØUnder the MVAT Act, every dealer, registered or unregistered, liable to pay

tax shall:

lIf his turnover of sales or, as the case may be, of purchase

exceeds Rs.1,00,00,000 in any year, or

lIf he is a dealer or person who holds license in certain specified

cases - get his accounts in respect of such year audited by an

6.8 Deduction For Sub-Contract

6.9 Refund Of Tax Paid By Developer In Case SC Judgement Comes In Favour Of

Developer

6.10 VAT Audit


accountant (i.e.practicing Chartered Accountant or Cost

Accountant) within the prescribed period from the end of that year

and furnish within that period the report of such audit in the

prescribed form duly signed and verified by such accountant and

setting forth such particulars and certificates as may be prescribed.

ØIn case of failure to furnish the copy of such report within the time

prescribed, the Commissioner may, after giving a reasonable opportunity

of being heard, impose on him, in addition to any tax payable, a sum by way

of penalty equal to 0.1 % of the total sales.

ØIt is pertinent to note that the terms ‘sales’ and ‘purchases’ under the VAT

regime, include sale/purchase of capital goods, scrap, packing material,

stationery, goods purchased and debited to Profit and Loss account, DEPB,

Copyrights, etc.

ØAs per Rule 66 of the MVAT Rules the report of the audit under Section 61

shall be submitted within 9 ½ months from the end of the year to which the

report relates.

ØDeveloper issued allotment letter specifying that the terms and conditions

of allotment are subject to sale deed to be signed by parties in future.

ØAs per the terms, allotee agreed that no right will accrue in his favour until

the sale deed is executed.

ØThe petitioner shall remain the owner and the construction thereon and no

rights shall devolve upon the allottee by way of allotment even though any

/ all payment(s) has / (have) been received by petitioner.

ØDevelopers will continue to remain the owner of apartments including all

constructions till execution of sale deeds of such apartment, hence no

work for construction.

6.11 Assotech Realty Pvt. Ltd. Vs. State Of UP [2007 (7) STR 129 ALL.]

6.11.1 Facts of the case

6.11.2 Ratio of the judgement


ØThe petitioner not carrying out construction activity for and on behalf of

allottee as the right, title and the interest in construction remained with

the petitioner at all times till execution of sale deed of apartment as a

whole.

ØHence, it is not liable for VAT.

ØIn K. Raheja’s case, the agreement provided that the developer will

construct for and on behalf of the person who agreed to purchase the flat.

In this case works contract was made taxable.

K. Raheja’s case has been challenged in the case of Larsen and Toubro Ltd Vs.

State of Karnataka decided on 19 August 2008 (2008) 17 VST 460 SC wherein the

ratio of K. Raheja case was referred to the larger Bench for reconsideration.

ØWhere a builder purchases the land, develops it and sells fully constructed

flats / premises to buyer, it is sale of immovable property. Hence, VAT will

not be applicable on sale of immovable property.

ØBuilding, residential / commercial premises, if sold by receiving booking

amount and installments from buyer, that would not amount to agreement

for construction of property for buyers. It would be sale of immovable

property. VAT will not be applicable in such a case.

ØIf the ratio of K. Raheja’s case is accepted, then there would be no

difference between the works contract and a contract for sale of chattel as

a chattel.

ØThe case of K. Raheja Development needs re-consideration. The matter is

referred to larger bench.

The definition of ‘sale’ in the CST Act was amended in

2002 so as to include within its purview the concept of

deemed sales involved in the works contracts. Central

Government has authority to levy CST on such deemed sale

6.12 Larsen And Toubro Ltd And ANR. Vs. State Of Karnataka [2008 (SC2)-GJX

2195-(SC)]

6.13 Inter-State Works Contract


involved in the works contract if such deemed sale is an inter state sale.

Taxable event in works contracts:

ØTaxable event in case of works contracts is deemed sale and such deemed

sales are considered to have taken place, when the goods are incorporatedin the works contract.

ØIn 2002, definition of Sale under CST Act was amended to include deemed

sale in Works contract.

ØThe Punjab and Haryana High Court in Thomson Press (I) Ltd vs. State of

Haryana (1996)100 STC 417(P and H) held that if the inter state movement ofgoods arises due to a pre–existing contract then inputs and goods involvedin the execution of works contract shall also be deemed to have moved and the State Government can not levy tax on deemed sale of such goods.

ØThe High Court made it clear that if a pre-existing works contract occasions

the movement of goods, then such goods shall be deemed to have beenincorporated in such inter state works contract. In such case, no tax can belevied by the State Government.

In the States of Andhra Pradesh, Gujarat, Karnataka, Tamilnadu, West Bengal and

Delhi

6.14 Summary Of VAT Provisions


Sr. No.

i Andhra Pradesh

Composition Rate @ 5 %

Only 75% of Value of contract towards Land will be

Total Contract Value

Less :

Standard

Deduction

@25%

Works Contract


Less :

Actual Charges for labor and Services

State Definition of Works Contract

‘Works Contract’ includes any agreement for carrying out for cash or for deferred payment or for any other valuable consideration, the building

Option 1 Option 2 Option 3Actual

ExpenseStandard Deduction

Composition

Sr. No.

allowed as deduction and on remaining 25% of portion Composition rate is chargeable @ 5%.

ITC not available

for labor and Services etc.=Taxable Material

Value

VAT = Rate of Materials

ITC available

Works Contract

etc.=Taxable Material Value


Input tax credit (ITC) available


construction, manufacture, processing, fabrication, erection, installation, laying, fitting out, improvement, modification, repair or commissioning of any movable or immovable property



Composition


ii Gujarat Composition tax rate @ 0.6% of Total Contract Value

Provided all purchases are made from local registered dealer.

Inter state purchase is not allowed.

ITC not available


Less :

Standard

Deduction

@20% for labor and Services etc.=Taxable Material

Value


ITC available


Less :

Actual Charges for labor and Services etc. =Taxable Material Value


ITC available

‘Works Contract’ means a contract for execution of works and includes such works contract as the State Government may, by notification in the Official Gazette, specify;

Sr. No.

iii Karnataka Composition tax rate @ 5% of Total Contract Value

ITC not available


Less : Standard

Deduction

@25% for labor and Services etc.=Taxable Material

Value


ITC available

Works Contract


Less :

Actual Charges for labor and Services etc. =Taxable Material Value


ITC available


'Works Contract' includes any agreement for carrying out for cash, deferred payment or other valuable consideration, the building, construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, modification, repair or commissioning of any movable or immovable property.



Composition


iv Tamilnadu Composition tax rate @ 2% of Total Contract Value

ITC not available


Less : Standard

Deduction

@30% for labor and Services etc.=Taxable


Less :

Actual Charges for labor and Services etc.

=

Taxable Material Value

‘Works Contract’ includes any agreement for carrying out for cash, deferred payment or other valuable consideration, building construction, manufacture, processing, fabrication, erection, installation, fitting

Sr. No.

Material

Value


ITC available

Works Contract


ITC available


out, improvement, modification, repair or commissioning, of any movable or immovable property;



Composition


v West Bengal

Composition tax rate @ 2% of Total Contract Value

ITC not available


Less : Standard

Deduction

@ 25% for labor and Services etc.=Taxable Material

Value


ITC available


Less :

Actual Charges for labor and Services etc.=Taxable Material Value


ITC available

‘Works Contract’ means any agreement for carrying out for cash, deferred payment or other valuable consideration-

(a) the construction, fitting out, improvement or repair of any building, road, bridge or other immovable property,

vi Delhi Composition tax rate @ 2.5% of Total Contract Value if purchases


Less : Standard

Deduction


Less :

Actual Charges for

‘Works Contract’ includes any agreement for carrying out for cash or for deferred payment or for valuable

Sr. No.

and sale during the period for composition is opted within Delhi only

3% of the entire turnover on account of works contracts executed in Delhi if the dealer is engaged in procuring goods from any place outside Delhi or in supplying goods to any place outside Delhi.

ITC not available

@ 25% for labor and Services etc.=Taxable Material

Value


Works Contract

labor and Services etc.=Taxable Material Value



consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property



Composition


7.1 Background

7.2 Adjudication

7.3 Other Related Aspects

Stamp Duty in India is governed by

the Indian Stamp Act, 1899. It applies

in case of transfer of property

whether moveable or immovable.

Through this chapter, we aim to

highlight certain pertinent aspects relating to Stamp Duty, its adjudication and

various rates prevailing in different states of India.

ØLevy of stamp duty is dependent upon many variable factors like area of

the property, locality, circle rate, nature of interest, encumbrances, etc.

Therefore, it is advisable to get the stamp duty adjudicated by the

competent authority in case of uncertainty about the valuation.

ØIf an instrument is not duly stamped, the stamp authorities may levy a

penalty, which is generally an ad valorem rate which varies from state to

state, and maximum penalty could range from twice the deficient stamp

duty to ten times the deficient stamp duty. Deliberate evasion of stamp

duty could also attract imprisonment.

ØStamp duty is a very important factor in structuring transactions. A

document inadequately stamped is not admissible as evidence.

ØMany states provide for levying differential stamp duty. Stamp duty

implications must be examined when documents or their photocopies are

being moved from one state to another. Many states provide that the

shortfall in stamp duty must be paid within a specified period (most

commonly 3 months) of the documents being brought into the state.

ØThe stamp laws of most states provide that when there are multiple

67 |

CHAPTER 7: STAMP DUTY REGULATIONS


instruments for specified transactions, highest duty is to be paid on

principal instrument and nominal stamp duty is payable on the rest of the

documents.

ØWhen a single instrument relates to distinct matters, stamp laws require

that the instrument shall be chargeable with the aggregate amount of

duties with which the separate instruments, each comprising of one of

such distinct matters, would be chargeable.

ØFinally, there may be situations where one stamps a document in

anticipation of execution but the deal falls through and the document is

not executed at all. If the stamp duty is high, then most states provide for

claiming a refund within a specific time.

ØStamp duty depends upon many factors. Below is an indicative chart of

approximate Stamp duty in case of transfer of immovable property in India:

68 |

State Rate

Andhra Pradesh 5%

Bihar 9%

Chhattisgarh 7.5%

Goa 7%

Gujarat 3.5% +Additional Duty 40% on Stamp Duty

Haryana 5%

Himachal Pradesh 8%

Jharkhand 6%

Kerala 8.5%

Madhya Pradesh 7.5%

Maharashtra 5%

Orissa 14.7%

Punjab 6%

Rajasthan 10%

Tamil Nadu 8%

Uttaranchal 4%

Uttar Pradesh 6%

West Bengal 7%


8.1 Background

8.2 Foreign Direct Investment In Real Estate Sector In India

The Government of India frames broad

guidelines on sector-specific FDI policy and

issues press notes from time to time. As per

the latest FDI policy, foreign direct investment

and investments by NRIs are allowed under

automatic route in almost all the sectors

except in certain sectors/activities such as

Trading in TDRs, real estate trading, etc., which are prohibited. Incidentally, the

foreign investment is allowed in construction-development projects subject to

fulfillment of certain specified conditions.

The Foreign Exchange Management Act, 1999 empowers RBI to frame regulations in

respect of cross border investments, foreign exchange transactions and

transactions between residents and non-residents.

Under this chapter, we aim to highlight few relevant provisions that govern foreign

investment transactions in real estate sector.

8.2.1 FDI is prohibited in real estate business or construction of farm houses, or trading

in TDRs. However, the RBI has clarified in its Circular that ‘Real Estate Business’

does not include construction of housing/commercial premises, educational

institutions, recreational facilities, city and regional level infrastructure,

townships. Further, the FDI policy of Government of India permits 100% foreign

investment under automatic route in Construction Development activity i.e.

Townships, Housing, Built-up infrastructure and construction development project

(which would include, but not be restricted to housing, commercial premises,

hotels, resorts, hospitals, educational institutions, recreational facilities, city and

regional level infrastructure) subject to certain conditions given below:

ØMinimum area to be developed* under each project would be as under:

69 |

CHAPTER 8: FOREIGN INVESTMENT REGULATIONS


lIn case of development of serviced housing plots, a minimum land

area of 10 hectares;

lIn case of construction-development projects, a minimum built-up

area of 50,000 square meters;

lIn case of a combination project, any one of the above two

conditions would suffice.

*Union Urban Development Ministry has suggested certain relaxations like

minimum land area proposed to be reduced to 2 hectares from 10 hectares,

minimum built-up area proposed to be reduced to 25,000 square meters from

50,000 square meters. However, the same is at the discussion stage at present and

not finalized.

ØMinimum capitalization of US$ 10million for WOS and US$ 5 million for

JV with Indian partners. The funds would have to be brought in within

6 months of commencement of business of the Company.

ØOriginal investment cannot be repatriated before a period of 3 years from

completion of minimum capitalization. Original investment means the

entire amount brought in as FDI. The lock-in period of 3 years will be applied

from the date of receipt of each installment/tranche of FDI or from the date

of completion of minimum capitalization, whichever is later. However, the

investor may be permitted to exit earlier with prior approval of the

Government through FIPB.

ØAt least 50% of each such project must be developed within a period of

5 years from the date of obtaining all statutory clearances. The

investor/investee company would not be permitted to sell undeveloped

plots. For the purpose of these guidelines, ‘Undeveloped Plots’ will mean

where roads, water supply, street lighting, drainage, sewerage, and other

conveniences, as applicable under prescribed regulations, have not been

made available. It will be necessary that the investor provides this

infrastructure and obtains the completion certificate from the concerned

local body/service agency before he would be allowed to dispose of

serviced housing plots.


ØThe project shall conform to the norms and standards, including land use

requirements and provision of community amenities and common

facilities, as laid down in the applicable building control regulations, bye

laws, rules and other regulations of the State Government/Municipal/Local

Body concerned.

ØThe investor/investee company shall be responsible for obtaining all

necessary approvals, including those of the building/layout plans,

developing internal and peripheral areas and other infrastructure

facilities, payment of development, external development and other

charges and complying with all other requirements as prescribed under

applicable rules/bye-laws/regulations of the State Government/Municipal/

Local Body concerned.

ØThe State Government / Municipal / Local Body concerned, which approves

the building / development plans, would monitor compliance of the above

conditions by the developer.

Notes:

lThe first four conditions given above would not apply to Hotels and

Tourism, Hospitals, SEZs, Education Sector, Old age Homes and

investment by NRIs.

lFDI is not allowed in real estate business (already discussed in para

8.2.1).

8.2.2 Investment by NRIs are allowed in partnership firms or proprietary concerns on

non-repatriation basis provided that such firms or concerns are not engaged in

real estate business (i.e. dealing in land and immovable property with a view to

earning profit or earning income therefrom).


72 |

*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.


8.2.3 Flow-chart for foreign investment regulations in real estate sector :

FDI in Real Estate Sector

Yes

FDI prohibited

Yes

No

Other conditions prevail and need to be complied

Activity

No

Real Estate Business* / Trading in TDRs

Townships, housing, built-up infrastructure and

construction-development projects

FDI in Hotels and Tourism, Hospitals, SEZs, Education Sector, Old age Homes

and investment by NRIs

Condition w.r.t. area, capitalization, lock-in-period for repatriation, term of

development need not be fulfilled

Conditions w.r.t. area, capitalization, lock-in-period for repatriation, term of

development need to be fulfilled

Yes

73 |

8.2.4 Certain ongoing issues in relation to Foreign Investment Regulations in real

estate sector, inter alia, include the followings:

8.3 Liberalized Foreign Investment Policy For Retail Trading Sector - Impact On

Real Estate Sector

lOnce the project is completed,

whether funds can be redeployed in

another pro ject without any

restriction as mentioned above?

lFrom which date, the lock-in period

of 3 years commence when amount

is received in tranches/installment

i.e. whether from the date of each

installment or from the date of minimum capitalization?

lWhether foreign investor can acquire the property for the purpose of

leasing?

lWhether the property constructed as per FDI guidelines can be leased out?

lWhether FII can subscribe to initial public offer of a company engaged in

real estate business without FDI compliant project?

In the year 2006 , FD I up to 5 1% under

G ove r n m e n t a p p rova l ro u te wa s a l l owe d

in reta i l segment under SBRT. Th is l imi t

has been raised to 100% in the year 2012. The

Government, vide Press note no.6 dated 22

August 2013, has allowed FDI up to 49%, in

SBRT under the automatic route.

In September 2012, the Government of India further liberalized FDI policy for MBRT,

by allowing 51% under Government approval route with certain terms and

conditions. One of the conditions of such FDI in MRBT is that at least 50% of total

FDI should be invested in ‘backend infrastructure’ within 3 years of the first

tranche of FDI. This could enable significant growth in the Real Estate Sector in

India.


8.4 Acquisitions And Transfers Of Immovable Property In India

8.5 External Commercial Borrowings

Foreign Exchange Management (Acquisition and Transfer of Immovable Property

in India) Regulations, 2000 regulate the transactions in immovable property by

non-residents. The same are briefly discussed as under:

ØA person resident outside India who has established in India, a branch,

office or other place of business for carrying on in India any activity,

excluding a liaison office, in accordance with the Foreign Exchange

Management (Establishment in India of Branch or Office or Other Place of

Business) Regulations, 2000,may acquire any immovable property in India,

which is necessary for or incidental to carrying on such activity subject to

complying with reporting requirements. Liaison office cannot acquire

immovable property except by way of lease not exceeding 5 years.

ØIn addition to FDI permitted in real estate as discussed above, NRIs or PIO

are permitted to acquire or transfer immovable property in India i.e.

residential or commercial property. However, purchase of agricultural

property, plantation or farm house is not permitted.

ØNRIs/PIOs can also avail loan from an authorized dealer, a Housing

Financial Institution or an Employer subject to certain conditions.

ØForeign nationals of non-Indian origin, resident outside India are not

permitted to acquire any immovable property in India unless such property

is acquired by way of inheritance from a person who was resident in

India. However, they can acquire or transfer immovable property in India,

on lease, for a period not exceeding 5 years without prior permission of RBI.

ØA person resident in India who is a citizen of Pakistan or Bangladesh or Sri

Lanka or Afghanistan or China or Iran or Nepal or Bhutan would require RBI

permission for acquisition or transfer of immovable property in India,

other than lease, not exceeding 5 years.

ECBs refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’

credit, securitized instruments availed from eligible non-resident lenders with a

minimum average maturity of 3 years.


The Indian Company or any other eligible entity as specified by RBI is allowed to

raise ECBs from eligible lenders subject to specified conditions and end-use

restrictions. The ECBs can be utilized for specified purposes only and shall not be

utilized for any investment in real estate sector. In November 2012, RBI has

permitted ECBs for low-cost affordable housing project (‘Project’) under the

approval route for certain eligible borrowers, subject to certain conditions which

include the followings:

lA project in which at least 60% of the permissible FSI would be for the units having maximum carpet area up to 60 square meters,

lECB proceeds should not be utilized for the purpose of acquiring land,

lThe maximum fund that can be availed through ECB is US$ 1 billion,

lDevelopers / builders should have minimum 3 years’ experience in undertaking residential projects and should have good track record in terms of quality and delivery,

lDevelopers / builders should not have defaulted in any of their financial commitments to banks / financial institutions or any other agencies. Further, the project should not be a matter of litigation,

lThe minimum NOF for the past 3 financial years should not be less than Rs. 300 crores,

lBorrowing through ECB should be within overall borrowing limit of 16 times of their NOF and the NNPA shall not exceed 2.5% of the net advances,

lThe maximum loan amount sanctioned to individual buyer will be capped at Rs. 25,00,000 subject to the condition that the cost of the individual housing unit shall not exceed Rs.30, 00,000.

Under Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004, an Indian party can make investment in JV / WOS outside India subject to complying with certain conditions and procedural requirements.

8.6 Outbound Investments


However, Indian party is not allowed to make any investment in a foreign entity engaged in real estate business. ‘Real Estate Business’ means ‘buying and selling of real estate or trading in TDRs but does not include development of townships, constructions of residential / commercial premises, roads or bridges’. As such, an Indian party can invest outside India in real estate business other than buying and selling of real estate or TDRs, subject to complying with net-worth criteria, certain conditions and procedural requirements.

Under LRS scheme of RBI, the authorized dealers may freely allow remittances by resident individuals up to specified limits per financial year for any permitted current or capital account transactions or a combination of both. Till now, the resident individuals were permitted to acquire and hold immovable property outside India under LRS. However, recently, RBI has amended/clarified that LRS should no longer be used for acquisition of immovable property, directly or indirectly, outside India. Therefore, AD banks may henceforth not allow any remittances under the LRS scheme for acquisition of immovable property outside India.

8.7 Acquisition Of Immovable Property Outside India Under LRS Of RBI


9.1 Background

9.2 Accounting Under Indian GAAP

Accounting Standards (AS) are rules

regarding recognition, measurement and

disclosure aspects in financial statements

and relate to the codification of generally

accepted accounting principles.

These are norms of accounting policies and

practices, which direct how the items which

make up the financial statements, should be dealt with in accounts and presented

in the financial statements. There are various Accounting Standards followed

worldwide (e.g. US GAAP, IFRS, Indian GAAP, etc.)

In exercise of the powers conferred by clause (a) of sub-section (1) of section 642 of

the Companies Act, 1956, read with section 211(3C) and section 210A(1) of the

Companies Act, 1956, the Central Government, in consultation with National

Advisory Committee on Accounting Standards, had made the Companies

(Accounting Standards) Rules, 2006.

Accounting Standards as specified under the Companies (Accounting Standards)

Rules, 2006 are to be applied by the companies in the preparation of General

Purpose Financial Statements for the accounting periods commencing on or after

7 December 2006.

ØThe accounting standards that deal with the accounting treatment of

revenue are (AS)-7 Construction Contracts and (AS)-9 Revenue

Recognition. (AS)-7 is to be applied for accounting for construction

contracts in the financial statements of contractor.

ØAs per (AS)-7, when the outcome of a construction contract can be

estimated reliably, contract revenue and contract costs associated with

the construction contract should be recognized as revenue and expenses

77 |

CHAPTER 9: FINANCIAL REPORTING STANDARDS


respectively by reference to the stage of completion of the contract

activity at the reporting date. An expected loss on the construction

contract should be recognized as an expense immediately in accordance

with the standard. The recognition of revenue and expenses by reference

to the stage of completion of a contract is often referred to as the

percentage of completion method.

Ø(AS)-9 Revenue Recognition deals with the recognition of revenue arising

in the course of the ordinary activities of the enterprise from:

lthe sale of goods,

lthe rendering of services, and

lthe use by others of enterprise resources yielding interest,

royalties and dividends.

ØAs per (AS)-9, revenue should be accounted when significant risk and

rewards of ownership are transferred to the buyer and it is not

unreasonable to expect ultimate collection.

ØIn 2006, the ICAI had also issued a Guidance Note on Recognition of

Revenue by Real Estate Developers. As per the said guidance note, revenue

would be recognized by applying the principles of percentage completion

method as per principles provided in (AS)-7 if there is transfer of risk and

rewards of ownership and no uncertainty exists as regard to collection of

the amount.

ØIn most cases, Real Estate Developers would not fall under the definition of

contractor. In such a situation, (AS)-7 cannot be applied to transactions

entered by the real estate developers and principles laid down under (AS)-9

Revenue Recognition needs to be applied.

ØHowever, due to the distinguished revenue model of this sector, it was

observed that different practices were followed by the various real estate

developers in recognising their revenue till recent past. To harmonize the

diverse practices followed by different players in this sector into a single

uniform practice, particularly, in the application of Percentage Completion


Method of recognition of revenue, in 2012, the ICAI issued a Guidance Note

on Accounting for Real Estate Transactions (Revised 2012).

ØDefinitions

lA construction contract is a contract specifically negotiated for

construction of an asset or a combination of assets that are closely

interrelated or interdependent in terms of their design, technology

and function or their ultimate purpose or use.

lA fixed price contract is a construction contract in which the

contractor agrees to a fixed contract price, or a fixed rate per unit of

output, which in some cases is subject to cost escalation clauses.

lA cost plus contract is a construction contract in which the

contractor is reimbursed for allowable or otherwise defined costs,

plus percentage of these costs or a fixed fee.

ØContract revenue includes:

lthe initial amount of revenue agreed in the contract; and

lvariations in contract work, claims and incentive payments:

}to the extent that it is probable that they will result in

revenue; and

}they are capable of being reliably measured.

Contract revenue is measured at the consideration received or receivable.

The measurement of contract revenue is affected by a variety of

uncertainties that depend on the outcome of future events.

ØContract costs comprise of:

lcosts that relate directly to the specific contract;

lcosts that are attributable to contract activity in general and can be

allocated to the contract; and

9.2.1 (AS) - 7 construction contracts


80 |

lsuch other costs as are specifically chargeable to the customer

under the terms of the contract.

ØCosts that relate directly to a specific contract include:

lsite labour costs, including site supervision;

lcosts of materials used in construction;

ldepreciation of plant and equipment used on the contract;

lcosts of moving plant, equipment and materials to and from the

contract site;

lcosts of hiring plant and equipment;

lcosts of design and technical assistance that is directly related to

the contract;

lthe estimated costs of rectification and guarantee work, including

expected warranty costs; and

lclaims from third parties.

ØThese costs may be reduced by any incidental income that is not included

in contract revenue, for example income from the sale of surplus materials

and the disposal of plant and equipment at the end of the contract.

ØCosts that may be attributable to contract activity in general and can

be allocated to specific contracts include:

linsurance;

lcosts of design and technical assistance that is not directly related

to a specific contract; and

lconstruction overheads.

ØRecognition of contract revenue and expenses

lWhen the outcome of a construction contract can be estimated


81 |

reliably, contract revenue and contract costs associated with the

construction contract should be recognized as revenue and

expenses respectively by reference to the stage of completion of

the contract activity at the reporting date. An expected loss on

the construction contract should be recognized as an expense

immediately.

ØIn the case of a fixed price contract, the outcome of a construction

contract can be estimated reliably when all the following conditions are

satisfied:

ltotal contract revenue can be measured reliably;

lit is probable that the economic benefits associated with the

contract will flow to the enterprise;

lboth the contract costs to complete the contract and the stage of

contract completion at the reporting date can be measured

reliably; and

lthe contract costs attributable to the contract can be clearly

identified and measured reliably so that actual contract costs

incurred can be compared with prior estimates.

ØIn the case of a cost plus contract, the outcome of a construction

contract can be estimated reliably when all the following conditions are

satisfied:

lit is probable that the economic benefits associated with the

contract will flow to the enterprise; and

lthe contract costs attributable to the contract, whether or not

specifically reimbursable, can be clearly identified and measured

reliably.

ØPercentage completion method:

lUnder this method, contract revenue is

matched with the contract costs


incurred in reaching the stage of completion, resulting in the

reporting of revenue, expenses and profit which can be attributed

to the proportion of work completed.

lUnder the percentage of completion method, contract revenue is

recognized as revenue in the statement of profit and loss in the

accounting periods in which the work is performed. Contract costs

are usually recognized as an expense in the statement of profit and

loss in the accounting periods in which the work to which they

relate is performed. However, any expected excess of total contract

costs over total contract revenue for the contract is recognized as

an expense immediately.

lA contractor may have incurred contract costs that relate to future

activity on the contract. Such contract costs are recognized as an

asset provided it is probable that they will be recovered.

lWhen an uncertainty arises about the collectability of an amount

already included in contract revenue, and already recognized in the

statement of profit and loss, the uncollectable amount or the

amount in respect of which recovery has ceased to be probable, is

recognized as an expense rather than as an adjustment of the

amount of contract revenue.

lThe stage of completion of a contract may be determined in a

variety of ways. The enterprise uses the method that measures

reliably the work performed. Depending on the nature of the

contract, the methods may include:

}the proportion that contract costs incurred for work

performed up to the reporting date bear to the estimated

total contract costs; or

}surveys of work performed; or

}completion of a physical proportion of the contract work.

lProgress payments and advances received from customers may not

necessarily reflect the work performed.


ØContract costs which are excluded are:

lcontract costs that relate to future activity on the contract, such as

costs of materials that have been delivered to a contract site or set

aside for use in a contract but not yet installed, used or applied

during contract performance, unless the materials have been made

especially for the contract; and

lpayments made to subcontractors in advance of work performed

under the subcontract.

ØWhen the outcome of a construction contract cannot be estimated

reliably:

lrevenue should be recognized only to the extent of contract costs

incurred of which recovery is probable; and

lcontract costs should be recognized as an expense in the period in

which they are incurred.

lan expected loss on the construction contract should be recognized

as an expense immediately.

lcontract costs, recovery of which is not probable, are recognized as

an expense immediately.

ØRecognition of expected losses

lWhen it is probable that total contract costs will exceed total

contract revenue, the expected loss should be recognized as an

expense immediately.

ØChange in estimates

lThe effect of a change in the estimate of contract revenue or

contract costs, or the effect of a change in the estimate of the

outcome of a contract, is accounted for as a change in accounting

estimate.

lThe changed estimates are used in determination of the amount of


revenue and expenses recognized in the statement of profit and

loss in the period in which the change is made and in subsequent

periods.

ØThis guidance note is applicable to all projects which are commenced on or

after 1 April 2012. However, this guidance note does not apply to real estate

transactions of the nature covered by AS-10, AS-12, AS-19 and AS-26.

ØIllustrative list of transactions covered is as under:

lSale of plots of land (including long-term sale type leases) without

any development.

lSale of plots of land (including long-term sale type leases) with

development in the form of common facilities like laying of roads,

drainage lines and water pipelines, electrical lines, sewage tanks,

water storage tanks, sports facilities, gymnasium, club house,

landscaping etc.

lDevelopment and sale of residential and commercial units, row

houses, independent houses, with or without an undivided share in

land.

lAcquisition, utilisation and transfer of development rights.

lRedevelopment of existing buildings and structures.

lJoint development agreements for any of the above activities.

ØProject – Project is the smallest

group of units/plots/saleable spaces,

which are linked with a common set of

amenities in such a manner that

unless the common amenities are

9.3 Guidance Note On Accounting For Real Estate Transaction (Revised 2012)

9.3.1 Applicability

9.3.2 Definitions


85 |

made available and functional, these units/plots/saleable spaces cannot

be put to their intended effective use.

ØProject Costs – Project costs in relation to a project ordinarily comprise:

lCost of land and cost of development rights - All costs related to the

acquisition of land, development rights in the land or property

including cost of land, cost of development rights, rehabilitation

costs, registration charges, stamp duty, brokerage costs and

incidental expenses.

lBorrowing Costs – In accordance with (AS)-16, borrowing costs

which are incurred directly in relation to a project or which are

apportioned to a project.

lConstruction and development costs – These would include costs

that relate directly to the specific project and costs that may be

attributable to project activity in general and can be allocated to

the project.

ØProject revenues – Project revenues include revenue on sale of plots,

undivided share in land, sale of finished and semi-finished structures,

consideration for construction, consideration for amenities and interiors,

consideration for parking spaces and sale of development rights.

ØReal estate activities and transactions take diverse forms. While some are

for sale of land (developed or undeveloped), others are for construction,

development or sale of units that are not complete at the time of entering

into agreements for construction, development or sale.

ØThe typical features of most construction/development of commercial and

residential units have all features of a construction contract – land

development, structural engineering, architectural design and

construction are all present. The natures of these activities are such that

often the date when the activity is commenced and the date when the

activity is completed usually fall into different accounting periods. It is not

unusual for such activities to spread over two or more accounting periods.

9.3.3 Accounting for real estate transactions


ØReal estate sales take place in a variety of ways and may be subject to

different terms and conditions as specified in the agreement for sale.

Accordingly, the point of time at which all significant risks and rewards of

ownership can be considered as transferred, is required to be determined

on the basis of the terms and conditions of the agreement for sale.

ØOnce the seller has transferred all the significant risks and rewards to the

buyer, any acts on the real estate performed by the seller are, in substance,

performed on behalf of the buyer in the manner similar to a contractor.

Accordingly, revenue in such cases is recognized by applying the

percentage of completion method on the basis of the methodology

explained in (AS)-7 Construction Contracts.

ØWhere individual contracts are part of a single project, although risks and

rewards may have been transferred on signing of a legally enforceable

individual contract but significant performance in respect of remaining

components of the project is pending, revenue in respect of such an

individual contract should not be recognized until the performance on the

remaining components is considered to be completed on the basis of the

aforesaid principles.

9.3.4 Summary of principles to be followed for accounting of various types of real

estate transactions

86 |

Nature of Transaction Key Principles / Conditions

ØPrinciples of (AS)-9 for recognizing revenue,

costs and profits from the transactions need to

be applied, provided:

lThe seller has transferred to the buyer all

significant risks and rewards of ownership

and the seller retains no effective control of

the real estate to a degree usually

associated with ownership;

lThe seller has effectively handed over

possession of the real estate unit to the

Sale of plots of land without

any development.

Transactions of real estate

which are in substance similar

to delivery of goods


87 |


buyer forming part of the transaction;

lNo significant uncertainty exists regarding

the amount of consideration that will be

derived from the real estate sales; and

lIt is not unreasonable to expect ultimate

collection of revenue from buyers.

ØWhere the development activity is significant,

‘Percentage Completion Method’ to be applied,

provided the outcome of a real estate project can

be estimated reliably and when all the following

conditions are satisfied:

ltotal project revenues can be estimated

reliably;

lit is probable that the economic benefits

associated with the project will flow to the

enterprise;

lthe project costs to complete the project

and the stage of project completion at the

reporting date can be measured reliably;

and

lthe project costs attributable to the project

can be clearly identified and measured

reliably so that actual project costs

incurred can be compared with prior

estimates.

ØRevenue should be recognized under the

percentage completion method only when the

events in below cases are completed:

Sale of developed plots.

Transactions and activities of

real estate which have the

same economic substance like

a construction contract


88 |


lAll critical approvals necessary for

commencement of the project have been

obtained. These include, wherever

applicable:

}Environmental and other clearances.

}Approval of plans, designs, etc.

}Title to land or other rights to

development/ construction.

}Change in land use.

lWhen the stage of completion of the project

reaches a reasonable level of development.

A reasonable level of development is not

achieved if the expenditure incurred on

construction and development costs is less

than 25 % of the construction and

development.

lAt least 25% of the saleable project area is

secured by contracts or agreements with

buyers.

lAt least 10% of the total revenue as per the

agreements of sale or any other legally

enforceable documents are realised at the

reporting date in respect of each of the

contracts and it is reasonable to expect

that the parties to such contracts will

comply with the payment terms as defined

in the contracts.


89 |

ØThus the application of the methods described above requires a careful

analysis of the elements of the transaction, agreement, understanding and

conduct of the parties to the transaction to determine the economic

substance of the transaction. The economic substance of the transaction is

not influenced or affected by the structure and/or legal form of the

transaction or agreement.

ØFor computation of revenue, the stage of completion is arrived at with

reference to the entire project costs incurred including land costs,

borrowing costs and construction and development costs.

ØThe method of determination of stage of completion with reference to

project costs incurred is the preferred method.

ØOther methods for determination of stage of completion include surveys of

work done, technical estimation, etc. However, computation of revenue

with reference to other methods of determination of stage of completion

should not, in any case, exceed the revenue computed with reference to the

'project costs incurred' method.

ØThe project costs which are recognized in the statement of profit and loss

by reference to the stage of completion of the project activity are matched

with the revenues recognized resulting in the reporting of revenue,

expenses and profit, which can be attributed to the proportion of work

completed.

ØCosts incurred that relate to future activity on the project and payments

made to sub-contractors in advance of work performed under the sub-

contract are excluded and matched with revenues when the activity or

work is performed.

ØThe recognition of project revenue by reference to the stage of completion

of the project activity should not at any point exceed the estimated total

revenues from 'eligible contracts’/other legally enforceable agreements

for sale.

9.3.5 Additional consideration in application of percentage completion method


ØWhen it is probable that total project costs will exceed total eligible project

revenues, the expected loss should be recognized as an expense

immediately. The amount of such a loss is determined irrespective of:

lcommencement of project work; or

lthe stage of completion of project activity.

ØThe percentage of completion method is applied on a cumulative basis in

each reporting period to the current estimates of project revenues and

project costs. Therefore, the effect of a change in the estimate of project

costs, or the effect of a change in the estimate of the outcome of a project,

is accounted for as a change in accounting estimate.

ØRevenues attributable to cancelled contracts and cases where the

property or part thereof is subsequently earmarked for own use or for

rental purposes, previously recognized revenue on such contracts should

be reversed and the costs in relation to property earmarked for own use

shall be carried forward and accounted in accordance with AS 10,

Accounting for Fixed Assets.

ØIllustration on application of percentage completion method

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Total saleable area 20,000 Sq. ft.

Estimated project costs Rs. 600 lakhs(This comprises land cost of Rs. 300 lakhs and construction costs of Rs. 300 lakhs)

Cost incurred till end of reporting period Rs. 360 lakhs(This includes land cost of Rs 300 lakhs and construction cost of Rs 60 lakhs)

Total area sold till the date of reporting period 5,000 Sq. ft.

Total sale consideration as per agreements of Rs. 200 lakhssale executed

Amount realised till the end of the reporting Rs.50 lakhsperiod

Percentage of completion of work 60% of total project

cost including land cost or 20% of total construction cost


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ØAt the end of the reporting period, the enterprise will not be able to

recognize any revenue as reasonable level of construction, which is 25% of

the total construction cost, has not been achieved, though 10% of the

agreement amount has been realized.

Continuing the illustration

If the work completed till end of reporting Rs. 390 lakhsperiod is (This includes land cost of Rs 300 lakhs and construction cost of Rs 90 lakhs)

Percentage of completion of work would be 65% of total projectcost including land cost or 30% of construction cost

The enterprise would be able to recognize revenues at the end of the

accounting period. The revenue recognition and profits would be as under:

Revenue recognized Rs. 130 lakhs

(65% of Rs 200 lakhs as per agreement of sale)

Proportionate cost Rs. 97.50 lakhs

(5000 square feet / 20,000 square feet) x 390

Income from the project Rs. 32.50 lakhs

Work in progress to be carried forward Rs. 292.50 lakhs

9.3.6 Transferable development rights

ØTransferable Development Rights (TDRs)

are generally acquired in different ways

as mentioned hereunder:

lDirect purchase - cost of

acquisition would be the amount

spent on for buying the said certificate.

lDevelopment and construction of built-up area - cost of

acquisition would be the cost of purchases or amount spent on

development or construction of built-up area, respectively.


lGiving up of rights over existing structures or open land - the

development rights should be recorded either at fair market value

or at the net book value of the portion of the asset given up

whichever is less.

ØFor this purpose, fair market value may be determined by reference either

to the asset or portion thereof given up or to the fair market value of the

rights acquired, whichever is more clearly evident.

ØWhen development rights are utilized in a real estate project by an

enterprise, the cost of acquisition should be added to the project costs.

ØWhen development rights are sold or transferred, revenue should be

recognized when both the following conditions are fulfilled:

ltitle to the development rights is transferred to the buyer; and

lit is not unreasonable to expect ultimate realization of revenue.

ØAn enterprise may contract with a buyer to deliver goods or services in

addition to the construction/development of real estate [e.g. property

management services, sale of decorative fittings (excluding fittings which

are an integral part of the unit to be delivered), rental in lieu of unoccupied

premises, etc.] In such cases, the contract consideration should be split

into separately identifiable components including one for the construction

and delivery of real estate units.

ØThe consideration received or receivable for the contract should be

allocated to each component on the basis of the fair market value of each

component.

ØIndia is committed to implement IFRS. The ICAI and

the MCA have expressed their view that India

would converge to IFRS in a phased manned

starting 1 April 2011. In February 2011, MCA has also

9.3.7 Transactions with multiple elements

9.4 Indian Accounting Standard (Ind AS)


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notified 35 Indian Accounting Standards converged with IFRS (Ind AS,) but

due to certain tax related issues, which needed to be resolved with the

concerned department, the date of implementation is still not notified.

9.4.1 Key differences between (AS)-7 and Ind AS-11

(AS)-7 Ind AS-11

Applied in accounting for construction contracts in the financial statements of contractors.

Applied in accounting for construc-tion contracts in the financial statements of contractors including the financial statements of real estate developers.

Is applicable to contracts specifically negotiated for the construction of an asset or a combination of assets that are closely interrelated or interdependent in terms of their design, technology and function or their ultimate purpose or use.

It also includes agreements of real estate development to provide services together with construction material in order to perform contractual obligation to deliver the real estate to the buyer.

(AS)-7 does not deal with accounting for Service Concession Arrangements, i.e., the arrangement where private sector entity (an operator) constructs or upgrades the infrastructure to be used to provide the public service and operates and maintains that infrastructure for a specified period of time.

Appendix A of Ind AS 11 deals with accounting aspects involved in such arrangements.

Includes borrowing costs as per AS 16 - Borrowing Costs, in the costs that may be attributable to contract activity in general and can be allocated to specific contracts.

Does not specifically make reference to Ind AS 23.

Contract revenue is measured at the consideration received or receivable.

Contract revenue is measured at the fair value of the consideration received or receivable.


10.1 Restriction On Transfer Of LandHolding

10.1.1 Maharashtra Land Revenue Code, 1966

10.1.2 Bombay Tenancy and Agricultural Lands Act, 1948

10.1.3 The Bombay Prevention of Fragmentation and Consolidation of Holdings Act,1947

Right to property is a Constitutional right. This is a transferable right. However, the Government for various social, political and economic reasons restricts the transferability of land. There are many laws which impose restriction on transfer of immovable property. These laws are meant to protect the interest of specific class of people. Every State has separate laws which protect its residents in one way or other. Before entering into any transaction regarding immovable property, one must be sure that no such law is attracted to that particular transaction. The laws which restrict a person’s rights of transfer of the land in the State of Maharashtra are as follows:

As per the Maharashtra Land Revenue Code, no land used for agriculture shall beused for any non-agricultural purpose, and no land assessed for one non-agricultural purpose shall be used for any other non-agricultural purpose or forthe same non-agricultural purpose but in relaxation of any of the conditionsimposed at the time of the grant or permission for non-agricultural purpose,except with the permission of the Collector.

As per section 43 of this Act, no land purchased by a tenant under sections 32, 32F,32I, 32O, 33C and 43ID or sold to any person under section 32P or 64 shall betransferred by sale, gift, exchange, mortgage, lease or assignment without theprevious sanction of the Collector. Any transfer of land in contravention ofaforesaid provision shall be invalid.

This Act prohibits transfer of any fragment in respect of which a notice has beengiven under the Act, except to the owner of a contiguous survey number

CHAPTER 10: CERTAIN PROPERTY RELATED LAWS



(contiguous holder) or recognized sub-division of a survey number. Further, thisAct also prohibits subdivision of the land. Section 8 of the Act provides that noland in any local area shall be transferred or partitioned so as to create a fragment.

This Act restricts the size of holdings which a person or family can own. Acquisitionof land in excess of the ceiling is prohibited. Land rendered surplus to the ceiling istaken over by the state and distributed among the weaker sections of the society.

Any person or family cannot hold land in excess of ceiling area fixed on 26September 1961. A person or family cannot transfer surplus land until the land inexcess of the ceiling area is determined under the act (Section 8). A personpossessing land in excess of ceiling area cannot acquire land by transfer (Section9). The land held by individual or the family of the Maharashtra State or the part ofIndia is to be taken into consideration while calculating the ceiling area.

Wakf is a permanent dedication of movable or immovable properties for religious,pious or charitable purposes as recognized by Muslim Law. Board constitutedunder the Act has the power to sanction any transfer of immovable property of awakf by way of sale, gift, mortgage, exchange or lease, in accordance with theprovisions of Act, provided that no such sanction shall be given unless at least twothirds of the members of the Board vote in favour of such transaction.

Section 36 of this Act provides that notwithstanding anything contained in theinstrument of trust

lno sale, exchange or gift of any immovable property, and

lno lease for a period exceeding 10 years in the case of agricultural land orfor a period exceeding 3 years in the case of non-agricultural land or abuilding belonging to a public trust, shall be valid without the previoussanction of the Charity Commissioner.

If the Charity Commissioner is satisfied that in the interest of any public trust any immovable property thereof should be disposed of, he may, on application, authorise any trustee to dispose of such property subject to such conditions as he

10.1.4 The Maharashtra Agricultural Lands (Ceiling on Holdings) Act, 1961

10.1.5 Wakf Act, 1995

10.1.6 Bombay Public Trust Act, 1950

may think fit to impose, regard being had to the interest or benefit or protection ofthe trust.

Section 3 and 4 of this Act provide for restoration of land held by non-tribaltransferee to tribal transferor by the collector either suo motto at any time or onapplication of tribal transferor made within 30 years from 6 July 2004.

No company for which any land is acquired under part 7, which deals with Acquisition of Land for Companies, shall be entitled to transfer the said land or any part thereof by sale, mortgage, gift, and lease or otherwise except with the previous sanction of the appropriate Government.

ØDefinitions

• Contract for sale

A contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties. It does not, of itself, create any interest in or charge on such property.

• Sale

‘Sale’ is a transfer of ownership in exchange for a price paid orpromised or part-paid and part-promised.

• Transfer of property

Transfer of property has been defined in Section 5 of the Transfer of Property Act meaning 'an act by which a living person conveysproperty, in present or in future to one or more other living personsand ‘to transfer property’ is to perform such act'. 'Living person' hasbeen defined to include a company or association or body ofindividuals whether incorporated or not.

10.1.7 The Maharashtra Restoration of Lands to Schedule Tribes Act, 1974

10.1.8 Land Acquisition Act, 1894

10.2 Transfer Of Property Act, 1882



• Immovable property

The definition of ‘Immovable Property’ given in Transfer of PropertyAct, 1882 is not exhaustive. It simply says: 'Immovable Property'does not include standing timber, growing crops or grass. Thedefinition of 'Immovable Property' in the General Clauses Act is alsonot exhaustive. Some of the things such as piece of land orsuperstructure constructed thereon in all circumstances areconsidered as immovable property.

• Interests in property

As ownership consists of a bundle of rights, the various rights and interests may be vested in different persons. Absolute ownership is an aggregate of component rights such as the right of possession, the right of enjoying the usufruct of the land, and as on. These subordinate rights, the aggregate of which make up absolute ownership, are called in this Act ‘Interests in Property’. A transfer of property is either a transfer of absolute ownership or a transfer of one or more of these subordinate rights.

ØSale how made

Transfer, in the case of tangible immovable property of the value of Rs. 100 and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument.

In the case of tangible immovable property of a value less than Rs. 100, such transfer may be made either by a registered instrument or by delivery of the property.

Delivery of tangible immovable property takes place when the seller places the buyer or such person as he directs, in possession of the property.

ØPart performance

Where any person contracts to transfer for consideration any immoveable property by writing signed by him (from which the terms necessary to

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constitute the transfer can be ascertained), and the transferee has, in part performance of the contract, taken possession of the property and has performed or is willing to perform his part of the contract, then in such circumstances, the transferor is debarred from enforcing against the transferee any right in respect of the property of which the transferee has taken possession.

ØRegistration

The following documents shall be registered:

lInstruments of gift of immovable property;

lOther non-testamentary instruments which purport or operate to create, declare, assign, limit or extinguish, whether in present or in future, any right, title or interest, whether vested or contingent, of the value of Rs.100, and upwards, to or in immovable property;

lNon-testamentary instruments which acknowledge the receipt or payment of any consideration on account of the creation, declaration, assignment, limitation or extinction of any such right, title or interest; and

lLeases of immovable property from year to year, or for any term exceeding 1 year, or reserving a yearly rent.

ØTime for presenting documents for registration

No document affecting transfer of immovable property executed in India is accepted for registration unless presented for that purpose to the proper officer within 4 months from the date of its execution.

However if, owing to urgent necessity or unavoidable accident, any document executed is not presented for registration till after the expiration of 4 months, the Registrar, in cases where the delay in presentation does not exceed 4 months, may direct that, on payment of a fine not exceeding 10 times the amount of the proper registration-fee, such document shal l be accepted for registrat ion.

ØEffect of non-registration of documents

If the document purporting to transfer immovable property is not



registered in accordance with the provision of Registration Act, 1908 then it will not affect any immovable property comprised therein or confer any right to adopt, or be received as evidence of any transaction affecting such property.

10.3.1 Building and Other Construction Worker Act, 1996 provides for constant and adequate supervision o f a n y b u i l d i n g o r o t h e r c o n s t r u c t i o n w o r k i n h i s establ ishment as to ensure compliance with the provisions of this Act relating to safety and for taking all practical steps to prevent accidents. Further, this Act provides for responsibility of employer to provide proper facilities as follows:

leffective arrangements to provide drinking water

lsufficient latrine and urinal accommodation

ltemporary living accommodation to all building workers employed by him

lin every place wherein, more than 50 female building workers are ordinarily employed, there shall be provided and maintained a suitable room or rooms for the use of children under the age of 6 years of such female workers.

lprovide first-aid facilities

10.3.2 The Environment (Protection) Act, 1986 provides for the necessary safeguards which need to be adhered to in handling any hazardous substance in case of employer undertaking construction or development activity.

10.3.3 The Indian Electricity Act, 2003 provides for various safeguards which should be adhered to while installing electricity line in a particular area.

10.3.4 Bombay Lift Act, 1939 provides for the duty of person intending to install lift in a building to comply with the prescribed requirements.

10.3 Other Significant Laws

10.3.5 The Public Liability Insurance Act, 1991 provides for the liability of the employer, in case of death or injury to any person (other than a workman) or damage to any property has resulted from an accident, liability as specified in the act.

10.3.6 The Chi ld Labour (Prohibit ion and R e g u l a t i o n ) A c t , 1 9 8 6 p r o h i b i t s employment of children below the age of 14 years in any specified occupation as mentioned in Schedule to the above act.

10.3.7 The Indian Fatal Accidents Act, 1855 provides for obligation of the employer to pay compensation to the families of the deceased employee caused by actionable wrong.

10.3.8 Payment of Bonus Act, 1965 provides for the payment of bonus to persons employed in certain establishments on the basis of profits or on basis of production or productivity and for matters connected therewith.

10.3.9 The Payment of Gratuity Act, 1972 provides for payment of gratuity to every employee who has rendered continuous service of not less than 5 years on his superannuation or resignation or death. The employer shall be under an obligation to obtain insurance for his liability for payment towards the gratuity under the act.

10.3.10 The Contract Labour (Regulation and Abolition) Act, 1970 provides for the duty of the employers as under:

lTo make an application in the prescribed manner for registration for twenty or more employees are employed.

lTo nominate a representative to be present at the time of and to certify the disbursements of wages paid by the contractor.

10.3.11 The Employees Provident Funds and Miscellaneous Provisions Act, 1952 provides for duty of employer (to whom the above Act applies) to contribute 12% of the basic and dearness allowance to the provident fund within 15 days of the last day of calendar month in which the contributions fall due.

10.3.12 The Maharashtra Shops and Establishments Act, 1948 provides for registration of commercial establishment which carries on any business, trade or profession with respect to state of Maharashtra and regulation of conditions of work and



employment.

10.3.13 Employees Compensation Act, 1923 provides for obligation of the employer to provide compensation for injury by accident. Amount of compensation to be paid shall depend upon the nature of injury sustained which varies from 50% to 60% of monthly wages.

10.3.14 Employees State Insurance Act, 1948 provides for duty of the employers (to whom the above Act applies) to contribute 4.75% of the wage payable to the employee within 21 days with the appropriate authorities.

10.3.15 Maternity Benefit Act, 1961 provides for duty of the employers to provide for maternity benefit and certain other benefits to women as under:

lNo employer shall knowingly employ a woman in any establishment during the 6 weeks immediately following the day of her delivery, miscarriage or medical termination of pregnancy.

lNo women shall work in any establishment during the 6 weeks immediately following the day of her delivery miscarriage or medical termination of pregnancy.

10.3.16 Minimum Wages Act, 1948 provides for duty of employers to pay certain fixed minimum wages to employees employed under scheduled employment which is nearly equal to the cost of living index number applicable to such workers, all inclusive rate allowing for the basic rate and cash value of the concessions.

10.3.17 Payment of Wages Act, 1936 is applicable in case of certain classes of persons whose wage does not exceed Rs. 6,500/- per month and also provides for responsibility of the employers to make payment of wages by cheque or crediting in bank account of all those employees who are earning more than Rs. 3,000/- per month and in continuous services under section 25B of the Industrial Dispute Act.

10.3.18 Employers Liability Act, 1938 provides for declaration from the employer that certain defenses shall not be raised in suits for damages in respect of injuries sustained by workmen.


MCA Ministry of Corporate Affairs

MOFA Maharashtra Ownership Flats Act, 1963

MVAT Maharashtra Value Added Tax

NNPA Net Non-Performing assets

NOF Net Owned Fund

NRE Non Resident External (Account)

NRI Non-Resident Indian

PIO Person of Indian Origin

POTR Point of Taxation Rules

PPSR Place of Provision of Services Rules

PTEC Professional Tax Enrollment Certificate

PTRC Professional Tax Registration Certificate

RBI Reserve Bank of India

RCM Reverse Charge Mechanism

SBRT Single Brand Retail Trading

SC Supreme Court

SEZ Special Economic Zone

SLP Special Leave Petition

STR Service Tax Rules

TAS Tax Accounting Standards

TCS Tax Collected at Source

TDR Transfer of Development Rights

TDS Tax Deducted at Source

TNVAT Tamil Nadu Value Added Tax

UT Union Territory

VAT Value Added Tax

WBVAT West Bengal Value Added Tax

WCT Works Contract Tax

WOS Wholly Owned Subsidiary

WRT With Respect To

APR Annual Performance Report

APVAT Andhra Pradesh Value Added Tax

AS Accounting Standards

AY Assessment Year

CBDT Central Board of Direct Taxes

CENVAT Central Excise Value Added Tax

CST Central Sales Tax

DEPB Duty Entitlement Passbook Scheme

DVAT Delhi Value Added Tax

ECB External Commercial Borrowing

EPF Employees Provident Fund

EPS Employees' Pension Scheme

FDI Foreign Direct Investment

FEMA The Foreign Exchange Management Act, 1999

FII Foreign Institutional Investors

FIPB Foreign Investment Promotion Board

FLA Foreign Liabilities and Assets

FSI Floor Space Index

GAAP Generally Accepted Accounting Principles

GDP Gross Domestic Product

GVAT Gujarat Value Added Tax

HUF Hindu Undivided Family

ICAI Institute of Chartered Accountants of India

IFRS International Financial Reporting Standards

Income Tax Act The Income Tax Act, 1961

JV Joint Venture

KVAT Karnataka Value Added Tax

LRS Liberalised Remittance Scheme

MBRT Multi-Brand Retail Trading

ABBREVIATIONS

Real Estate Sector In India - Certain Tax and Regulatory Aspects (2013) - RSM India publication

Law

Transcript of Real Estate Sector In India - Certain Tax and Regulatory Aspects (2013) - RSM India publication