Joint Development Agreement & Reduced LTCG rate of 12.50%.
Joint Development Agreement (JDA) has emerged as a popular and efficient method for real estate development. Under this arrangement, the property owner contributes land, while the developer undertakes investment, approvals, construction, and marketing, leveraging their expertise. This mutually beneficial arrangement allows the landowner to realize better value while avoiding direct capital deployment in the project. Taxation of JDAs has, however, been a complex and contentious matter, particularly regarding the timing and amount of tax liability. With the Finance Act (No. 2) of 2024 reducing the long-term capital gains (LTCG) tax rate to 12.50%, the taxation framework has undergone significant transformation. Let’s explore the evolution of JDA taxation and the impact of the reduced LTCG rate.
1. Taxation of JDA Prior to 2017:
Prior to 2017, there was no special tax provision for taxation of JDA. It was taxable as under:
a) Timing of Taxation:
The tax liability typically arose at the time of signing the JDA, as it often involved handing over “possession” of the property to the developer. Taxpayers were liable to pay capital gains tax even if they had not received any payment or faced uncertainties about project completion.
b) Judicial Precedent:
In Chaturbhuj Dwarkadas Kapadia v. CIT [(2003) 29 Taxman 497 (Bombay HC)], the court ruled that the date of signing the development agreement was decisive for taxation. Factors such as completion of construction or handing back of the developed portion were deemed irrelevant. This principle was followed in several subsequent rulings.
2. Taxation of JDA after 2017:
To address practical difficulties, the Finance Act, 2017 introduced section 45(5A)which deferred tax liability to the year in which the competent authority issued the completion certificate (CC) or occupancy certificate (OC). This measure alleviated hardships for individuals and HUFs. Key feature of JDA taxation as provided under section 45(5A) are as under:
a)Timing of Taxation:
Tax liability would arise only in the year in which the certificate of completion for the entire or a part of the project is issued by a competent authority & not at the time of signing development agreement. As a result of this, the issue faced by the property owner in paying capital gains tax in the year of ‘transfer’ is resolved.
b)Amount of sale consideration:
For levy of tax, the sale consideration in the hands of the property owner against transfer of a share in the property is aggregate of;
(i) Stamp duty value of the property received by the property owner from builder as his share in the developed property on the date of issue of completion certificate and
(ii) amount received in cash/cheque.
c)Restrictions:
If the owner transfers his share in the project before the issuance completion certificate then the capital gains will be taxable in the year in which such transfer took place.
d)Tax Deduction At Source (TDS):
TDS @ 10% is applicable on the payment by the developer to the property owner pursuant to JDA.
3. JDA entered prior to 23.07.2024 & LTCG Rate of 12.50%:
a) Grandfathering for Properties Acquired Before 23rd July 2024:
The tax rate on Long Term Capital Gains (LTCG) from the sale of immovable property on or after 23rd July 2024 has been reduced from 20% to 12.50% without any indexation benefit. However, in respect of property purchased before July 23, 2024, taxpayers have an option to compute & pay the tax at lower of 20% under the old scheme with indexation benefit or @12.50% under the new scheme without indexation benefit. In short, if the tax calculated @ 12.50% is higher than taxpayers may continue to offer the tax @20% by availing the indexation benefit. In short, the benefit of grandfathering to LTCG on the sale of immovable property acquired before July 23, 2024 is offered now.
b) Applicability to JDAs Signed Before 23rd July 2024:
The question arises, whether the benefit of lower rate of 12.50% will be available to the taxpayers if the JDA is done before 23.07.2024 & the CC is issued after this date? Logically, the answer is affirmative since Section 45(5A) defers taxation to the year of CC issuance. Thus, JDAs with CC issued post-23rd July 2024 can benefit from the lower tax rate.
c) Potential Controversies:
i) Section 45(5A) is just deferring the mode of computation of capital gain and timing of taxation.
ii) Section 2(47) of the Income Tax Act -1961 defines “Transfer” & it has never been amended & aligned in line with section 45(5A). In short, the year of “Transfer” under the income tax has not been changed by the Finance Act – 2017 or 2024. It is merely the year of taxation which has been changed.
iii) As a result, controversy & disputes may arise as to-
(a) the year up to which the indexation benefit would be available;
(b) the applicability of tax rate of 12.50% if the JDA is entered prior to 23.07.2024.
Conclusion:
1. Suggestion to CBDT:
Section 45(5A) has simplified the taxation of JDA, albeit for Individuals / HUF only. It would be better if the scope of section 45(5A) is stretched further to other categories of taxpayers like Firm, AOP, Companies etc.
Simplification of the tax laws was needed not only for the timing of taxation but also about the tax rate. Further, an amendment in the definition of transfer U/s 2(470) in line with section 45(5A) would result in avoidance of potential litigation.
2. Advice to taxpayers who have done JDA in the recent past:
Recently, CBDT has issued instructions to the Investigation Department to collect data from Local Authority which has issued the completion certificate in JDA from 2020-21 to 2022-23. Those taxpayers who have failed to disclose & pay the Capital Gain tax on JDA may consider filing an updated return before formal notice is issued from the tax Department so asto avoid penal consequences.
[Views expressed are the personal view of the author. Readers are advised to seek professional advice before taking any decisions. Readers may forward their feedback & queries at nareshjakhotia@gmail.com. Other articles & responses to queries are available at www.theTAXtalk.com].
