Nirmala Sitharaman should simplify capital gains tax on property

One of the issues the taxpaying middle class would be keenly looking for in the forthcoming Union Budget would be the chapter dealing with capital gains tax on property.

In simple words any profit or gain that arises from the sale of a ‘capital asset’ is taxed under the head capital gain. This gain is also labeled as ‘income’, and hence an assessee needs to pay tax for that amount in the year in which the transfer of the capital asset takes place. This is called capital gains tax, which can be either short-term or long-term.

In this article we would be dealing with certain areas which require clarification and elucidation from the Income Tax department.

Lack of clarity on liability

In the case of Joint Development of Property, popularly known as JDA, the bone of contention between the assessee and the Income Tax Department is the year in which the property gets transferred, triggering in liability to capital gain tax. The issue which is being debated is that whether the liability arises the moment the property is handed over to the builder for development or would it arise when the completed flats by the builder is handed over to the assessee.

The government introduced a new sub-section 5A in section 45 of the Income tax Act in the Finance Act 2017, effective Assessment Year 2018-19. This says the capital gain liability gets triggered only when the completion certificate is obtained by the builder, provided the JDA is registered. But this concession was extended only to two categories of assessees such as an individual or Hindu Undivided Family or HUF.

Of course, there are other assessees such as firms and limited companies who are not covered in this newly introduced section. Why should not the government extend such facilities to these other assessees also who enter into JDAs and are liable to pay capital gain tax?

Need for amendments to existing law

The time limit provided in the Income-tax Act for re-rolling of tax benefits is two years for purchase and three years for construction from the date of sale of the old property. Generally, for big project or township, the developers take minimum five years before handing over the possession of the property to the buyers. In such cases if a buyer gets the possession of new house after three years, it may not be possible for him to claim capital gain exemption without litigation.

Therefore, suitable amendment is needed to allow exemptions to genuine taxpayers who invest in a project developed by a builder registered under the Real Estate Regulation and Development (RERA) Act, 2016. RERA is considered one of the landmark legislations passed by the Union government. Its objective is to reform the real estate sector in India, encouraging greater transparency, accountability and financial discipline. It also seeks the centrality of the citizen’s rights. This is in line with the vast and growing economy of India as in future many people may be investing in real estate sector.

Hiccups in issuing lower deduction certificates

The issue of liability in capital gain tax, arising only in the assessment year in which completion certificate is obtained, has created issues for NRIs when they apply for a certificate for lower deduction under section 197 read with section 195 involving cash consideration which would be received as soon as the JDA is signed, but the property would be handed over in a later year.

How would the officer issue a certificate and how would the assessee submit capital gain workings as the liability would occur only in the later year? So, this section requires suitable amendment. It should be understood that any payment made to a non-resident Indian seller by the purchaser, whether he is a resident or non-resident tax has to be withheld and paid to the government by the purchaser at full rate in the absence of a certificate.

As per provisions dealing with capital gain exemptions, only purchase of property prior one year of sale of the existing property is exempt and construction is not covered. However, there are divergent judicial views on this issue. Though most of the judicial authorities do not make a distinction between purchase and construction, it is better that the Act is amended so as to extend the benefit to include construction in such cases.

Necessary exemptions

Section 54EC of the Act is one section which provides for exemption up to ₹50 lakhs (per year) for investment in capital gain bonds out of capital gain income. This is, apart, from exemption available in investing in residential property. This exemption, which was available to sale of shares etc. till last year was restricted, without reason, to sale of land and buildings from the financial year 2018-19. This (withdrawal) amendment should be withdrawn so as to extend the benefit to sale of shares etc. too. Moreover, the lock-in-period of five years for the capital gain bonds should be reduced to three years as it was till the financial year 2017-18.

(S Krishnan is a Chennai based Chartered Accountant and contributes regularly to Taxman Publication)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not reflect the views of The Federal)