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Benefits to promoters/builders, for construction of affordable houses
Under the newly-enacted Section 80IBA, 100% of the profits derived by the builder/promoter from a residential housing project, are allowed as deduction to every tax payer including an individual or HUF. This has been done, to give a boost to the affordable housing category and is subject to satisfaction of certain conditions.
The first condition stipulates that the size of the residential units, should not exceed 30 sq metres in case project is in any of the four metro cities or in an area that is not beyond 25 kms from these metro cities. For other places, the size is restricted to 60 sq metres per unit.
The law also stipulates that the minimum size of the plot, on which such housing projects can be undertaken, should not be less than 1,000 sq metres for metro cities and for other places, it is 2,000 sq metres. Moreover, the developer cannot undertake any other housing project, on the same plot of land.
In order to accommodate commercial establishments, like shops, etc., for the convenience of residents, the law allows the developer to construct commercial areas not exceeding 3% of the total built-up area of the entire project.
Residential unit in the complex
In order to ensure maximum use of the land and to make the units cheaper and affordable, the total covered plinth area on all the floors of the project, should not be less than 90% of the area of the plot, for projects in metro cities. For other places, the project should utilise at least 80% of the available area.
The benefits are available only to the promoter and not to the contractors, who undertake such works on a contract basis. To ensure that the profits of such projects are correctly calculated, the assessee is required to maintain a separate books of accounts.
The benefits are available to new projects only, approved after April 1, 2016 but before March 31, 2019. Moreover, the project needs to be completed within three years of its approval and evidenced by a completion certificate from the approving authority. If the project is not completed within three years, any profit already claimed as exempt in earlier years, are required to be reversed and offered for tax, in the year in which the period of three years expires.
The law further stipulates that only one residential unit can be allotted to an individual and neither the spouse nor the minor child of such individual, can book any residential unit in the project. However, no such restrictions have been placed on a Hindu Undivided Family (HUF) getting allotment of more than one house in the complex.
Amendments in service tax
Due to the concept of negative list under the service law, all services are subject to service tax, unless specifically exempted. In order to give an impetus to affordable housing, the government has exempted service tax on the services of construction of low-cost houses up to a carpet area of 60 sq metres per house in an approved housing project, under the Pradhan Mantri Awas Yojana (PMAY). It also exempts any similar housing scheme of a state government from service tax.
For construction activities, where costs include services and cost of the materials, the service tax is not levied on the full cost but only on a certain percentage. This is called ‘abatement’, in excise and service tax terminology. Hitherto, there were two different rates of abatement. For residential units having a carpet area of less than 2,000 sq ft and costing less than Rs one crore, service tax was payable only on 25% of the full value. For other units, the same was payable at 30%. The Finance Act 2016 has removed this distinction and provided for a uniform rate of 30%, on which the service tax shall be payable.
(The author is a taxation and home finance expert, with 30 years’ experience)