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CBDT’s Draft Income Calculation Norms For Real Estate

18, May, 2017

The revenue deparment has released a draft last week for computation of income for the real estate sector, under which transactions with regard to sale and purchase of units will be recognized at arm’s length price.
The proposed Income Computation and Disclosure Standards (ICDS) for Real Estate Transactions, which follows the guidance note of Institute of Chartered Accountants of India (ICAI), is aimed at providing "uniformity, certainty and harmonizing the norms with the provision of the Income Tax Act".

The draft includes implementation of the Real Estate (Regulation and Development) Act, 2016 (RERA).As per the draft, the revenue and cost will be recognized with reference to the stage of completion of the project, which too has been defined. The norms will apply for determination of income from all form of transactions in the real estate with respect to land, buildings and rights therein.

The ICDS deals with sale of plots of land with or without development of common facilities, development and sale of residential and commercial units, transfer of development rights, and re-development of existing buildings and structures.

The Central Board of Direct Taxes (CBDT) has invited comments from stakeholders on the draft till May 26. The draft defines fair values as "the amount for which an asset could be exchanged between a knowledgeable, willing buyer and a knowledgeable, willing seller in an arm's length transaction". "Most of the deviations from the ICAI's guidance note will have the effect of accelerating revenue recognition for tax purposes.

"Specifically, the change requiring recording Transferable Development Rights (TDRs) at fair value will create tax incidence on unrealized revenues," said Abhishek Goenka, Partner PwC.

While the guidance suggested that TDRs should be recorded at fair market value or net book value, the ICDS proposes that they should be calculated at the fair value of the development rights acquired. Goenka also said that with the advent of RERA, "removal of the critical approvals test for revenue recognition is a logical step".

Commenting on the draft, JLLR Chairman Anuj Puri said the government has already made its intention to make all real estate related transactions clear with the Benami Property Act and RERA. "Via these and various related measures, the message being sent out is that transactions related to property and any income arising from such transactions will no longer be hidden and must be reported and declared," he said.

Rakesh Bhargava, Director, said: "The proposed ICDS shall be applicable for determination of income from all forms of transactions in real estate, which refers to land as well as buildings and rights in relation thereto". The companies will have to disclose the aggregate amount of cost incurred, profits recognized, advances received and work in progress along with inventories, the draft said.

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