Joint Development Agreements will Reduce Tax in the Housing Sector
The Union Budget 2017 made an empowering change for the housing sector. The capital gains tax liability for joint development agreements will only be payable in the year of completion. The current case has developers compensate for the same, post-completion as well. This will push the joint development agreement model as an efficient means of procuring land when there is a lack of capital. Thanks to this move, Affordable housing projects will be cheaper.
Landowners often face problems paying taxes in the year of transfer. Such hiccups promote tax evasion and other unethical practices among the builders. The JDA model will decrease these practices by the dozen by easing the tax-paying process with a one-time-payable tax, in the year of receipt. To explain the mechanization of this process, let’s take an example. Suppose a JDA is bonded between a developer and land owner for 70 crore, whose cost price was earlier 20 crore. The revenue generation has been forecasted as 100 crores for the supposed project. That revenue generation’s potential will be the basis of how much the capital gains tax will be levied. Despite the development, more clarity on the applicability of service tax on development rights transfer is needed.
Joint development agreements will reduce the developer’s upfront capital requirements and reform the land owner’s equity returns. However, this scheme is not applicable to corporate and non-corporate organizations. Recently, lower-tier developers are joining hands with the big building league for mutual benefit through joint development agreements. Under this model, the land belonging to another party is used by the developer to build a housing project. The revenue of the project is shared by both of the parties in a pre-mediated ratio. If the revenue-share model ratio is 40:60 where the apartments are sold for 100 crores, then 40% of the revenue will go into an escrow account for the land owner’s share.
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