CBDT issues draft accounting rules for real estate projects
NEW DELHI, MAY 11: In what could lead to a higher tax incidence on real estate projects, the Finance Ministry on Thursday issued a fresh draft of the Income Computation and Disclosure (प्रकटीकरण) Standard (ICDS) for such transactions.With the Real Estate (Regulation and Development) Act, 2016 (RERA) coming into effect from May 1, the draft norms propose to do away with the condition of obtaining all ‘critical approvals’ for revenue recognition. “Since the recognition(मान्यता) of revenue under other conditions is deferred up to incurrence of 25 per cent of the construction and development cost (which does not include land cost), the condition of obtaining critical approval (गंभीर अनुमोदन) is not found by the Committee to be very relevant(प्रासंगिक),” it said. The proposed norms also do not provide for capping the recognition of revenue based on the stage of completion determined with reference to the project cost incurred . The fresh draft is based on the guidance note issued on real estate transactions by the Institute of Chartered Accountants of India last year that was reviewed by a government committee.
In all, it has proposed changes in five areas, including the definition of project and project cost, revenue recognition, application of percentage of completion method (POCM) for real estate projects and transferable development rights.
The Central Board of Direct Taxes (CBDT) has now sought comments from stakeholders by May 26, after which the norms will be finalised.
“These ICDS are applicable from assessment(मूल्यांकन) year 2017-18 in respect of specified assessees for computation of income under the head ‘profits and gains of business or profession’ or ‘income from other sources’,” it said in a release on Thursday.
In a nutshell, ICDS are accounting standards that are used to calculate the income tax liability.
The draft has also proposed to define the “project” as a set of units which are connected by basic facilities and not the earlier proposed common amenities.
“This would ensure restricting the definition of the term project to the smallest possible group of units,” it said, adding that the revenue will be required to be recognised on such smallest group of units without linking the same to peripheral common amenities like club-house, entertainment, sports, gymnasiums, health club and restaurants.
While defining the project cost, it has proposed that costs that cannot be attributed to any project activity or allocated to project shall be excluded from project cost. The draft also proposes to recognise the transferable development rights (TDRs) at the fair value of the development rights so acquired, as against fair market value or net book value that was earlier proposed.
Higher tax impact
Experts said that the norms could offer more clarity to taxation of computable income in real estate but could also have a higher tax impact.
“Most of the deviations from the guidance note of the ICAI will have the effect of accelerating (तेज) revenue recognition for tax purposes. Specifically, the change requiring recording TDRs at fair value will create tax incidence on unrealised revenues,” said Abhishek Goenka, Partner and Leader, Direct Tax, PwC.
Vikas Gupta, Partner-Assurance, Nangia & Co, said that it can be expected that the government will issue ICDS for other specific sectors where application of ICDS III & IV on income is unclear in the near future.