Real Estate Sector In India - Certain Tax and Regulatory Aspects (2013) - RSM India publication

|Real Estate Sector In India
REAL ESTATE SECTOR IN INDIA
- Certain Tax And Regulatory Aspects
ØThe Real Estate (Regulation and Development) Bill, 2013
ØAccounting Standards (including Guidance Note issued by ICAI)
ØForeign Investment Guidelines in Real Estate Sector
ØDirect Tax (including impact of recent changes)
ØIndirect Tax (including Service Tax Amnesty Scheme)
Includes
RSM Astute Consulting

CHAPTER1 : BACKGROUND 1
CHAPTER2 : PROPOSEDREGULATORYBILLFORREALESTATESECTOR 7
CHAPTER3 : COMPLIANCECALENDAR 11
CHAPTER4 : INCOMETAX&WEALTHTAX 19
CHAPTER5 : SERVICETAXREGULATIONS 35
CHAPTER6 : VATANDWORKSCONTRACTREGULATIONS 53
CHAPTER7 : STAMPDUTYREGULATIONS 67
CHAPTER8 : FOREIGNINVESTMENTREGULATIONS 69
CHAPTER9 : FINANCIALREPORTINGSTANDARDS 77
CHAPTER10 : CERTAINPROPERTYRELATEDLAWS 94
ABBREVIATIONS 102
REAL ESTATE SECTOR IN INDIA
- Certain Tax And Regulatory Aspects
RSM Astute Consulting| Real Estate Sector In India
CONTENTS

1.1 RealEstateIndustryInIndia
The sustained growth of the Indian
economy in the past few years has
resulted in a phenomenal growth of
the real estate sector in India as
evident from the changing skylines
of all Indian cities and townships.
Thehub ofindustrialparks, high-rise
residential complexes, sprawling
malls, huge commercial complexes and brightly colored cranes, rubble,
construction and hordes of workers scurrying up and down the towering
skyscrapers,arethetestimonyoftheexplosionofrealestatesectorinIndia.
Currently, contribution of realty sector to Indian GDP is about 5% and its market
sizeisexpectedtotouchUS$180billionby2020.Thedemandofaffordablehousing
by lower income group was estimated at 19 million households in 2012 and
expected to reach 900 million by 2050. As such, it is expected that residential real
estatesectorwillwitnessasteadydemandriseinfuture.
1|
CHAPTER 1: BACKGROUND
Real Estate Sector In IndiaRSM Astute Consulting
15685
12062
1842
847 1096
92
0
2000
4000
6000
8000
10000
12000
14000
16000
USA Eurozone India
GDP
Real Estate Mkt Size
(*5.4%)
* Represents % of GDP
(Source: Trading Economics, OECD, IBEF & useconomyabout.com. Data for YE Dec '12)
GDP and Real Estate Contribution
(*9.1%)
(*5%)
US$inBillions

2 | Real Estate Sector In India
The real estate sector is the second largest employer in the country next only to
agriculture.Thegrowthindemandhasresultedinemergenceofseveralorganized
real estate developers and intermediaries. In certain segments of real estate,
there is an influx of investments by private equity firms, overseas investors,
domestic financial institutions and speculators, which is adding to the hype and
frenzycreatedintheconcreteworldofrealestateinIndia.
Flying high on the wings of booming real estate, property in India has become a
dreamforeverypotentialinvestorlookingforwardtoearnprofits.
The relaxed FDI guidelines have invited more foreign investors, and accordingly
real estate in India is seemingly the most lucrative ground at present. The revised
investor-friendly policies allowed foreigners to own property and dropped the
minimum size for housing estates built with foreign capital to 25 acres (10
hectares) from 100 acres (40 hectares). The overseas investors can now develop
real estate projects as long as the project surpasses 50,000 square meters
(538,200 square feet) of floor space. Recently, the government has announced its
intentiontoreducethislimitto25,000squaremeters.
The organized retail project
completion rate will witness more
than 100% rise in year-on-year basis
in 2013. 9.5 million square feet of
additional mall space will be added in
2013. Of the total mall space
absorption in the country, Mumbai,
Delhi NCR, Chennai and Bangalore will have the major share, around 70%. Other
citieslikeHyderabad,KolkataandPunewillabsorbtherest30%.
Government’s approval of FDI into multi-brand retail is set to be the most
influencingfactorontheretailscenarioofthecountry.Asperrecentreports,India
has replaced USA as the second most-preferred FDI destination in the world. The
relaxation ofFDI will open up portalsto major MNC retail brands in India, which will
beinstrumentalinincreasingtheretailspaceabsorptioninthecountry.
1.2 RegulatoryFramework
1.2.1 Foreigninvestment

3|Real Estate Sector In India
Government policy now permits FDI of up to 51% into multi-brand retail, which will
invite products, practices and technologies to Indian retail sector. Along with it,
50%oftotalFDIwillbedirectedtowardsinfrastructuralfacilitieslikewarehousing
and logistics, which will further boost the retail growth in the long run. Recently,
the Union Cabinet has approved certain relaxation in the conditions attached to
theopeningofFDIinmulti-brandretailtrading.
1.2.2 Theproposedrealestateregulatorybill
Realty sector in India has seen an
unprecedented growth after liberalization
in 1991. However, there was no direct
regulatory supervision on real estate sector
by any authority similar to Telecom
Regulatory Authority of India or Insurance
Regulatory & Development Authority. To overcome this, the Government has
proposed‘TheReal Estate (Regulation and Development) Bill 2013’, which provides
certain protection to customers and helps real estate sector to grow in an orderly
way.However,thiswouldbeeffectiveonlyuponpassingoftheBillinParliament.
(Source: DIPP)
FDI vis-à-vis Real Estate Sector in India
37.7
34.9
46.6
36.9
2.9 1.2
3.1
1.3
0
10
20
30
40
50
2009-10 2010-11 2011-12 2012-13
Total FDI Recd. by
India
FDI Equity Recd. By
Real Estate Sector
(%age of total FDI
recd.)
(7.8%)
(3.5%) (6.7%)
(3.6%)
US$inBillions

1.2.3 Levyofservicetax
1.2.4 LevyofVAT
Service tax was introduced in Indian tax regime in the year 1994. Further,
subsequent amendment brought construction activity in service tax regime.
However, there was a controversy between service tax administration authority
and real estate developers as to the applicability of service tax to real estate
developers. This has been settled by introducing amendment in service tax law
from 1 July 2010 by amending the definition of services under ‘construction or
industrial construction’ and ‘construction of complex.’ Further, under negative-
based taxation approach from 1 July 2012, certain services, which include
construction of complex, works contract and renting of immovable property, have
been covered under declared services. This has brought real estate developers
into service tax net. Service tax law provides option to real estate developers to
choose abatement method to arrive at service tax liability on 25% or 30% of
accrued revenue depending upon the value and area of real estate transaction as
thecasemaybe.
Recently, service tax law has provided a
scheme called ‘Service Tax Voluntary
Compliance Encouragement Scheme.’
UnderthisScheme,theassessecandeclare
service tax liability for the period October
2007 to 31 December 2012 and submit a declaration before 31 December 2013 and
pay service tax liability in installments i.e. 50% before 31 December 2013 and 50%
before 30 June 2014. This will enable waiver of interest and penalty under service
taxlaw.
LevyofVATisaStatesubject.ThemajorityofstatesinIndialevyVATontransferof
property involved in the execution of works contract. There has been a
controversy whether activity of real estate developers attracts VAT and whether
State has power to levy tax on real estate developers. This controversy has been
settled by the constitutional amendment empowering states to levy works
contract tax (WCT). Further, the issue relating to levy of VAT on sale of a unit under
construction has been upheld by the Honourable Bombay High Court in a writ
petition filed by the Maharashtra Chamber of Housing Industry. While the issue is
to be finally settled by the Honourable Supreme Court, presently, VAT is collected

by the State Governments on the transfer of goods involved in the execution of
works contract. The different States have different rates of VAT on goods involved
in execution of works contract. As the determination of VAT in real estate
transaction is a complex issue, the VAT law provides option to the assesse to
choosecompositionmethod.
The direct tax law regulations have been recently amended to provide for more
stringent regulations for real estate transactions. The measures taken by the
government in this regard include levy of withholding tax at 1% on certain real
estate transactions of Rs.50 lakhs or more, taxation on the differential amount in
case of transfer of real estate at a value below stamp duty valuation, levy of
withholding tax on renting of immovable property for a rent exceeding certain
limit, etc. Hence, the Government of India expects a rise in collection of revenue
fromrealestatetransactionsinfuture.
There was no uniformity within the accounting
fraternity in respect of accounting of income in case
of real estate developers. It was a controversy
whether ‘Project Completion Method’ or ‘Percentage
Completion Method’ is to be considered as a valid
methodofaccounting.TheAccountingStandardsi.e.AS-7
or AS-9 issued by the ICAI in the past provided limited
guidance on this aspect. In the year 2012, the ICAI has issued a guidance note on
‘Accounting for Real Estate Transactions,’ which is intended to apply to
enterprisesdealinginrealestateassellersordevelopers.Thiswouldbeapplicable
in case of real estate projects commencing on or after 1 April 2012. This will bring
uniformity in accounting of income on certain parameters such as receipt of
minimumrevenue,executionofsaleofrealestateuptoacertainlevel,incurringof
constructionexpensesuptoacertainlevel,etc.Thiswillhelpinbookingofrevenue
inadvanceordeferringofrevenuetosubsequentaccountingperiods.
Going forward, while the real estate sector will continue to grow, there will be
1.2.5 Wideningofdirecttax ambit
1.2.6 Financialreportingframework
1.3 RealEstate–GoingForward

greater focus on transparency and improved governance.
There will be a much higher level of overview by the
regulatory authorities (after the enactment of Real Estate
RegulatoryBill)andgreaterabilityforforeigninvestorsand
NRIs to invest in the Indian real estate. The compliances
with service tax, VAT and the income-tax authorities will
result in substantially higher level of tax incidence and
exposure.

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CHAPTER 2: PROPOSED REGULATORY BILL FOR
REAL ESTATE SECTOR
2.1 Background
2.2 ApplicabilityOfTheBill
2.3 KeyHighlightsOfTheBill
The Real Estate (Regulation and
Development) Bill, 2013 (‘the Bill’) approved
by the Union Cabinet on 4 June 2013, is an
initiative to protect the interest of
consumers, to promote fair play in real
estate transactions and to ensure timely execution of projects. Currently, the real
estate and housing sector is largely unregulated and opaque, and consumers are
often unable to procure complete information or enforce accountability against
builders and developers in the absence of effective regulation. This Bill seeks to
create a regulator for the real estate sector to protect interests of buyers by
providing a uniform regulatory environment. The Bill necessitates establishment
of one or more ‘Real Estate Regulatory Authorities’ in every State/UT, to oversee
realestatetransactions.TheBillisalsoexpectedtopromoteregulatedandorderly
growththroughefficiency,professionalismandstandardization.Itseekstoensure
consumer protection, without adding another stage in the procedure for
sanctions. However, the Bill will be effective upon passing of the Bill in Parliament
andsubsequentnotificationinGazette.
The proposed Bill is limited in its applicability to residential real estate i.e. housing
andanyotherindependentuseancillarytohousing.
ØThe Bill directs developers to sell their properties only on a 'carpet area'
basis, thus doing away with all other concepts prevalent in the market at
present. Carpet area is the actual net usable floor area of a residential unit
anddoesnotincludetheareacoveredbywallsandcommonarea.
ØMandatory registration of real estate projects and real estate agents who
intend to sell any immovable property, with the ‘Real Estate Regulatory
Authority’. The Bill proposes that all residential projects with plot areas of

8 | RSM Astute ConsultingReal Estate Sector In India
4,000 square meters or more need to be registered with a regulator, which
will be possible after the developer submits all necessary clearances. Each
project and phase has to be registered separately and non-compliance of
thisprovisionisapenaloffence.
ØThe Bill seeks to safeguard buyers against misleading
advertisements, pertaining to the quality of services or
amenities proposed that the developer has not
secured. Buyers are entitled to get refund with interest
or compensation in case it is found that the
advertisements and promotions were false or
misleading.
ØThe Bill mandates that ‘70% or such lesser percentage, as notified by the
appropriate state government’ of the money raised for a project should be
deposited in a separate account. By ensuring that developers do not divert
fundsmeantforaparticular projecttotheirotherprojects,theBillseeksto
curb delays in project completion, due to shortage of funds. The Bill also
protects buyers against project delays by requiring that developers refund
the amount paid along with interest in the event of a delay. Both these
factors are expected to ensure timely completion and handover ofprojects
tothebuyers.
ØPunitiveprovisionsincludingde-registrationoftheprojectandpenaltiesin
case of contravention of the provisions of the Bill or the orders of the
AuthorityortheTribunal.
ØMandatory public disclosure norms for all registered projects, including
details of the promoters, project, layout plan, plan of development works,
land status, carpet area and number of the apartments booked, status of
the statutory approvals and disclosure of proforma agreements, names
and addresses of the real estate agents, contractors, architect, structural
engineer,etc.Allthesedetailswillbemaintainedinapublicdatabasewhich
can be assessed by general public. The system is very similar to what we
haveatpresentincaseofRegistrarofCompanies.
ØTheBillalsomandatesregistrationofrealestateagentswiththeauthority,
toensurethatagentsonlyfacilitatesaleofregisteredproperties.Functions

9|
of Real estate agents: Real estate agents not to
facilitate the sale of immovable properties,
which are not registered with the Authority
required under the provisions of the Act,
obligation to keep,maintainand preserve books
of accounts, records and documents, obligation
to not involve in any unfair trade practices,
obligation to facilitate the possessionofdocumentsto allotteesas entitled
atthetimeofbooking,andtocomplywithsuchotherfunctionsasspecified
byrulesmadeinthatregard.
ØDuty of promoters towards disclosure of all relevant information and
adherence to approved plans and project specifications, obligations
regarding veracity of the advertisement for sale or prospectus,
responsibilitytorectifystructuraldefects,andtorefundmoneysincasesof
default. No amount can be received by the promoter without first entering
intoawrittenagreement.
ØEstablishment of one or more ‘Real Estate Regulatory Authority’ in each
State/UT, or one Authority for two or more States/UT, by the Appropriate
Government, with specified functions, powers, and responsibilities to
exercise oversight of real estate transactions, to appoint adjudicating
officers to settle disputes between parties, and to impose penalty and
interest. The regulatory authority shall have extensive powers under the
Act and can interfere with the project at any stage if the rules and
regulationsarenotcompliedwiththepromoter.
ØIt provides for establishment of fast-track dispute resolution mechanisms
for settlement of disputes, through adjudicating officers and Appellate
Tribunal.Further,CivilCourtswillhavenojurisdictioninsuchmatters.
ØEstablishment of Central Advisory Council to advise the Central
Government on matters concerning implementation of the Act, with a
mandate to make recommendations on major questions of policy,
protection of consumer interest and to foster growth and development of
therealestatesector.
ØAppropriate Government to have powers to make rules over subjects

specifiedintheBill.
The Bill, when enacted by the Parliament, will bring about standardization in the
sector leading to healthy and orderly growth of the industry through introduction
of definitions such as ‘apartment’, ‘common areas’, ‘carpet area’, ‘advertisement’,
‘realestateproject’,‘prospectus,’etc.
2.4 Conclusion

3.1 Background
This chapter deals with compliances under certain
laws. In India, there are numerous laws enacted,
which provide compliances on regular basis. Below
is the list of significant compliances under Income-
TaxAct,FEMA,ServiceTax,VAT,etc.
CHAPTER 3: COMPLIANCE CALENDAR
11|
Sr. Particulars Due Date
No
3.1.1 FEMA compliances:
3.1.2 Income tax compliances:
i. Annual performance report in 30 June every year
Form APR
ii. Annual return of foreign liabilities and 15 July every year
assets (FLA) in Form FLA
iii. ECB returns in Form ECB -2 7 days from the close of the month
iv. FDI in Advance Reporting Form 30 days of receipt of money
v. Non-resident person acquiring 90 days from the date of acquisition
property in India in IPI Form of immovable property
A TDS/ TCS compliance
i. Return cum challan in Form 26QB for 7 days from end of the month in
1% TDS on transfer of immovable which deduction is made
property under section 194 – IA
ii. TDS/TCS statements for other 15 days from the end of quarter for
payments in Form 24Q/ 26Q/ 27Q/ 27EQ 1st, 2nd and 3rd quarter of the year
and 15 May for the last quarter of
the year
iii. Issue of TDS/TCS certificate in • Form 16 – by 31 May annually
• Form 16B - 15 days from the due
date for furnishing the
challan-cum-statement
• Form 16A/27D- 15 days from the
due date of furnishing of TDS/TCS
statement
Form 16/16A/16B/27D

12 |
No
iv. Filing in Form 15G/ 15H/ 15I for 7 days from the date of receipt
non deduction of tax at source
B Return of Income / Return of
Wealth / Tax Audit Report /
Transfer Pricing Report
i. Person covered under tax audit 30 September
(other than those to whom transfer
pricing is applicable)
ii. Person covered under Transfer pricing 30 November
(including those covered by domestic
transfer pricing)
iii Other persons Corporate assesse - 30 September
Others - 31 July
C Annual information return
i. Annual information return in case of 31 August of the following year
certain specific transactions to be
reported under section 285BA by
specified persons
i. Payment of service tax under Rule 6(1) 5th of the month (6th in case of
of the Service Tax Rules, 1994, in e-payment) subsequent to the
GAR – 7 Challan month/quarter for which the tax is
to be paid. (For the month/quarter
ending March, the due date is
31 March)
ii. Half yearly service tax return under • For the period April to September -
Rule 7(2) of the Service Tax Rules, 1994, 25 October
in Form ST-3
• For the period October to March -
25 April
A Maharashtra
i. MVAT return (in Forms 231-235) / CST 21 days from the end of the month
Returns ( in form IIE)
ii. MVAT audit in Form 704 15 January of succeeding year
3.1.3 Service tax compliances:
3.1.4 VAT compliances:
RSM Astute ConsultingReal Estate Sector In India

13|Real Estate Sector In IndiaRSM Astute Consulting
No
iii. Profession tax return:
a If tax liability during P.Y. > Rs.50,000
PTRC return in Form III B Last day of next month
PTRC payment in Form MTR 6 30 days from end of the month
b If tax liability during P.Y. < Rs.50,000
PTRC return in Form III B 31 March of succeeding year
PTRC payment in Form MTR 6 31 March of succeeding year
iv. WCT TDS return in Form 424 30 June of that year
WCT TDS payment in Form MTR 6 21 days from the end of the month
B Gujarat
i. GVAT return (in Forms 201, 201A, 201B, 30 days from the end of the month
201C ) to which return relates
ii. GVAT audit in Form 217 9 months from the end of the year
i.e. 31 December
iii. Annual return in Form 205 , 205A 30 June of succeeding year
iv. TDS return in Form 704 30 days from the end of the quarter
v. Profession tax return:
PTRC in Form 5 15th of the next month/ quarter,
depends on periodicity
Profession tax return PTEC (payment 30 September of that year
to be made online)
C Delhi
i. DVAT return in Form DVAT 16 21 days from the end of the month
VAT / CST Payment in Form DVAT 20 28 days from the end of the tax
period
ii. TDS certificate in Form DVAT 43 15 days after the end of the month
in which the deduction is made
iii. Profession tax return Not applicable
iv. DVAT audit in Form AR-I 7.5 months from the end of the year
i.e. 15 November
D Tamil Nadu
i. TNVATreturninFormIandFormL Before20thofthesucceedingmonth
ii. TVATauditinFormWW 7 months from end of the year i.e.
31October

14 |
No
iii. TDS payment in Forms R and 20 day of the succeeding month in
TDS certificate in Form S which the deduction was made
iv. Profession Tax Return PTRC and PTEC in Half yearly April to September and
Form 2 for October to March, return should
be filed on first day of the half year
E Karnataka
i. KVAT return in Form 100
ii. TDS certificate in Form 156, 20 days after the end of the
Monthly statement in Form VAT 125 and relevant month
Payment in Form 152 or 153-Challan
iii. Profession Tax Return
PTRC
a) in, Form 5A 20 days from the end of the month
in which deduction was made
b) in, Form 5 30 days of subsequent year
a) PTEC in Form 4-A in respect of a person who stands
enrolled before the commencement
of a year – 30 April of that year
b) PTEC in Form 25-Certificate in respect of a person who is
enrolled after the commencement
of a year – within 1 month from
the date of enrolment
iv. KVAT Audit in Form 240 9 months from end of the year i.e.
31 December
F West Bengal
i. WBVAT return under Rule 34(1) in Within the next English calendar
Forms 14 and 15 month from the date of end of each
quarter
WB VAT Audit in Form 22 , Form 23 31 December of succeeding year
ii. TDS:
TDS certificate of payment of tax in 25 days from the end of English
respect of works contract in Form 18 calendar month during which
deduction is made
TDS Payment in Form 19 45 days from the date immediately
after the date of end of the calendar
month reckoned according to the
English calendar during which such
deduction is made

No
PTRC in Form III 30 days from end of each quarter
Tax payable:
a) for first 2 months of each
quarter within 21 days from the
expiry of each month
b) last month of quarter – before
filing of the return
PTEC under section 8 in Form III On or before 31 July of that year
G Andhra Pradesh
i. APVAT return in Forms 200, 200A, 200B 20 days after the end of the tax
and CST VI period
ii. TDS Return in Form 501A 15 days after the end of the month
in which the deduction is made
PTRC in Form V 10 days of the month succeeding the
month for which the return has to
be filed
PTRC in Form V 30 June of the year
Sr. Particulars Relevant Relevant Due Date
No. Provision Form
i. Annual return under Building Rule 242 Form XXV On or before
And Other Construction of The Building 15 February
Workers (Regulation Of and Other
Employment and Conditions Construction
of Service) Act, 1996. Workers‘
(Regulation of
Employment
and Conditions
of Service)
Central Rules,
1998
3.1.5 Labour law compliances:

16 |
No. Provision Form
ii. Every occupier of an
establishment shall maintain
a register in respect of
children employed or
permitted to work, in Form
under The Child Labour
(Prohibition And Regulation)
Act, 1986.
iii. Under the Inter State Migrant Section 23 As may Continual basis
Workmen (Regulation of be
Employment and Conditions prescrib-
of Service) Act, 1979 every ed
principal employer and every
contractor shall maintain
such registers and keep
exhibited in such a manner
as may be prescribed within
the premises of the
establishment where the
inter-state migrant workmen
are employed, notices in the
prescribed form containing
particulars about the hours
or work, nature of duty and
such other information as
may be prescribed.
iv. Annual return under the Rule 5 Form D 30 days after the
Payment of Bonus Act, 1965 expiry of the time
limit i.e. within a
period of 8 months
from the close of
the accounting year
v. Nomination form under the Rule 6 (1) & (2) Form F Within 30 days of
Gratuity Act completion of 1 year
of services
Section 16 Form A Continual basis

No. Provision Form
vi. Annual return by principal
employer Contract XXV (in February following
Labour duplicate) the end of the year
(Regulation & to which it relates
Abolition)
Central Rules,
1971
vii. Under Employee’s Provident Para 36(2)(a), Form ECR Within 30 days of
Funds and Miscellaneous Para 10(1A)(a) (filed close of each month
Provisions Act, 1952 every of EDLI online)
employer shall send to the
Commissioner, return of
consolidated EPS & EPF,
employee qualifying to
become members of the fund
for the first time along with
declaration in the Form 2,
resigning during the
preceding month.
Payment of provident fund 15 days of every
contribution into the account. succeeding month
(plus grace period of
5 days)
viii. Maharashtra Shops And Sec 7 (2-A) & Form B Not less than 15
Establishment Act, 1948 (2-B) days before the date
of expiry of the
registration
certificate
Renewal of Registration Rule 5
Certificate:
A registration certificate is
generally valid up to the end
of the year for which it is
granted. However, the same
may, at the option of the
employer, be granted or
renewed for a period of
3 years at a time, on payment
of the fees for that period.
Reg 82(2) of Form On or before 15th

18 |
No. Provision Form
An application for the
renewal of a registration
certificate should be
submitted accompanied by
such fees in such form, as
may be prescribed.
If the application for the
renewal of a registration
certificate is submitted after
the expiry of the specified
period but within 30 days
after the dale of expiry of the
registration certificate, such
application shall be
accompanied by an
additional fee as late fee
equal to half the fee payable
for the renewal of a
registration certificate.
ix. Employees State Insurance Rule 51 As may Within 21 days of the
Act, 1948 be month following, in
prescrib- which the wages
ed fall due
Rates of Contribution
Employer 4.75%
Employee 1.75%
Of wage payable to employee
x. Under Equal Remuneration Section 8 Form D Continual basis
Act, 1976, Register of male
and female workers
xi. Under Maternity Benefit Act, Section 20 Form 10 Continual basis
1961, Register of female
workers who have taken
benefit under the Maternity
Benefit Act
xii. Register of wages under the Sec 22A Form X Before the date on
Minimum Wages Act which the wages for
such wage-period
fall due

4.1 Background
4.2 RevenueRecognition
Income-tax regulations play a very crucial role
in any business scenario, real estate being no
exception to it. The real estate sector has
unique business characteristics or business
practices from accounting and tax regulatory
perspective.Forexample,realestateprojectsextendingbeyondonefinancialyear
could result in option to opt either project completion method or percentage
completion method. Further, tax implication may vary depending upon the use of
estimates for revenue / expenditure, cost incurred for land / FSI available at
different point of time including transferrable development rights, arrangement
on joint development agreements, uncertainty of receipt of sale proceeds over a
period of time, execution of agreement for sale, cancellation of sale agreements,
components of sale proceeds not in align with activity, claim of certain
expenditure as a period cost, claim of certain incentive, character of certain
incomeascapitalgainorbusinessincome,etc.
Further,incaseofanindividualassessee,therearedifferentsetsoftaxationissues
oncapitalgains,exemptions,deductions,etc.
In this Chapter, we have attempted to cover recognition of revenue, incentives,
deductions / exemptions and recent judicial pronouncements relating to the real
estatesector.
4.2.1 AS-7(old) had provided two methods of accounting i.e. project (contract)
completion method and percentage completion method, and further it did not
differentiate between the applicability in case of real estate developers and
constructioncontractor.Inprojectcompletionmethod,revenueisrecognizedonly
when entire project is completed thereby helping businessman to defer the
accounting of income in books resulting in postponement of payment of tax.
However,inpercentagecompletionmethod,theincomeisrecognizedineachyear
based on percentage of work completed. It has always been debated by the tax
19|
CHAPTER 4: INCOME TAX & WEALTH TAX

authorities that completed contract method shall not be adopted as it results in
deferring of tax liability to future period rather than on year-on-year basis.
However, based on the AS-7(old), certain real estate developers adopted project
completion method and the same had been accepted in certain judicial decisions.
However, in case of Champion Construction Co. Vs. ITO (1983) 5 ITD 495, the
Honorable Tribunal held partially against the assessee stating that when the work
wassubstantiallycomplete,theassesseecannotpostponerecognitionofrevenue.
The revised AS-7 applicable in case of a construction contractor provides for
percentage completion method. Hence, the issue arose that in absence of AS-
7(old), whether project completion method is still valid method of accounting for
tax purposes. The Guidance Note on ‘Accounting of real estate transactions’
discussed in Chapter 9 (Accounting Aspects) recommends that the percentage
completion method will be appropriate in the accounting of real estate
transactions where the project is having attributes or character of construction
contract. AS-9 provides for recognition of revenue only when substantial risk and
rewardsaretransferredtothebuyeroftheproperty.
4.2.2 TheGuidanceNotereferredaboveprovides
for its applicability in respect of revenue
recognition for a real estate project which
commences on or after 1 April 2012. It is
pertinent to note that the Guidance Note
emphasises that percentage completion
methodwillbeapplicableintheaccounting
of all real estate transactions where the economic substance is similar to
constructioncontracts.
ØThe indicators which decide whether a transaction is a construction
contractareasunder:
lTheperiodoftheprojectisinexcessof12months.
lMost features of the project are common to construction contract
i.e. land development, structural engineering, architectural design,
constructionetc.
lIndividualunitsintheprojectaredependentuponorinterrelatedto
completionofcommonfacilities/amenities,

21|
lThe construction and development activities form significant
proportionoftheprojectactivity.
‘TheGroupfollowsthepercentagecompletionmethodforitsprojects.Therevenue
recognitionpolicyisasunder:
ØProject for which revenue is recognized for the first time on or after 1 April
2012
lThe ICAI has issued a Guidance Note on Accounting for Real Estate
Transactions (Revised 2012) in connection with the revenue
recognition for a real estate project which commences on or after
April 1, 2012 and also to real estate projects which have already
commenced but where revenue is being recognized for the first
timeonorafter1April2012.
lIn this scenario, the Group recognizes revenue in proportion to the
actual project cost incurred (including land cost) as against the
total estimated project cost (including land cost) as well as area
sold,in line with the GuidanceNote and depending upon the type of
project.
ØProjectforwhichrevenuerecognitionhascommencedpriorto1April2012
lIn this scenario, the Group recognizes revenue in proportion to the
actual project cost incurred (excluding land cost) as against the
total estimated project cost (excluding land cost) subject to
completionofconstructionworktoacertainleveldependingonthe
typeofproject.
lRevenue is recognized net of indirect taxes and on execution of
eitherofagreementorletterofallotment.
ØThe estimates relating to percentage of completion, costs to completion,
area available for sale, etc. being of a technical nature are reviewed and
revised periodically by the management and are considered as change in
estimates and accordingly, the effect of such changes in estimates is
4.2.3 The notes attached to the audited accounts of a leading real estate
developerisreproducedbelow,forreferencepurpose:

22 |
recognized prospectively in the period in which such changes are
determined.
ØLand cost includes the cost of land, land related development rights and
premium.
ØThe construction work in progress is valued at lower of cost or net
realizable value. Cost includes cost of land, development rights, rates and
taxes, construction costs, other direct expenditure, allocated overheads
andotherincidentalexpenses’.
4.2.4 It is observed that generally, accounting method followed is also considered for
tax purposes to compute taxable income although there is no legal bar in
following one method for accounting and another method for tax purpose.
However,insuchacase,litigationfromtaxauthoritiescannotberuledout.
ØTDR is issued by the local authority in the form of a certificate called
‘DevelopmentRightCertificate’grantingtotheholderofthecertificatethe
right to certain area of construction on a plot of land. The Guidance Note
issued by ICAI (detailed discussion in Chapter 9) does not recommend any
accounting entry when TDR is received from the local authority. The
accounting entry is passed on sale of TDR and cost thereof is determined
based on actual cost of land area given up. However, if the entire land cost
is already claimed as deduction then, the issue arises whether receipt of
TDR is to be recorded at the time ofreceipt ofTDR certificate or at the time
ofsaleofTDRoruseofTDRinanotherproject.
ØIn case of a slum redevelopment project, the issue arises whether TDR
receivedagainstfreeconstructionistobeaccountedoncompletionoffree
construction area or on sale of area constructed on the basis of TDR
received.
ØFinance Act, 2013, introduced a
4.3 TransferableDevelopmentRights(TDR)
4.4 Deemed Consideration On Transfer Of
Asset (Other Than Capital Asset) Being
LandOrBuildingOrBoth

new section 43CA in the Income Tax Act, 1961 (‘the Act’) with a view to
considerdeemedsalesconsiderationinrespectoftransferofassets(other
than those held as capital assets) being land or building or both if actual
consideration received or accrued is less than the value adopted or
assessed or assessable by any authority of a State Government for the
purposeofstampdutyinrespectofsuchtransfer.Insuchcase,thedeemed
sales consideration shall be the value adopted or assessed or assessable
for stamp duty by any authority of a State Government for the purpose of
computingincomefrombusinessorprofession..
ØThefollowingpointsarerelevanttoconsidertheimpactontaxableincome:
lIn case of distress sale also, the above provisions will be covered,
sincenospecificexceptionshavebeenprovidedintheAct.
lThesectiondoesnothavementionaboutthetolerancelimitswhich
can be permitted. Hence even a minor variation would invoke
provisionsofsection43CA.
lThe above section will be applicable in all cases even if the sale of
landorbuildingisnotregisteredwiththegovernmentauthorities.
lIfadvanceisreceivedagainstpropertyandagreementisregistered
atalaterdate,thenasperprovisionsofsection43CA(3),thestamp
duty value as on the date of agreement be considered as deemed
consideration. However, this would be applicable only where the
amountofconsiderationorapart thereofhasbeenreceivedbyany
modeotherthancashonorbeforethedateofagreement.
lTransfer defined under section 2(47) of the Act does not apply to
this section. Accordingly, reference to the term transfer has to be
understoodasprovidedinTransferofPropertyAct,1882.
ØSection56(2) (vii) ofthe Act providesfor taxation ofdeemed incomeunder
thehead‘IncomefromOthersources’inthehandsofindividualorHUFwho
receives immovable property. In case receipt of Immovable property is
4.5 Deemed Income In Case Of Individual Or HUF On Transfer Of Immovable
PropertyForAConsiderationLessThanStampDutyValue

24 |
without consideration, the stamp duty value of which exceeds Rs.50,000,
thestampdutyvalueofsuchpropertyistreatedasdeemedincome.
ØIn case, receipt of immovable property is for inadequate consideration
which is less than stamp duty value of the property by an amount
exceeding Rs.50,000, the stamp duty value of such property as exceeds
suchconsiderationistreatedasdeemedincome.However,thissectionalso
provides for certain exceptions which include transaction with relatives,
property received under a will or by way of inheritance, on the occasion of
marriage,etc.
ØSection 50C of the Act provides that in case the consideration received or
accrued as a result of the transfer of a capital asset being land or building
or both, is less than the value adopted or assessed or assessable by any
authorityofaStateGovernmentforthepurposeofpaymentofstampduty,
the value adopted or assessed or assessable shall be deemed to be full
valueoftheconsiderationreceivedoraccruingasaresultofsuchtransfer.
ØCertain relevant judicial pronouncements are provided hereunder for
readyreference:
lIt has been held that the provision of section 50C of the Act would
also be applicable to depreciable assets for computing gain under
section50oftheAct.
lIt has been held that provisions of section 50C of the Act are not
applicableongrantofleaseholdrights.
lSection 50C of the Act will not be applicable in case of a transfer of
shares of a company having immovable property in its balance
sheet.
lSection 50C of the Act would be applicable in case of a
development agreement whereby land owner transfers
developmentrightstorealestatedeveloper.
4.6 Deemed Consideration In Case Of A Transfer Of A CapitalAsset Being Land Or
BuildingOrBoth

lSection 50C of the Act will be applicable even if exemption is
claimedtotheextentofactualsalesconsiderationreceived.
Section50oftheActprovidesforcomputationofcapitalgainasunder:
4.7 DeemedShort-TermGainOnTransferOfDepreciableAsset
Sr. No Particulars Amount
A Full value of consideration received or accruing as a result
of transfer or transfers of asset falling within the concerned
block of assets during the previous year less expenditure
incurred
B Less: Actual cost of any asset falling within the concerned b
block of assets acquired during the year
C Less: Opening written down value of the block of assets c
Resultant Figure (see note below) a-b-c
a
ØCertain relevant judicial pronouncements are provided hereunder for
readyreference:
lIftheresultantfigureispositive,thesameischargeableasdeemed
shorttermcapitalgainundersection50oftheAct.
lIf the resultant figure is negative and the entire block of assets
ceasestoexistassuch,theresultantfigureindicatesdeemedshort
termcapitalloss.However,iftheresultantfigureisnegativeandthe
blockcontinuestoexist(forthereasonthatatleastoneassetinthe
block continues to be owned by the assesse) then there will be no
gains or losses and the assesse will be entitled to claim
depreciationontheresultantfigure.
ØSection 50B of the Act provides
that profit arising on slump sale
of one or more undertakings
would be chargeable to tax as
long-term capital gain in the year
of transfer if such undertakings
4.8 CapitalGainInCaseOfSlumpSale

26 |
have been owned and held by the assesse for more than 36 months or as short-
termcapitalgainifheldupto36months.
ØThe net worth of the undertaking would be regarded as the cost of
acquisition and improvement. The net worth shall be the aggregate value
of total assets of the undertaking or division as reduced by the value of
liabilities of such undertaking or division as per books of account. For
computing the value of assets in case of depreciable assets, the written
downvalueoftheblockofassetsshallbeaspertheIncome-taxActi.e.sub-
item(C)ofsection43(6)(c)(i)oftheAct.
ØThe profits or gain arising from the transfer of a capital asset effected in
the previous year shall be chargeable to income-tax under the head
‘Capital Gain’ and shall be deemed to be the income of the previous year in
which the transfer took place. Hence, the incidence of gain is dependent
uponthetransfer.
ØTheterm‘transfer’asdefinedinsection2(47)oftheActincludes:
lthesale,exchangeorrelinquishmentoftheasset;or
ltheextinguishmentofanyrightstherein;or
lthecompulsoryacquisitionthereofunderanylaw;or
lin a case where the asset is converted by the owner thereof into, or
is treated by him as, stock-in-trade of a business carried on by him,
suchconversionortreatment;or
lany transaction involving the allowing of the possession of any
immovable property to be taken or retained in part performance of
a contract ofthe nature referred to in section53A ofthe Transfer of
PropertyAct,1882(4of1882);or
lany transaction (whether by way of becoming a member of, or
acquiring shares in, a co-operative society, company or other
association of persons or by way of any agreement or any
arrangement or in any other manner whatsoever) which has the
4.9 IncidenceOfGainOnTransferOfACapitalAsset

effectoftransferring,orenablingtheenjoymentof,anyimmovable
property.
lWhether joint development agreement results in transfer of land
fromtheownertorealestatedeveloper?
lAt what point of time is the joint development agreement liable to
taxundertheAct?
lAtwhatpointoftimeisthecompulsoryacquisitionofassetliableto
taxundertheAct?
From the definition of term ‘transfer,’ it is necessary to examine the arrangement
/agreementstoascertainwhetheritisasaleorexchangeorrelinquishmentofany
rightsinassetorpossessiongiventodeveloperinpartperformanceofagreement
undertheTransferofPropertyAct,1882orarrangementhaseffectoftransferring,
or enabling the enjoyment of, the immovable property. There are various judicial
verdictsbasedonthefactsofeachcase.
ØGain arising from sale ofagricultural land situated in a rural area in India is
not taxable under the provisions of the Act. From the assessment year
2014-15, the meaning of rural area has been amended. After modification,
the rural area means any area which is outside the jurisdiction of a
municipality or cantonment board having a population of 10,000 or more
and also which does not fall within distance (measured aerially) given
below-
4.9.1 Theissuesarisingfromtheabovedefinitionofterm‘transfer’areasfollows:
4.9.2 Gainarisingfromsaleofruralagriculturalland-nottaxable:
2 kilometers from the local limits If the population of the municipality
municipality /cantonment board /cantonment board is more than
10,000 but not exceeding 1,00,000
6 kilometers from the local limits of If the population of the municipality
municipality /cantonment board /cantonment board is more than
1,00,000 not exceeding 10,00,000
8 kilometers from the local limits of If the population of the municipality
municipality/cantonment board /cantonment board is more than
10,00,000

4.10 IncomeFromHouseProperty
4.11 PropertyOwnedByCo-Owners
4.12 ComponentOfCostToBeConsideredForWorkInProgress
ØTheannualvalueofproperty(asdefinedin
section 23 of the Act) consisting of any
building or lands appurtenant thereto
owned by the assesse other than such
portions of such property used for
business carried on by him shall be chargeable to income tax under the
head ‘Income from House Property’ after reducing certain deduction as
provided in section 24 of the Act. The annual value of one house which is in
theoccupationofownerforthepurposeofhisownresidenceisconsidered
as nil. If assesse owns more than one residential house, then one house
accordingtoassessee’schoiceistreatedasselfoccupiedandannualvalue
of another house is to be calculated considering it deemed to be let out.
Deduction for municipal taxes levied by any local authority and paid by the
assesseewouldbemadewhiledeterminingannualvalue.
ØFurther, income chargeable under the head ‘Income from house property’
shallbecomputedaftermakingfollowingdeductions:
l30% of annual value (this is irrespective of whether actual
expenditureisincurredornot)
lInterestonborrowedcapitalwherethepropertyhasbeenacquired,
constructed,etc.withborrowedcapital.
ØWhere the buildings or building and land appurtenant thereto is owned by
two or more persons and their respective shares are definite and
ascertainable, then the share of each such person in the income from the
propertyascomputedshallbeincludedinhistotalincome.
ØIn real estate sector, the controversial issue is regarding what component
of cost to be considered for valuation of work in progress. In normal
scenario, the real estate developer incurs various expenditures such as
interest cost, selling and marketing cost, general administration and

overhead cost, research and development, depreciation of idle plant, cost
incurred in securing the contract, cost such as material set aside but not
usedandapplied,etc.
ØThe question arises as to whether above costs are to be considered as a
period cost and charged to profit and loss account and claimed as
expenses for tax purpose or the same to be capitalized as part of project
cost in various scenarios such as when revenue is not recognized or when
revenue is recognized on percentage completion method. The Guidance
Note issued by ICAI for real estate transactions provides that above cost
(excluding interest cost) should not be considered as part of construction
costsanddevelopmentcostsiftheyarematerial.
ØIntermsofsection145(2)oftheAct,theCBDThasissuedadiscussionpaper
onTaxAccountingStandard(TAS)inrespectofaccountingforconstruction
contracts. It is relevant to note that this TAS is applicable in case of a
constructioncontractorandnottotherealestatedevelopers.
ØSomeofthepointsofTASareasunder:
l‘Construction contract’ is a contract specifically negotiated for the
construction ofan asset or a combinationofassets that are closely
interrelated or interdependent in terms of their design, technology
andfunctionortheirultimatepurposeoruse.
lDuring the early stage of a contract, where the outcome of the
contract cannot be estimated reliably, contract revenue is
recognized only to the extent ofcostsincurred. Theearly stage ofa
contractshallnotexceedbeyond25%ofthestageofcompletion.
lContract revenue shall comprise of i) the initial amount of revenue
agreed in the contract, including retentions; and ii) variations in
contract work, claims and incentive payments. Where contract
revenue already recognized as income is subsequently written off
in the books as uncollectible, the same shall be recognized as an
expense and not as an adjustment of the amount of contract
4.13 Tax Accounting Standard On Construction Contracts (Discussion Paper
Proposed)

30 |
revenue. The taxation of retention money is in contradiction to
chargingsection4oftheActandseveraljudicialdecisions.
The above TAS is still at discussion stage and will be effective only on its
notification.
The taxation laws provide for certain
exemptions / deductions as incentives to
corporate or other specified entities i.e.
Individual, HUF, etc. Some of the exemptions /
deductionsarementionedbrieflyasunder:
4.14.1 Section 35AD of the Act provides for deduction of capital expenditure incurred for
the purpose of specified businesses. The specified businesses include a)
developing and building a housing project under a scheme for slum
redevelopment or rehabilitation framed by the Central or State Government in
accordance with the guidelines prescribed and; b) developing and building a
housing project under a scheme for affordable housing framed by the Central
Government or State Government in accordance with the guidelines prescribed. It
is provided in this section that capital expenditure shall not include any
expenditure incurred on the acquisition of any land or goodwill or financial
instrument.
4.14.2 Section 54G of the Act provides for exemption in respect of a capital gain arising
fromtransferofassets(beingmachineryorbuildingorland)incasesofshiftingof
industrial undertaking from urban area if the assesse fulfills certain conditions,
whichincludethereinvestmentofcapitalgaininsimilarassetsorincursexpenses
on shifting of original assets within 1 year before or 3 years after the date of
transferofassets.
4.14.3 Section 54GA of the Act provides for exemption in respect of a capital gain arising
fromtransferofassets(beingmachineryorbuildingorland)incasesofshiftingof
industrial undertaking from urban area to any specified economic zone if the
assessefulfillscertainconditionswhichincludethereinvestmentofcapitalgainin
similar assetsor incurs expenseson shifting oforiginal assetswithin 1 yearbefore
or3yearsafterthedateoftransferofassets.
4.14 TaxIncentives:

4.14.4 Section 80-IB(10) of the Act provides for deduction in respect of a profit of an
undertaking developing and building a housing project approved by a local
authority after 1 October 1998 but before 31 March 2008 subject to certain
conditionsasmentionedbelow:
lsuch undertaking completes such construction within 5 years from
theendofthefinancialyearinacasewherethehousingprojecthas
been approved on or after 1 April 2005 (within 4 years if project is
approved on or after 1 April 2004 but before 31 March 2005) and
before31March2008inothercases;
lthe project is on the size of a plot of land which has minimum area
of1acre;
lthe residential unit has a maximum built-up area of 1,000 square
feetwheresuchresidentialunitissituatedwithinthecityofDelhior
Mumbai or within 25 kilometers from the municipal limits of these
citiesand1,500squarefeetatanyotherplace;
lthe built-up area of the shops and other commercial
establishmentsincludedinthehousingprojectdoesnotexceed3%
of the aggregate built-up area of the housing project or 500 square
feet,whicheverishigher;
lnot more than 1 residential unit in the housing project is allotted to
anypersonnotbeinganindividual;and
linacasewherearesidentialunitinthehousingprojectisallottedto
a person being an individual, no other residential unit in such
housingprojectisallottedtoanyofthefollowingpersons,namely:—
}the individual or the spouse or the minor children of such
individual,
}theHUFinwhichsuchindividualisthekarta,
}any person representing such individual, the spouse or the
minor children of such individual or the HUF in which such
individualisthekarta.

32 |
4.14.5 Section 54D of the Act provides for exemption in respect of a capital gain arising
from compulsory acquisition of land or building forming part of an industrial
undertaking subject to certain conditions, which include that the assesse has
purchasedanyotherlandorbuildingwithinaperiodof3years.
4.14.6 Section 54GB of the Act provides for exemption in respect of a capital gain arising
fromatransferofalong-termcapitalassetbeingaresidentialproperty(ahouseor
a plot of land) if the assesse (individual or a HUF) fulfills certain conditions, which,
inter-alia, include utilizing the net consideration for subscription in the equity
sharesofaneligiblecompany.
4.14.7 Section54oftheActprovidesforexemptioninrespectofcapitalgainarisingfrom
transfer of a long-term capital asset being a residential house if the assesse
(individual or HUF) fulfills certain conditions which include utilization of capital
gainforpurchaseofaresidentialhouse.Inthisscenario,thecontroversyarisesas
to whether investment in more than one residential house (which are adjacent to
each other) is eligible for deduction or not. Similarly, Section 54F of the Act
provides for exemption in respect of a transfer of a long term capital asset (other
than residentialhouse) if the assesse(individual or HUF) fulfills certain conditions
whichincludeutilizationofnetconsiderationforpurchaseofaresidentialhouse.
4.14.8 Section 80EE of the Act provides an additional benefit for first-time home buyers
by allowing an additional deduction up to Rs. 1,00,000 in respect of interest on
loans obtained up to Rs. 25,00,000 for the acquiring residential house property.
This additional deduction is to be claimed in AY 2014-15 and if the limit is not
exhausted,thebalancemaybeclaimedinAY2015-16.
4.14.9 Section 24 of the Act provides for deduction of interest on borrowed funds (from a
specified person) utilized for purchase of an immovable property. However, in
respect a self-occupied residential property, the deduction is restricted to
Rs. 1,50,000. Interest of pre-construction period is deductible in 5 equal
installments.
ØThere are no standard rules for selecting the form of entities for acquiring
real estate properties. The option to select form of entities namely
individual or HUF or Trust or a Company or associationof persons depends
upon the intention of a person and long-term needs of perpetual
4.15 FormOfEntities:

succession, purpose of acquiring assets, etc. Generally, immovable
propertylikeresidentialhouseispurchasedinthenameofanindividual.
ØHowever, in certain cases, the residential property is purchased in the
name of Private Trust so as to provide perpetual succession. Further,
business premises are purchased in the name of either a partnership firm
oracompanysoastoclaimdepreciationoncostofaproperty.
ØSection 194-IA of the Act provides the obligation to deduct tax at source on
all buyers, whether resident or non-resident, and includes firm, company,
etc. in case of transfer of immovable property if consideration amount is
Rs. 50,00,000 or more and paid to a resident transferor. The term
‘immovable property’ means land or building or both but excluding certain
agricultureland.TherateofTDSshallbe1%ofamountpaidorcreditedand
shall be deposited before 7th of next month. It is relevant to note that in
case of seller being a non-resident, the purchaser has to consider TDS
undersection195oftheAct.
Wealth-tax is applicable in case of
individuals, HUFs and all companies in
respect of value of those assets as
specified in section 2(ea) of the Wealth
Tax Act after reducing therefrom the
debts incurred in relation to such
assets. The taxable wealth (assets)
includesthefollowing:
ØAny building or land appurtenant thereto, residential or commercial but
excluding
lHouse(residentialorcommercial)heldasstockintrade,
lHouse occupied for the purpose of business/ profession carried on
bytheassesse,
lResidentialpropertyletoutforatleast300daysinapreviousyear,
4.16 TDSOnTransferOfImmovableProperties
4.17 WealthTax

34 |
lCommercialestablishmentorcomplexes,
lIn case of a company, a house meant exclusively for residential
purpose and allotted to an employee, officer or a whole time
director whose gross annual salary is less than Rs. 10,00,000 (1
million),
lLandonwhichconstructionisnotpermissible.
ØUrbanLandasdefined butexcludesthefollowing:
lUnusedland held for industrialpurposefor a period of2 years from
thedateofacquisition,
lLand held as stock in trade for a period of 10 years from the date of
acquisition,
lLand occupied by any building constructed with the approval of
appropriateauthority,
lLand classified as agriculture land in the record of the Government
andusedforagriculturepurposes.
Urban land means land which is not situated in a rural area. The meaning of ‘rural
area’hasbeendiscussedinparano.4.9.2
lIn case of an individual or HUF - One house or part of a house or a
plot of land not exceeding 500 square metres belonging to the
individualorHUF.
lAssetsbroughtwithin1yearpriortoreturn/atanytimeafterreturn
toIndiabyareturningNRIfor7successiveassessmentyears.
lBalancesinNREaccountonthedateofreturnandassetspurchased
therefrom 1 year prior to return/ at any time within 7 successive
assessmentyears.
lAnyassetsheldbypubliccharitabletrust.
4.17.1 ExemptionOfAssetsFromWealth-taxIncludesTheFollowing:

5.1 Background
The Government of India, vide the
Finance Act, 1994 introduced service tax
with effect from 1 July 1994.Theambit of
services which were covered under the
tax net was increasing year on year. The
real estate sector was brought into the
servicetaxnetforfirsttimeon10September2004byintroducingacategorytitled
‘CommercialServices’.Thereafter,thecoveragewasextendedvideintroductionof
several other categories such as ‘Construction of Complex Services,’ ‘Works
Contract Services,’ ‘Preferential Services provided by Builder to Prospective
Buyers’.
35|
CHAPTER 5: SERVICE TAX REGULATIONS
Real Estate Sector In India
Date
10September2004 Category‘ConstructionServices’wasintroduced
16June2005 Category ‘Construction Services’ was omitted and new
categories ‘Commercial or Industrial Construction
Services’ and a new category ‘Construction of Complex
Services’wereintroduced
1June2007 New categories ‘Renting of Immovable Property Services’
and‘WorksContractServices’wereintroduced
1July2010 The explanation was inserted to the definition of taxable
services ‘Construction or Industrial Construction’ and
‘Construction of Complex’ so as to bring sale of flats by
buildersunderservicetaxnet
Various Developments and Changes in the Service
Tax Law
Witheffectfrom1July2012,theGovernmentofIndiahasadoptedthenegativelist-
basedtaxationapproachasagainstthepositivelistapproachwhichwasprevailing
since the introduction of service tax. In this Chapter, the implication of service tax
onrealestatesectorunderthenegativelistregimeisdiscussed.

36 |
5.2 ServiceTaxVis-À-VisRealEstate
ØThe broad framework of applicability of service tax can be explained
throughthebelowdiagram:
ØDefinitionofService
(A) SERVICEMEANS
Whether activity covered
within a definition of service ?
Not
Taxable
No
No
Yes
Yes
Yes
Yes
No
No
Whether Provided in
Taxable Territory ?
Whether covered
under negative list ?
Whether
Exemped ?
Taxable
Any Activity
Carried out by
a person for
another
For a
Consideration

RSM Astute Consulting 37|Real Estate Sector In India
(B) SERVICEINCLUDES
lService includes declared services. The list of services covered
underdeclaredservicesisprovidedinsection66EoftheAct.
Section
66E(_)
(a) Rentingofimmovablepropertyservice
(b) Construction of a complex, building, civil structure or a part thereof
(including additions, alterations, replacement or remodeling of an
existingcivil structure), including a complex or building intended for
sale to a buyer wholly or partly except where the entire
consideration is received after issuance ofcompletion certificate by
thecompetentauthority.
The term ‘competent authority’ means the government or any
authority authorized to issue completion certificate under any law
for the time being in force. In case of non requirement of such
certificatefromsuchauthority,anyofthefollowing–
(a) architect registered with the Council of Architecture
constitutedundertheArchitectsAct,1972;or
(b) chartered engineer registered with the Institution of
Engineers(India);or
(c) licensed surveyor of the respective local body of the city or
townorvillageordevelopmentorplanningauthority.
(h) Serviceportioninexecutionofaworkscontract
‘Works Contract’ is defined under section 65B(54) of the Act to mean
a contract wherein transfer of property in goods involved in the
executionofsuchcontractisleviabletotaxassaleofgoodsandsuch
contract is for the purpose of carrying out construction, erection,
commissioning, installation, completion, fitting out, repair,
maintenance, renovation, alteration of any moveable or immovable
property or for carrying out any other similar activity or a part
thereofinrelationtosuchproperty.
Declared Services

Mere transfer of
title in goods
or immovable
property, by
way of sale/
gift or any
other manner
Deemed
sales under
article
366(29A)of
the
constitution
of India
Mere
transaction
in money
or
actionable
claim
Service by
an employee
to his
employer, in
relation to
employment
Fees
taken
by
court/
tribunal
ØIssuesthatarisefromthedefinitionofservices:
lHow the service tax liability is to be determined in case of joint
developmentagreements?
lHow the consideration is to be determined in case of barter
transaction, i.e. sale of flats against receipt of development rights
onland?
lWhether service tax liability arises on various charges collected by
builders such as society maintenance charges, recreation facility
charges (both one time and recurring), legal charges, water
charges,etc.
ØIt is essential to determine the nature of services which are provided since
the applicability of various provisions, exemptions, abatement, etc.
dependsuponthenatureofservicesprovided.
lGeneral rule – The reference to main service shall not include a
servicewhichisusedforprovidingmainservice.
lIf the services provided are capable of differential treatment for
5.3 PrincipleOfInterpretationOfService(NatureOfService)
(C) SERVICEEXCLUDES
Any activity which
constitutes
Exclusions from the definition of Service

any purpose – Most-specific description would be preferred over
andabovethegeneraldescription.
lBundled Services - ‘Bundled Service’ means a bundle of provision
of various services wherein an element of provision of one service
is combined with an element or elements of provision of any other
serviceorservices.
5.4 Exemptions
ØExemption has been granted from the
whole of Service Tax on providing of
certain services vide notification no.
25/2012 – ST dated 20 June 2012, as
amended from time to time. The list of
exemptionsinrelationtorealestatesectorisgiveninthefollowingtable:
Interpretation of Bundled Services
Clause
No.
Exempted Services Remarks
12 Services provided to the Government
or local authority by way of erection,
construction, maintenance, repair,
alteration, renovation or restoration
of-
l‘Governmental Authority’
means a board, or an
authority or any other body
established with 90% or
moreparticipationbywayof
Bundled
Services
Services that are
naturally bundled
Services that are not
naturally bundled
Service which attracts
the highest amount
of Service Tax
Single Service based
on its essential
character

Clause
No.
(a) a civil structure or any other
o r i g i n a l w o r k s m e a n t
predominantly for use other than
for commerce, industry or any
otherbusinessorprofession;
(b) a historical monument,
archaeological site or remains of
n a t i o n a l i m p o r t a n c e ,
archaeological excavation, or
antiquity specified under Ancient
Monuments and Archaeological
SitesandRemainsAct,1958;
(c) a structure meant predominantly
for use as (i) an educational, (ii) a
clinical, or (iii) an art or cultural
establishment;
(d) canal, dam or other irrigation
works;
(e) pipeline, conduit or plant for (i)
water supply (ii) water treatment,
or (iii) sewerage treatment or
disposal;or
(f) a r e s i d e n t i a l c o m p l e x
predominantly meant for self-use
or the use of their employees or
other persons specified in the
Explanation 1 to section 65B(44)
ofthesaidAct
equity or control by
Government and set up by
an Act of the Parliament or a
State Legislature to carry
out any function entrusted
to a municipality under
article 243W of the
Constitution.
l‘ResidentialComplex’means
any complex comprisingofa
building or buildings, having
more than one single
residentialunit.
lConstruction of hospitals
and educational institutions
for Government or local
a u t h o r i t y a r e o n l y
exempted. In case the same
are constructed for others,
thereisnoexemption.
l‘Original Works’ has the
meaning assigned to it in
Rule 2A of the Service Tax
(Determination of Value)
Rules,2006.

Clause
No.
13 Services provided by way of
c o n s t r u c t i o n , e r e c t i o n ,
commissioning, installation,
completion, fitting out, repair,
maintenance, renovation or
alterationof-
(a) a road, bridge, tunnel, or terminal
for road transportation for use by
generalpublic;
(b) a civil structure or any other
original works pertaining to a
scheme under Jawaharlal Nehru
National Urban Renewal Mission
orRajivAwasYojana;
(c) a building owned by an entity
registered under Section 12AA of
the Income tax Act, 1961 and
meant predominantly for
religioususebygeneralpublic;
(d) a pollution control or effluent
treatment plant, except located
asapartofafactory;or
(e) A structure meant for funeral,
burialorcremationofdeceased.
l‘General Public’ means the
body of people at large
sufficiently defined by some
common quality of public or
impersonalnature.
14 Services by way of construction,
erection, commissioning or
installation of original works
pertainingto-
l‘Single Residential Unit’
means a self-contained
residential unit which is
designed for use, wholly or
principally for residential
purposesforonefamily.

Clause
No.
(a) an airport, port or railways,
includingmonorailormetro;
(b) single residential unit otherwise
asapartofaresidentialcomplex;
(c) low-cost houses up to a carpet
area of 60 square meters per
house in a housing project
approved by competent authority
empowered under the ‘Scheme of
A f f o r d a b l e H o u s i n g i n
Partnership’ framed by the
MHUPA,GovernmentofIndia;
(d) p o s t - h a r v e s t s t o r a g e
infrastructure for agricultural
produce including cold storages
forsuchpurposes;or
(e) mechanized food grain handling
system, machinery or equipment
for units processing agricultural
produce as food stuff excluding
alcoholicbeverages.
l‘agricultural produce’
means any produce of
agriculture on which either
no further processing is
done or such processing is
done as is usually done by a
cultivatororproducerwhich
does not alter its essential
characteristics but makes it
marketable for primary
market.
lNo exemption is granted to
repair, maintenance of
airports,portsandrailways.
29 Services by the following persons in
respectivecapacities–
(h) sub – contractor providing
services by way of works contract
to another contractor providing
workscontractserviceswhichare
exempt

Rule
No.
Nature of
Services
Determination of
Place of Provision
5 Related to
immovable
property
Services provided by experts and
estate agents, provision of hotel
accommodation by a hotel, inn,
guest house, club or campsite, by
whatever, name called, grant of
rights to use immovable property,
services for carrying out or
coordination of construction
work, including architects or
interiordecorators
Types of Services / Remarks
Place where the
immovable property
is located or intended
tobelocated
5.5 Place Of Provision Of Services Rules, 2012 (Where The Services Are
Rendered)
ØAs per charging section, section 66B of the Act, only those services which
are deemed to be provided in the taxable territory, by one person to
anotherareliabletoservicetax.
ØPlace of Provision of Services Rules, 2012 (‘PPSR, 2012’) has been notified
under section 66C ofthe Actto determine the placewhere the services are
deemedtobeprovided.
ØRule 14 of the PPSR, 2012 provides that notwithstanding anything stated in
any rule, where the provision of service is ‘prima facie’ determinable in
terms of more than one rule, it shall be determined in accordance with the
rulethatoccurslateramongtherulesthatmeritequalconsideration.
lGeneral rule - The place of provision of a service shall be the
location of the service receiver. In case the location of the service
receiver is not available in the ordinary course of business, the
placeofprovisionshallbethelocationoftheserviceprovider.(Rule
3ofPPSR)
lSpecificRules:

5.6 PointOfTaxation(WhenTheServicesAreRendered)
Point of Taxation Rules, 2011 (‘POTR, 2011’) is notified to determine the point of
taxation (POT) of service. Point of Taxation means the point in time when a service
shallbedeemedtohavebeenprovided.
Determining point of taxation of any service is essential as relevant exemption
notifications,rules,etc.asapplicableonthatdate,willbemadeapplicable.Further,
the due date for payment of service tax is also aligned to the point of taxation
rules.
Rule
No.
Nature of
Services
Determination of
Place of Provision
7 Services
referred to in
Rule 5 and
provided at
more than one
location
Any service referred to in rules 4,
5, or 6 is provided at more than
one location, including a location
inthetaxableterritory
Types of Services / Remarks
The location in the
taxable territory
where the greatest
portion of the service
isprovided
8 Service
provider and
receiver both
are located in
taxable
territory
Any service other than listed in
negative list or specifically
excluded
Location of service
receiver
Overview of Point of Taxation Rules, 2011
Point of Taxation
In case of
liability under
Reverse
Charge
Mechanism
(Rule 7)
In case of
services
taxed for
first time
(Rule 5)
In case of
change in
effective rate
of Service
Tax (Rule 4)
General
Rule
(Rule 3)
Copyright
Services
(Rule 8)

5.6.1 Generalrule
In case of continuous supply of services, (i.e. any service which is provided
continuously or on recurrent basis, under a contract for a period exceeding 3
monthswiththeobligationforpaymentperiodically,orfromtimetotime)thedate
of completion of each event which requires the service receiver to make any
payment to service provider, shall be deemed to be the date of completion of
service.
IncasetheadvancereceiptisuptoRs.1,000/-,inexcessoftheamountindicatedin
the invoice, the service provider is having option to determine point of taxation to
theextentofsuchexcessamountasandwhentheinvoiceisraisedwithinthetime
prescribedorcompletionofservice,asthecasemaybe.
Incaseofchangeineffectiverateoftaxinbetweenthe
date of provision of service, issuance of invoice or
receipt of payment, point of taxation is required to be
determinedasperRule4ofPOTR,2011.
5.6.2 Changeineffectiverateoftax
Yes
Yes
No
No
Advance
receipt
POT will be date of
receipt of advance
POT will be date of
issuance of Invoice
Invoice raised
within time
prescribed in Rule
4A of STR, 1994
POT will be Completion
of Service
The General Rule of Point of Taxation - Rule 3 of POTR, 2011

Change in effective rate of tax also includes a change in the portion of value on
whichtaxispayableintermsofanotification.
ThesummaryofRule4isgivenherebelow:
Provision
of Service
Issue of Invoice Payment
Before
change
of rate
After change of rate Date of invoice or
payment, whichever is
earlier(newrate)
Point of Taxation
Afterchangeofrate
Before change of rate Dateofinvoice(oldrate)Afterchangeofrate
After change of rate Date of payment (old
rate)
Before change of
rate
After
change
of rate
Before change of rate Date of payment (new
rate)
Afterchangeofrate
Before change of rate Date of invoice or
payment, whichever is
earlier(oldrate)
Before change of
rate
After change of rate Dateofinvoice(newrate)Before change of
rate
5.6.3 Servicestaxedforthefirsttime
5.6.4 Liabilityunderreversechargemechanism
When a service is taxed for the first time, Point of Taxation is required to be
determined as per Rule 5 of POTR, 2011. In view of Rule 5, no tax is required to be
charged/paidincaseoffollowingscenarios:
ØWhere invoice as well as payment is received against such invoice before
suchservicebecametaxable.
ØWhere payment is received before such service became taxable and the
service provider has issued invoice within the period of 14 days from the
datewhentheserviceistaxedforthefirsttime.
ØInviewofRule7ofPOTR,2011,inrespectofservicesonwhichpersonis

required to pay tax as recipient of service (Reverse Charge Mechanism),
point of taxation shall be the date on which payment is made by service
receivertoserviceprovider.
ØIf such payment is not made within a period of 6 months of the date of
invoice, the point of taxation shall be determined as per rule 3, 4, 5 or 8 as
applicable.
ØIn case of ‘Associated Enterprises’, where the service provider is located
outsideIndia,thepointoftaxationshallbethedateofdebitinthebooksof
accounts of service receiver or date of making payment, whichever is
earlier.
Ø‘Associated Enterprises’ shall have the meaning as assignedto it in section
92AoftheIncome-TaxAct,1961.
ØGenerally, the person who provides the
taxable service (service provider) is
responsible for paying the service tax
to the Government. Service provider
has an option of charging and
collectingservicetaxfromtheservicereceiver.
ØHowever, in respect of certain notified taxable services, service tax is
required to be paid to the Government, by such person as may be notified.
In general parlance, the said services are said to be services liable under
ReverseChargeMechanism(‘RCM’).
ØNotification No. 30/2012-ST dated 20 June, 2012, as amended from time to
time, read with section 68(2) of the Act and Rule 2(1)(d) of STR, 1994
providesforRCMinthefollowingscenarios:
5.7 PersonLiableToPayTax

Sr.
No.
Description of Service % Payable
by Service
Provider
1 By an insurance agent to any person
carryingontheinsurancebusiness
100%
% Payable by
Service
Receiver
NIL
2 Good transport agency services in
respect of transportation of goods by
road, where the person liable to pay
freightisnotifiedperson
100%NIL
3 Sponsorship services to any body-
corporate or partnership firm located in
thetaxableterritory
100%NIL
4 By director of the company to the said
company
100%NIL
5 Servicesprovidedtoanybusinessentity:-
5.1 ByanArbitraltribunal 100%NIL
5.2 Legal Services by an advocate or firm of
advocates
100%NIL
5.3 Support services by Government except
renting of immovable property and
servicesspecifiedin66D(a)(i)to(iii)
100%NIL
6 Servicesprovidedbyanyindividual,HinduUndividedFamilyorpartnership
firm,whetherregisteredornot,includingassociationofpersons,locatedin
the taxable territory to a business entity registered as body corporate,
locatedinthetaxableterritory:
6.1 Renting of motor vehicle designed to
carry passengers to any person who is
notinsimilarlineofbusiness
At Abated
value: 100%
At Abated
value: NIL
At Non Abated
value:40%
At Non Abated
value: 60%
6.2 Supplyofmanpowerforanypurpose 75%25%
6.3 Securityservices 75%25%
6.4 Service portion in execution of Works
Contract
50%50%

Ø‘Business Entity’ is defined under section 65B (17) of the Act to mean any
person ordinarily carrying out any activity relating to industry, commerce
oranyotherbusinessorprofession.
Ø‘Legal Services’ is defined under rule 2(cca) of the STR, 1994 to mean any
service provided in relation to advice, consultancy or assistance in any
branchoflaw,inanymannerandincludesrepresentationalservicesbefore
anycourt,tribunalorauthority.
Ø‘Supply of Manpower’ is defined under rule 2(1)(g) of STR, 1994 to mean
supply of manpower, temporarily or otherwise, to another person to work
underhissuperintendenceorcontrol.
Ø‘Security Services’ is defined under rule 2(1)(d)(FA) of STR, 1994 to mean
services relating to the security of any property, whether movable or
immovable, or of any person, in any manner and includes the services of
investigation,detectionorverification,ofanyfactoractivity.
Ø‘Works Contract’ is defined under section 65B(54) of the Act to mean a
contractwhereintransferofpropertyingoodsinvolvedintheexecutionof
suchcontractisleviabletotaxassaleofgoodsandsuchcontractisforthe
purpose of carrying out construction, erection, commissioning,
installation, completion, fitting out, repair, maintenance, renovation,
alteration of any moveable or immovable property or for carrying out any
othersimilaractivityorapartthereofinrelationtosuchproperty.
ØServicetaxispayableonthevalueofallservices(i.e.taxableservices).The
’Value of Taxable Service’ means, the gross amount charged by the service
provider for the taxable service provided or to be provided by him. Taxable
value has to be determined as per the provisions under section 67 of the
5.8 ValueOfTaxableService
Sr.
No.
Description of Service % Payable
by Service
Provider
7 Services provided by any person located
outside the taxable territory to any
personlocatedinthetaxableterritory
100%
% Payable by
Service
Receiver
NIL

ØWhenthegrossamountisinclusiveofservicetaxpayable,
Valueoftaxableservice=
The term ‘consideration’, ‘money’ and ‘gross amount charged’ are defined
forthepurposeofvaluationoftaxableservices.
ØWhen certain expenditure or costs are incurred by the service provider in
thecourseofprovidingtaxableservices,allsuchexpenditureorcostsshall
betreatedasconsiderationfortaxableserviceprovided.
ØAs per Rule 5 (2) of Valuation Rules, expenditure or cost that a service
provider incurs, as ‘pure agent’ of client shall be excluded from value, if
service provider satisfies certain specified conditions. The term ‘pure
5.8.1 Inclusion/exclusionofcertainexpenditureorcost
Gross Amount Charged * 100
100 + rate of Service Tax
Value of Taxable Service:
Where
consideration for
service is
Wholly in
Money
Not Wholly /
Partly
in Money
Not
ascertainable
The
Gross
Amount
Charged
Such
Amount
in Money
Add
Service Tax
Charged
Gross amount charged
to provde similar
service to any person
If cannot be determined
in accordance with
above, then, equivalent
money value of such
consideration which
shall, be at least equal to
the cost of provision of
such taxable service
Act, read with Service Tax (Determination of Value) Rules, 2006 (‘Valuation
Rules’).Thevaluationprovisionscanbesummarizedasfollows:

Sr.
No.
Conditions Abate-
ment
(%)
12 Construction of a
complex, building,
civil structure or a
p a r t t h e r e o f ,
intended for a sale
to a buyer, wholly or
partly except where
entire consideration
is received after
i s s u a n c e o f
c o m p l e t i o n
certificate by the
c o m p e t e n t
authority,-
(i) for residential
unit having carpet
area up to 2000
squarefeetorwhere
the amount charged
is less than rupees
onecrore;
(ii) for other than
the(i)above.
--
Tax-
able
(%)
(i) No CENVAT credit on inputs to
be availed.
(ii) The value of land is included in
the amount charged from the
service receiver.
(iii) The amount charged shall be
the sum total of the amount
charged for the service including
the fair market value of all goods
and services supplied by the
recipient’s in or in relation to the
service, whether or not supplied
under the same contract or any
other contract, after deducting -
(a) the amount charged for
such goods or services supplied
to the service provider, if any; and
(b) the value added tax or sales
tax, if any, levied thereon:
Provided that the fair market
value of goods and services so
supplied may be determined in
accordance with the generally
accepted accounting principles.
Description of
Taxable Service
--
2575
3070
agent’isdefinedinexplanation1torule5(2)ofValuationRules.
ØRule 6 of Valuation Rules provides for certain specific items for inclusion
andexclusioninthevalueoftaxableservices.
For certain services, a specified percentage of abatement is allowed from the
gross amount charged for providing the services. The said abatements and
conditions thereto are provided under notification no. 26/2012-ST dated 20 June
2012.Thegistsofthesamearegivenherebelow:
5.8.2 Abatements

5.8.3 Valuation in the case of Works Contract
Service:
ØInviewofRule2AofValuationRules,the
value of service portion in execution of
works contract services is required to
beascertainedasfollows:-
lIt shall be gross amount charged less value of property in goods.
(the value ofpropertyin goods adopted for paymentofVAT shall be
takenasvalueofpropertyingoods)
lIn case the value has not been determined as above then the
serviceportioninworkscontracttobecalculatedasgivenbelow:
ØNo CENVAT credit on inputs is eligible. However CENVAT credit on input
servicesandcapitalgoodscanbeavailed.
Nature of Works Contract
% of Contract as
‘Service Portion’
Executionof:-
1. allnewconstructions
2. all types of additions and alterations to
abandoned or damaged structures on land that
arerequiredtomakethemworkable
3. erection, commissioning or installation of plant,
machinery or equipment or structures, whether
pre-fabricatedorotherwise
40%
Maintenance or repair or reconditioning or
restorationorservicingofanygoods
70%
In case of other works contract not covered above
including maintenance, repair, completion and
finishing services such as glazing, plastering, floor
and wall tiling, installation of electrical fittings of
immovableproperty
60%

6.1 Position In The State Of
Maharashtra
6.1.1 Background
6.1.2 Factsofthecase
6.1.3 Ratioofthejudgment
The levy of VAT on Builders and
Developers came in light with
the decision of the Honourable
Supreme Court in the case of
K. Raheja Development Corporation Vs. State of Karnataka, [(2005) 141 STC
298(S.C.)]
ØTwoseparatecontractsentered(i)saleofrightinlandand(ii)construction
ofbuildings.
ØThere was an arrangement to sell an undivided fractional share, right, title
andinteresttotheintendedbuyer.
ØThe developer, not being the owners of the land, had lien over the land and
building until the intended buyers paythe full consideration with regard to
bothlandaswellasconstructionactivity.
Ø‘The Honourable Supreme Court has held that, ‘works contract’ has an
inclusivedefinitionwhichincludesanyagreementforcarryingoutbuilding
for construction activity for cash, deferred payment or other valuable
consideration - hence appellants are owner to the extent that they have
entered into agreements to carry out construction activity on behalf of
somebodyelseforcash,deferredpaymentorothervaluableconsideration
- they would be carrying out a ‘works contract’ and would become liable to
pay turnover tax on the transfer of property in the goods involved in such
workscontract.’
53|
CHAPTER 6: VAT AND WORKS CONTRACT
REGULATIONS

ØThe appellants are undertaking to build as developers for the prospective
purchaser on payment of a price. Therefore it remains works contract as
definedundertheAct.
ØIf the agreement is entered into after completion of construction of flats,
there would not be works contract. In case agreement is entered into
before construction is completed, it would be works contract and liable to
VAT.
On the basis ofdecision ofHonourable Supreme Court in the caseof M/s K. Raheja
Development Corporation (141 STC 298 (SC), Maharashtra Government amended
definition ofSale with effect from 20June 2006.According to amended definition,
buildingconstructioncontractwasincludedinthedefinitionofsale.
Priorto20June2006
Section 2(24) of the MVAT, defines the term ‘sale’ to mean ‘a sale of goods made
withintheStateforcashordeferredpaymentorothervaluableconsideration,but
does not include a mortgage, hypothecation, charge or pledge; and the words
‘sell’, ‘buy’ and ‘purchase’, with all their grammatical variations and cognate
expressions,shallbeconstruedaccordingly.’
Witheffectfrom20June2006
Newamendeddefinitionisasfollows:
ØClause(b)(ii)oftheexplanationtoSec2(24)wasintroduced.
l‘(ii) the transfer of property in goods (whether as goods or in some
other form) involved in the execution ofa works contract including,
an agreement for carrying out for cash, deferred payment or other
valuable consideration, the building, construction, manufacture,
processing, fabrication, erection, installation, fitting out,
improvement, modification, repair or commissioning of any
movableorimmovableproperty;’
lIn pursuance to this definition the building and construction of an
6.2 ConsequentAmendmentInMVAT
54 | Real Estate Sector In India RSM Astute Consulting

immovable property was brought within the ambit of MVAT though
the indivisible contracts included charges towards land and labour
whichareoutoftheambitofVATLaw.
ØOn the basis of judgment of K. Raheja, Trade circular is issued by
MaharashtraSalesTaxDepartmenton7February2007.
ØIt clarifies that any transfer of property after 20June 2006,irrespective of
whetheranagreementwassignedpriortothatdate,wouldbegovernedby
theamendeddefinitionofsale.
ØTri-partite agreements between land-owners, developers and prospective
buyerswouldbecoveredbytheamendeddefinitionofsale.
ØIftheagreementisenteredintoaftertheflatorunitisalreadyconstructed,
then there would be no works contract, but so long as an agreement is
entered into before the construction is complete, it would constitute a
workscontract.
ØOn 9 July 2010, the Government ofMaharashtra provided for a composition
scheme.
ØIt was made applicable to registered dealers who undertake construction
offlats, dwellings, buildings or premisesand transfer them in pursuanceof
anagreementalongwithlandorinterestunderlyingtheland.
ØComposition amount prescribed at 1% of the agreement amount or the
value specified for the purpose of Stamp Duty under the Bombay Stamp
Act, 1958, whichever is higher. For the contracts entered into a particular
calendar year, the ready reckoner value as on 1 January of that year has to
betakeninconsideration.
6.3 TradeCircularDated7February2007
6.4 IntroductionOfCompositionScheme
6.5 Maharashtra Chamber Of Housing Industry And Ors Vs. State Of Maharashtra
AndOrs[2012-VIL-35-BOM]

56 |
The constitutional validity of the amended definition of
‘sale’, the Trade Circular dated 7 February. 2007 and 1%
Composition Scheme introduced with effect from 9 July
2010,waschallengedinaspateofwritpetitions.
On the behalf of the petitioner, it was contended as
under:
ØTheamendment was beyond the scope ofthe State’s power to taxunder Sl.
No.54ofListIIoftheSeventhScheduletothecondition.
ØAs per article 366(9A) (b), Contract would, inter-alia, involve a transfer
ofpropertyingoodsandimmovablepropertydoesnotconstitutegoods.
ØConsequent to the 46th Amendment to the Constitution, only a transfer of
property in goods involved in the execution of a works contract is taxable
and a contract for the sale of immovable property is not a works contract.
Thus,legalfictioncreatedbyArticle366(29A)wouldnotapply.
ØThe purpose underlying the enactment of deeming fiction in Article
366(29A) was to override the imitated definition of the expression ‘sale’ in
the Sale of Goods Act, 1930 and to isolate the sale of goods element
involved, inter alia, in a contract which is a works contract. The amended
definitionof‘sale’fallswithinthecompassofArticle366(29A).
ØIn an agreement which is governed by the MOFA, a conveyance of the
interest in the flat or at any rate an interest therein is created at the stage
oftheexecutionofanagreement.
ØThe doctrine of accretion is always subject to a contract to the contrary.
The provisions of the MOFA contain a statutory stipulation to the contrary
where the accretion to the property ensures to the benefit of the flat
purchaser; and the Trade Circular and the deduction schemes are only
clarificatoryinnature.
ØWorks contracts have numerous variations and it is not possible to accept
the contention either as a matter of principle or as a matter of
6.5.1 RatioOfTheJudgment
Real Estate Sector In India RSM Astute Consulting

57|
interpretation that a contract for work in the course of which title is
transferredtotheflatpurchaserwouldceasetobeaworkscontract.
ØThe effect of the amendment to Section 2(24) is to clarify the legislative
intent that a transfer of property in goods involved in the execution of
works contract including an agreement for building and construction of
immovable property would fall within the description of a sale of goods
withinthemeaningoftheprovision.
ØThe constitutional validity of the provisions of the MVAT Act, 2002, as
amended, is not contingent upon any other statutory regulation of
apartmentsundercognatelegislationintheStateofMaharashtra.
ØHaving regard to this statutory scheme, it is not possible to accept the
submission that a contract involving an agreement to sell a flat within the
purview of the MOFA is an agreement for sale of immovable property
simplicitor.
ØThe Constitutional validity of the amended definition of ‘sale’, the Trade
CirculardatedFebruary2007wasupheld.
ØHence,itisliableforVAT.
ØIt was issued in pursuance to the decision of the Honourable Bombay High
CourtinMaharashtraChamberofHousingIndustrycase.
ØAccordingly,itmadedevelopersliabletopayMVATActw.e.f.20June2006.
ØIt provided facilities for obtaining registration, granted administrative
reliefforunregisteredperiodandfilingofreturnsfrom20June2006.
Option1:Deductionofactualexpensesonlabour
Option2:Standarddeductionmethod
6.6 TradeCircularNo.14tOf2012Dated6August2012
6.7 OptionsForComputing WorksContractLiability
6.7.1 Fromtheperiod20June2006onwards:

6.7.2 From1April2010
Option3:CompositionScheme
Option1:Deductionofactualexpensesonlabour
ØThedeductionforlabourandservicechargesisavailableonactualbasis.
ØDeductionforlandisavailable.
ØSet off is available (subject to Rule 53 and 54) in respect of materials
transferredtocustomers.
Option2:Standarddeductionmethod
ØStandard deduction of 30% is available for labour from total contract
value.
ØDeductionforlandisavailable.
ØSet off is available (subject to Rule 53 and 54) in respect of materials
transferredtocustomers.
ForOption1andOption2,deductiontowardscostoflandshallnotexceed70%of
theagreementvalue.
Option3:Compositionscheme
ØVATpayableis@5%onagreementvalue.
ØDeductionforLandisnotavailable.
ØInputtaxcreditisavailablesubjecttoreductionof4%ofpurchaseprice.
Option4:Compositionscheme@1%
IntroductionofonemoreoptionunderSection42(2A)readwithNotification
No.VAT1510/CR-65/Taxation–1dated9July2010.
Conditions:
ØAgreementsshouldberegisteredonorafter1April2010.

ØVATispayable@1%oftotalagreementvalue.
ØDeductionforLandisnotavailable.
ØInput tax credit is not available. (If input tax credit is already claimed in
respectoftheseflats,thesamehastobereversed.)
ØA dealer (contractor) has an option to choose any of the above mentioned
options.
For availing deduction of VAT liability discharged by subcontractor from total
contract value, certain forms are required to be maintained by principal
contractorandsub-contractor.
In the Interim order of the SC dated 28 August
2012 in case of SLP filed by Promoters and
Builders Assn. and Ors. Vs. State of Maharashtra,
(17709/2012), it is mentioned in para 3(iii) ‘The
paymentoftaxbythedevelopersshallbesubject
to the final decision in the matter before this
court.’
So,ifitisultimatelyheldbyHonourableSCthatVATisnotpayableondevelopment
agreements,theVATpaidbybuildersanddeveloperswillberefundable.
ØUndertheMVAT Act, every dealer,registeredorunregistered,liabletopay
taxshall:
lIf his turnover of sales or, as the case may be, of purchase
exceedsRs.1,00,00,000inanyyear,or
lIf he is a dealer or personwho holds licensein certainspecified
cases - get his accounts in respect of such year audited by an
6.8 DeductionForSub-Contract
6.9 Refund Of Tax Paid By Developer In Case SC Judgement Comes In Favour Of
Developer
6.10 VATAudit

accountant (i.e.practicing Chartered Accountant or Cost
Accountant) within the prescribed period from the end of that year
and furnish within that period the report of such audit in the
prescribed form duly signed and verified by such accountant and
settingforthsuchparticularsandcertificatesasmaybeprescribed.
ØIn case of failure to furnish the copy of such report within the time
prescribed, the Commissioner may, after giving a reasonable opportunity
ofbeingheard,imposeonhim, inadditiontoanytaxpayable,asum byway
ofpenaltyequalto0.1%ofthetotalsales.
ØIt is pertinent to note that the terms ‘sales’ and ‘purchases’ under the VAT
regime, include sale/purchase of capital goods, scrap, packing material,
stationery, goods purchased and debited to Profit and Loss account, DEPB,
Copyrights,etc.
ØAs per Rule 66 of the MVAT Rules the report of the audit under Section 61
shallbesubmittedwithin9½monthsfromtheendoftheyeartowhichthe
reportrelates.
ØDeveloperissuedallotmentletterspecifyingthatthetermsandconditions
ofallotmentaresubjecttosaledeedtobesignedbypartiesinfuture.
ØAs per the terms, allotee agreed that no right will accrue in his favour until
thesaledeedisexecuted.
ØThepetitionershallremaintheownerandtheconstructionthereonandno
rights shall devolveupon the allottee by wayofallotment even though any
/allpayment(s)has/(have)beenreceivedbypetitioner.
ØDevelopers will continue to remain the owner of apartments including all
constructions till execution of sale deeds of such apartment, hence no
workforconstruction.
6.11 AssotechRealtyPvt.Ltd.Vs.StateOfUP[2007(7)STR129ALL.]
6.11.1 Factsofthecase
6.11.2 Ratioofthejudgement

ØThe petitioner not carrying out construction activity for and on behalf of
allottee as the right, title and the interest in construction remained with
the petitioner at all times till execution of sale deed of apartment as a
whole.
ØHence,itisnotliableforVAT.
ØIn K. Raheja’s case, the agreement provided that the developer will
construct for and on behalf of the person who agreed to purchase the flat.
Inthiscaseworkscontractwasmadetaxable.
K. Raheja’s case has been challenged in the case of Larsen and Toubro Ltd Vs.
State of Karnataka decided on 19 August 2008 (2008) 17 VST 460 SC wherein the
ratioofK.Rahejacasewasreferredtothelarger Benchforreconsideration.
ØWhere a builder purchases the land, develops it and sells fully constructed
flats / premises to buyer, it is sale of immovable property. Hence, VAT will
notbeapplicableonsaleofimmovableproperty.
ØBuilding, residential / commercial premises, if sold by receiving booking
amount and installments from buyer, that would not amount to agreement
for construction of property for buyers. It would be sale of immovable
property.VATwillnotbeapplicableinsuchacase.
ØIf the ratio of K. Raheja’s case is accepted, then there would be no
differencebetweenthe works contract and a contract for sale ofchattel as
achattel.
ØThe case of K. Raheja Development needs re-consideration. The matter is
referredtolargerbench.
The definition of ‘sale’ in the CST Act was amended in
2002 so as to include within its purview the concept of
deemed sales involved in the works contracts. Central
GovernmenthasauthoritytolevyCSTonsuchdeemedsale
6.12 Larsen And Toubro Ltd And ANR. Vs. State Of Karnataka [2008 (SC2)-GJX
2195-(SC)]
6.13 Inter-StateWorksContract

involvedintheworkscontractifsuchdeemedsaleisaninterstatesale.
Taxableeventinworkscontracts:
ØTaxable event in case of works contracts is deemed sale and such deemed
salesareconsideredtohavetakenplace,whenthegoodsareincorporated
intheworkscontract.
ØIn 2002, definition of Sale under CST Act was amended to include deemed
saleinWorkscontract.
ØThe Punjab and Haryana High Court in Thomson Press (I) Ltd vs. State of
Haryana(1996)100STC417(PandH)heldthatiftheinterstatemovementof
goodsarisesduetoapre–existingcontracttheninputsandgoodsinvolved
intheexecutionofworkscontractshallalsobedeemedtohavemovedand
theStateGovernmentcannotlevytaxondeemedsaleofsuchgoods.
ØTheHighCourtmadeitclearthatifapre-existingworkscontractoccasions
the movement of goods, then such goods shall be deemed to have been
incorporatedinsuchinterstateworkscontract. Insuchcase,notaxcanbe
leviedbytheStateGovernment.
In the States of Andhra Pradesh, Gujarat, Karnataka, Tamilnadu, West Bengal and
Delhi
6.14 SummaryOfVATProvisions
Sr.
No.
i Andhra
Pradesh
Compositio
n Rate @ 5
%
Only 75% of
Value of
contract
towards
Land will be
Total
Contract
Value
Less :
Standard
Deduction
@25%
Works Contract
Total
Contract
Value
Less :
Actual
Charges for
labor and
Services
State Definition of
Works Contract
‘Works Contract’
includes any
agreement for
carrying out for cash
or for deferred
payment or for any
other valuable
consideration, the
building
Option 1 Option 2 Option 3
Actual
Expense
Standard
Deduction
Composition

Sr.
No.
allowed as
deduction
and on
remaining
25% of
portion
Compositio
n rate is
chargeable
@ 5%.
ITC not
available
for labor
and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
Works Contract
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
Input tax
credit (ITC)
available
State Definition of
Works Contract
construction,
manufacture,
processing,
fabrication, erection,
installation, laying,
fitting out,
improvement,
modification, repair
or commissioning of
any movable or
immovable property
Actual
Expense
Standard
Deduction
Composition
ii Gujarat Compositio
n tax rate @
0.6% of
Total
Contract
Value
Provided all
purchases
are made
from local
registered
dealer.
Inter state
purchase is
not allowed.
ITC not
available
Total
Contract
Value
Less :
Standard
Deduction
@20%
for labor
and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
Total
Contract
Value
Less :
Actual
Charges for
labor and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
means a contract for
execution of works
and includes such
works contract as
the State
Government may, by
notification in the
Official Gazette,
specify;

Sr.
No.
iii Karnataka Compositio
n tax rate @
5% of Total
Contract
Value
ITC not
available
Total
Contract
Value
Less :
Standard
Deduction
@25%
for labor
and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
Works Contract
Total
Contract
Value
Less :
Actual
Charges for
labor and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
State Definition of
Works Contract
'Works Contract'
includes any
agreement for
carrying out for
cash, deferred
payment or other
valuable
consideration, the
building,
construction,
manufacture,
processing,
installation, fitting
out, improvement,
or commissioning of
any movable or
immovable property.
Actual
Expense
Standard
Deduction
Composition
iv Tamilnadu Compositio
n tax rate @
2% of Total
Contract
Value
ITC not
available
Total
Contract
Value
Less :
Standard
Deduction
@30%
for labor
and
Services
etc.
=
Taxable
Total
Contract
Value
Less :
Actual
Charges for
labor and
Services
etc.
=
Taxable
Material
Value
includes any
agreement for
carrying out for
cash, deferred
payment or other
valuable
consideration,
building
construction,
manufacture,
processing,

Sr.
No.
Material
Value
VAT = Rate
of Materials
ITC
available
Works Contract
VAT = Rate
of Materials
ITC
available
State Definition of
Works Contract
out, improvement,
or commissioning, of
any movable or
immovable property;
Actual
Expense
Standard
Deduction
Composition
v West
Bengal
Compositio
n tax rate @
2% of Total
Contract
Value
ITC not
available
Total
Contract
Value
Less :
Standard
Deduction
@ 25%
for labor
and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
Total
Contract
Value
Less :
Actual
Charges for
labor and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
ITC
available
means any
agreement for
carrying out for
cash, deferred
payment or other
valuable
consideration-
(a) the construction,
fitting out,
improvement or
repair of any
building, road,
bridge or other
immovable property,
vi Delhi Compositio
n tax rate @
2.5% of
Total
Contract
Value if
purchases
Total
Contract
Value
Less :
Standard
Deduction
Total
Contract
Value
Less :
Actual
Charges for
includes any
agreement for
carrying out for cash
or for deferred
payment or for
valuable

Sr.
No.
and sale
during the
period for
compositio
n is opted
within Delhi
only
3% of the
entire
turnover on
account of
works
contracts
executed in
Delhi if the
dealer is
engaged in
procuring
goods from
any place
outside
Delhi or in
supplying
goods to
any place
outside
Delhi.
ITC not
available
@ 25%
for labor
and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
Works Contract
labor and
Services
etc.
=
Taxable
Material
Value
VAT = Rate
of Materials
State Definition of
Works Contract
consideration, the
building
construction,
manufacture,
processing,
out, improvement,
repair or
commissioning of
any moveable or
immovable property
Actual
Expense
Standard
Deduction
Composition

7.1 Background
7.2 Adjudication
7.3 OtherRelatedAspects
Stamp Duty in India is governed by
the Indian Stamp Act, 1899. It applies
in case of transfer of property
whether moveable or immovable.
Through this chapter, we aim to
highlight certain pertinent aspects relating to Stamp Duty, its adjudication and
variousratesprevailingindifferentstatesofIndia.
ØLevy of stamp duty is dependent upon many variable factors like area of
the property, locality, circle rate, nature of interest, encumbrances, etc.
Therefore, it is advisable to get the stamp duty adjudicated by the
competentauthorityincaseofuncertaintyaboutthevaluation.
ØIf an instrument is not duly stamped, the stamp authorities may levy a
penalty, which is generally an ad valorem rate which varies from state to
state, and maximum penalty could range from twice the deficient stamp
duty to ten times the deficient stamp duty. Deliberate evasion of stamp
dutycouldalsoattractimprisonment.
ØStamp duty is a very important factor in structuring transactions. A
documentinadequatelystampedisnotadmissibleasevidence.
ØMany states provide for levying differential stamp duty. Stamp duty
implications must be examined when documents or their photocopies are
being moved from one state to another. Many states provide that the
shortfall in stamp duty must be paid within a specified period (most
commonly3months)ofthedocumentsbeingbroughtintothestate.
ØThe stamp laws of most states provide that when there are multiple
67|
CHAPTER 7: STAMP DUTY REGULATIONS

instruments for specified transactions, highest duty is to be paid on
principal instrument and nominal stamp duty is payable on the rest of the
documents.
ØWhen a single instrument relates to distinct matters, stamp laws require
that the instrument shall be chargeable with the aggregate amount of
duties with which the separate instruments, each comprising of one of
suchdistinctmatters,wouldbechargeable.
ØFinally, there may be situations where one stamps a document in
anticipation of execution but the deal falls through and the document is
not executed at all. If the stamp duty is high, then most states provide for
claimingarefundwithinaspecifictime.
ØStamp duty depends upon many factors. Below is an indicative chart of
approximateStampdutyincaseoftransferofimmovablepropertyinIndia:
68 |
State Rate
Andhra Pradesh 5%
Bihar 9%
Chhattisgarh 7.5%
Goa 7%
Gujarat 3.5% +Additional Duty 40% on Stamp Duty
Haryana 5%
Himachal Pradesh 8%
Jharkhand 6%
Kerala 8.5%
Madhya Pradesh 7.5%
Maharashtra 5%
Orissa 14.7%
Punjab 6%
Rajasthan 10%
Tamil Nadu 8%
Uttaranchal 4%
Uttar Pradesh 6%
West Bengal 7%

8.1 Background
8.2 ForeignDirectInvestmentInRealEstateSectorInIndia
The Government of India frames broad
guidelines on sector-specific FDI policy and
issues press notes from time to time. As per
the latest FDI policy, foreign direct investment
and investments by NRIs are allowed under
automatic route in almost all the sectors
except in certain sectors/activities such as
Trading in TDRs, real estate trading, etc., which are prohibited. Incidentally, the
foreign investment is allowed in construction-development projects subject to
fulfillmentofcertainspecifiedconditions.
TheForeignExchangeManagementAct,1999empowersRBItoframeregulationsin
respect of cross border investments, foreign exchange transactions and
transactionsbetweenresidentsandnon-residents.
Underthischapter,weaimtohighlightfewrelevantprovisionsthatgovernforeign
investmenttransactionsinrealestatesector.
8.2.1 FDI is prohibited in real estate business or construction of farm houses, or trading
in TDRs. However, the RBI has clarified in its Circular that ‘Real Estate Business’
does not include construction of housing/commercial premises, educational
institutions, recreational facilities, city and regional level infrastructure,
townships. Further, the FDI policy of Government of India permits 100% foreign
investment under automatic route in Construction Development activity i.e.
Townships,Housing,Built-upinfrastructureandconstructiondevelopmentproject
(which would include, but not be restricted to housing, commercial premises,
hotels, resorts, hospitals, educational institutions, recreational facilities, city and
regionallevelinfrastructure)subjecttocertainconditionsgivenbelow:
ØMinimumareatobedeveloped*undereachprojectwouldbeasunder:
69|
CHAPTER 8: FOREIGN INVESTMENT REGULATIONS

lIn case of development of serviced housing plots, a minimum land
areaof10hectares;
lIn case of construction-development projects, a minimum built-up
areaof50,000squaremeters;
lIn case of a combination project, any one of the above two
conditionswouldsuffice.
*Union Urban Development Ministry has suggested certain relaxations like
minimum land area proposed to be reduced to 2 hectares from 10 hectares,
minimum built-up area proposed to be reduced to 25,000 square meters from
50,000squaremeters.However,thesameisatthediscussionstageatpresentand
notfinalized.
ØMinimum capitalization of US$ 10million for WOS and US$ 5 million for
JV with Indian partners. The funds would have to be brought in within
6monthsofcommencementofbusinessoftheCompany.
ØOriginal investment cannot be repatriated before a period of 3 years from
completion of minimum capitalization. Original investment means the
entireamountbroughtinasFDI.Thelock-inperiodof3yearswillbeapplied
fromthedateofreceiptofeachinstallment/trancheofFDIorfromthedate
of completion of minimum capitalization, whichever is later. However, the
investor may be permitted to exit earlier with prior approval of the
GovernmentthroughFIPB.
ØAt least 50% of each such project must be developed within a period of
5 years from the date of obtaining all statutory clearances. The
investor/investee company would not be permitted to sell undeveloped
plots. For the purpose of these guidelines, ‘Undeveloped Plots’ will mean
where roads, water supply, street lighting, drainage, sewerage, and other
conveniences, as applicable under prescribed regulations, have not been
made available. It will be necessary that the investor provides this
infrastructure and obtains the completion certificate from the concerned
local body/service agency before he would be allowed to dispose of
servicedhousingplots.

ØThe project shall conform to the norms and standards, including land use
requirements and provision of community amenities and common
facilities, as laid down in the applicable building control regulations, bye
laws, rulesand other regulations ofthe State Government/Municipal/Local
Bodyconcerned.
ØThe investor/investee company shall be responsible for obtaining all
necessary approvals, including those of the building/layout plans,
developing internal and peripheral areas and other infrastructure
facilities, payment of development, external development and other
charges and complying with all other requirements as prescribed under
applicable rules/bye-laws/regulations of the State Government/Municipal/
LocalBodyconcerned.
ØThe State Government / Municipal / Local Body concerned, which approves
the building / development plans, would monitor compliance of the above
conditionsbythedeveloper.
Notes:
lThe first four conditions given above would not apply to Hotels and
Tourism, Hospitals, SEZs, Education Sector, Old age Homes and
investmentbyNRIs.
lFDI is not allowed in real estate business (already discussed in para
8.2.1).
8.2.2 Investment by NRIs are allowed in partnership firms or proprietary concerns on
non-repatriation basis provided that such firms or concerns are not engaged in
real estate business (i.e. dealing in land and immovable property with a view to
earningprofitorearningincometherefrom).

72 |
*Real Estate Business means dealing in land and immovable property with a view toearning profit or earning income therefrom
and does not include development of townships, construction of residential / commercial premises, roads or bridges,
educationalinstitutions,recreationalfacilities,cityandregionallevelinfrastructure,townships.
8.2.3 Flow-chartforforeigninvestmentregulationsinrealestatesector:
FDI in Real Estate Sector
Yes
FDI prohibited
Yes
No
Other conditions prevail and need to be complied
Activity
No
Real Estate Business* /
Trading in TDRs
Townships, housing, built-up
infrastructure and
construction-development
projects
FDI in Hotels and Tourism, Hospitals, SEZs,
Education Sector, Old age Homes
and investment by NRIs
Condition w.r.t. area, capitalization,
lock-in-period for repatriation, term of
development need not be fulfilled
Conditions w.r.t. area, capitalization,
lock-in-period for repatriation, term of
development need to be fulfilled
Yes

73|
8.2.4 Certain ongoing issues in relation to Foreign Investment Regulations in real
estate sector,interalia,includethefollowings:
8.3 Liberalized Foreign Investment Policy For Retail Trading Sector - Impact On
RealEstateSector
lOnce the project is completed,
whether funds can be redeployed in
another project without any
restrictionasmentionedabove?
lFrom which date, the lock-in period
of 3 years commence when amount
is received in tranches/installment
i.e. whether from the date of each
installmentorfromthedateofminimumcapitalization?
lWhether foreign investor can acquire the property for the purpose of
leasing?
lWhetherthepropertyconstructedasperFDIguidelinescanbeleasedout?
lWhether FII can subscribe to initial public offer of a company engaged in
realestatebusinesswithoutFDIcompliantproject?
In the year 2006, FDI up to 51% under
Government approval route was allowed
in retail segment under SBRT. This limit
has been raised to 100% in the year 2012. The
Government, vide Press note no.6 dated 22
August 2013, has allowed FDI up to 49%, in
SBRTundertheautomaticroute.
InSeptember2012,theGovernmentofIndiafurther liberalizedFDIpolicyforMBRT,
by allowing 51% under Government approval route with certain terms and
conditions. One of the conditions of such FDI in MRBT is that at least 50% of total
FDI should be invested in ‘backend infrastructure’ within 3 years of the first
tranche of FDI. This could enable significant growth in the Real Estate Sector in
India.

8.4 AcquisitionsAndTransfersOfImmovablePropertyInIndia
8.5 ExternalCommercialBorrowings
Foreign Exchange Management (Acquisition and Transfer of Immovable Property
in India) Regulations, 2000 regulate the transactions in immovable property by
non-residents.Thesamearebrieflydiscussedasunder:
ØA person resident outside India who has established in India, a branch,
office or other place of business for carrying on in India any activity,
excluding a liaison office, in accordance with the Foreign Exchange
Management (Establishment in India of Branch or Office or Other Place of
Business) Regulations, 2000,may acquire any immovable property in India,
which is necessary for or incidental to carrying on such activity subject to
complying with reporting requirements. Liaison office cannot acquire
immovablepropertyexceptbywayofleasenotexceeding5years.
ØIn addition to FDI permitted in real estate as discussed above, NRIs or PIO
are permitted to acquire or transfer immovable property in India i.e.
residential or commercial property. However, purchase of agricultural
property,plantationorfarmhouseisnotpermitted.
ØNRIs/PIOs can also avail loan from an authorized dealer, a Housing
FinancialInstitutionoranEmployersubjecttocertainconditions.
ØForeign nationals of non-Indian origin, resident outside India are not
permittedtoacquireanyimmovablepropertyinIndiaunlesssuchproperty
is acquired by way of inheritance from a person who was resident in
India. However, they can acquire or transfer immovable property in India,
onlease,foraperiodnotexceeding5yearswithoutpriorpermissionofRBI.
ØA person resident in India who is a citizen of Pakistan or Bangladesh or Sri
Lanka or Afghanistan or China or Iran or Nepal or Bhutanwouldrequire RBI
permission for acquisition or transfer of immovable property in India,
otherthanlease,notexceeding5years.
ECBsrefer to commercial loans in the form ofbank loans, buyers’ credit,suppliers’
credit, securitized instruments availed from eligible non-resident lenders with a
minimumaveragematurityof3years.

The Indian Company or any other eligible entity as specified by RBI is allowed to
raise ECBs from eligible lenders subject to specified conditions and end-use
restrictions. The ECBs can be utilized for specified purposes only and shall not be
utilized for any investment in real estate sector. In November 2012, RBI has
permitted ECBs for low-cost affordable housing project (‘Project’) under the
approval route for certain eligible borrowers, subject to certain conditions which
includethefollowings:
lAprojectinwhichatleast60%ofthepermissibleFSIwouldbefortheunits
havingmaximumcarpetareaupto60squaremeters,
lECBproceedsshouldnotbeutilizedforthepurposeofacquiringland,
lThemaximumfundthatcanbeavailedthroughECBisUS$1 billion,
lDevelopers / builders should have minimum 3 years’ experience in
undertaking residential projects and should have good track record in
termsofqualityanddelivery,
lDevelopers / builders should not have defaulted in any of their financial
commitments to banks / financial institutions or any other agencies.
Further,theprojectshouldnotbeamatteroflitigation,
lThe minimum NOF for the past 3 financial years should not be less than
Rs.300crores,
lBorrowingthrough ECB should be within overall borrowinglimit of16 times
oftheirNOFandtheNNPAshallnotexceed2.5%ofthenetadvances,
lThemaximumloanamountsanctionedtoindividualbuyerwillbecappedat
Rs. 25,00,000 subject to the condition that the cost of the individual
housingunitshallnotexceedRs.30,00,000.
Under Foreign Exchange Management (Transfer
or Issue of any Foreign Security) Regulations,
2004,anIndianpartycanmakeinvestmentinJV/
WOS outside India subject to complying with
certainconditionsandproceduralrequirements.
8.6 OutboundInvestments

However, Indian party is not allowed to make any investment in a foreign entity
engaged in real estate business. ‘Real Estate Business’ means ‘buying and selling
of real estate or trading in TDRs but does not include development of townships,
constructions of residential / commercial premises, roads or bridges’. As such, an
Indian partycan investoutside India in real estate businessother than buying and
selling ofreal estate or TDRs, subject to complyingwith net-worth criteria, certain
conditionsandproceduralrequirements.
Under LRS scheme of RBI, the authorized dealers may freely allow remittances by
resident individuals up to specified limits per financial year for any permitted
current or capital account transactions or a combination of both. Till now, the
resident individuals were permitted to acquire and hold immovable property
outside India under LRS. However, recently, RBI has amended/clarified that LRS
should no longer be used for acquisition of immovable property, directly or
indirectly, outside India. Therefore, AD banks may henceforth not allow any
remittances under the LRS scheme for acquisition of immovable property outside
India.
8.7 AcquisitionOfImmovablePropertyOutsideIndiaUnderLRSOfRBI

9.1 Background
9.2 AccountingUnderIndianGAAP
Accounting Standards (AS) are rules
regarding recognition, measurement and
disclosure aspects in financial statements
and relate to the codification of generally
acceptedaccountingprinciples.
These are norms of accounting policies and
practices, which direct how the items which
make up the financial statements, should be dealt with in accounts and presented
in the financial statements. There are various Accounting Standards followed
worldwide(e.g.USGAAP,IFRS,IndianGAAP,etc.)
Inexerciseofthepowersconferredbyclause(a)ofsub-section(1)ofsection642of
the Companies Act, 1956, read with section 211(3C) and section 210A(1) of the
Companies Act, 1956, the Central Government, in consultation with National
Advisory Committee on Accounting Standards, had made the Companies
(AccountingStandards)Rules,2006.
Accounting Standards as specified under the Companies (Accounting Standards)
Rules, 2006 are to be applied by the companies in the preparation of General
Purpose Financial Statements for the accounting periods commencing on or after
7December2006.
ØThe accounting standards that deal with the accounting treatment of
revenue are (AS)-7 Construction Contracts and (AS)-9 Revenue
Recognition. (AS)-7 is to be applied for accounting for construction
contractsinthefinancialstatementsofcontractor.
ØAs per (AS)-7, when the outcome of a construction contract can be
estimated reliably, contract revenue and contract costs associated with
the construction contract should be recognized as revenue and expenses
77|
CHAPTER 9: FINANCIAL REPORTING STANDARDS

respectively by reference to the stage of completion of the contract
activity at the reporting date. An expected loss on the construction
contract should be recognized as an expense immediately in accordance
with the standard. The recognition of revenue and expenses by reference
to the stage of completion of a contract is often referred to as the
percentageofcompletionmethod.
Ø(AS)-9 Revenue Recognition deals with the recognition of revenue arising
inthecourseoftheordinaryactivitiesoftheenterprisefrom:
lthesaleofgoods,
ltherenderingofservices,and
lthe use by others of enterprise resources yielding interest,
royaltiesanddividends.
ØAs per (AS)-9, revenue should be accounted when significant risk and
rewards of ownership are transferred to the buyer and it is not
unreasonabletoexpectultimatecollection.
ØIn 2006, the ICAI had also issued a Guidance Note on Recognition of
Revenue by Real Estate Developers. As per the said guidancenote, revenue
would be recognized by applying the principles of percentage completion
method as per principles provided in (AS)-7 if there is transfer of risk and
rewards of ownership and no uncertainty exists as regard to collection of
theamount.
ØIn mostcases, Real Estate Developers wouldnot fall under the definition of
contractor. In such a situation, (AS)-7 cannot be applied to transactions
enteredbytherealestatedevelopersandprincipleslaiddownunder(AS)-9
RevenueRecognitionneedstobeapplied.
ØHowever, due to the distinguished revenue model of this sector, it was
observed that different practices were followed by the various real estate
developers in recognising their revenue till recent past. To harmonize the
diverse practices followed by different players in this sector into a single
uniform practice, particularly, in the application ofPercentage Completion

Method of recognition of revenue, in 2012, the ICAI issued a Guidance Note
onAccountingforRealEstateTransactions(Revised2012).
ØDefinitions
lA construction contract is a contract specifically negotiated for
construction ofan asset or a combinationofassets that are closely
interrelated or interdependent in terms of their design, technology
andfunctionortheirultimatepurposeoruse.
lA fixed price contract is a construction contract in which the
contractoragreestoafixedcontractprice,orafixedrateperunitof
output,whichinsomecasesissubjecttocostescalationclauses.
lA cost plus contract is a construction contract in which the
contractor is reimbursed for allowable or otherwise defined costs,
pluspercentageofthesecostsorafixedfee.
ØContractrevenueincludes:
ltheinitialamountofrevenueagreedinthecontract;and
lvariationsincontractwork,claimsandincentivepayments:
}to the extent that it is probable that they will result in
revenue;and
}theyarecapableofbeingreliablymeasured.
Contract revenue is measured at the consideration received or receivable.
The measurement of contract revenue is affected by a variety of
uncertaintiesthatdependontheoutcomeoffutureevents.
ØContractcostscompriseof:
lcoststhatrelatedirectlytothespecificcontract;
lcoststhatareattributabletocontractactivityingeneralandcanbe
allocatedtothecontract;and
9.2.1 (AS)-7constructioncontracts

80 |
lsuch other costs as are specifically chargeable to the customer
underthetermsofthecontract.
ØCoststhatrelatedirectlytoaspecificcontractinclude:
lsitelabourcosts,includingsitesupervision;
lcostsofmaterialsusedinconstruction;
ldepreciationofplantandequipmentusedonthecontract;
lcosts of moving plant, equipment and materials to and from the
contractsite;
lcostsofhiringplantandequipment;
lcosts of design and technical assistance that is directly related to
thecontract;
lthe estimated costs of rectification and guarantee work, including
expectedwarrantycosts;and
lclaimsfromthirdparties.
ØThese costs may be reduced by any incidental income that is not included
in contract revenue, for example incomefrom the sale ofsurplus materials
andthedisposalofplantandequipmentattheendofthecontract.
ØCosts that may be attributable to contract activity in general and can
beallocatedtospecificcontractsinclude:
linsurance;
lcosts of design and technical assistance that is not directly related
toaspecificcontract;and
lconstructionoverheads.
ØRecognitionofcontractrevenueandexpenses
lWhen the outcome of a construction contract can be estimated

81|
reliably, contract revenue and contract costs associated with the
construction contract should be recognized as revenue and
expenses respectively by reference to the stage of completion of
the contract activity at the reporting date. An expected loss on
the construction contract should be recognized as an expense
immediately.
ØIn the case of a fixed price contract, the outcome of a construction
contract can be estimated reliably when all the following conditions are
satisfied:
ltotalcontractrevenuecanbemeasuredreliably;
lit is probable that the economic benefits associated with the
contractwillflowtotheenterprise;
lboth the contract costs to complete the contract and the stage of
contract completion at the reporting date can be measured
reliably;and
lthe contract costs attributable to the contract can be clearly
identified and measured reliably so that actual contract costs
incurredcanbecomparedwithpriorestimates.
ØIn the case of a cost plus contract, the outcome of a construction
contract can be estimated reliably when all the following conditions are
satisfied:
lit is probable that the economic benefits associated with the
contractwillflowtotheenterprise;and
lthe contract costs attributable to the contract, whether or not
specifically reimbursable, can be clearly identified and measured
reliably.
ØPercentagecompletionmethod:
lUnder this method, contract revenue is
matched with the contract costs

incurred in reaching the stage of completion, resulting in the
reporting of revenue, expenses and profit which can be attributed
totheproportionofworkcompleted.
lUnder the percentage of completion method, contract revenue is
recognized as revenue in the statement of profit and loss in the
accounting periods in which the work is performed. Contract costs
are usually recognized as an expense in the statement ofprofit and
loss in the accounting periods in which the work to which they
relate is performed. However, any expected excessoftotalcontract
costs over total contract revenue for the contract is recognized as
anexpenseimmediately.
lA contractor may have incurred contract costs that relate to future
activity on the contract. Such contract costs are recognized as an
assetprovideditisprobablethattheywillberecovered.
lWhen an uncertainty arises about the collectability of an amount
alreadyincludedincontractrevenue,andalreadyrecognizedinthe
statement of profit and loss, the uncollectable amount or the
amount in respect of which recovery has ceased to be probable, is
recognized as an expense rather than as an adjustment of the
amountofcontractrevenue.
lThe stage of completion of a contract may be determined in a
variety of ways. The enterprise uses the method that measures
reliably the work performed. Depending on the nature of the
contract,themethodsmayinclude:
}the proportion that contract costs incurred for work
performed up to the reporting date bear to the estimated
totalcontractcosts;or
}surveysofworkperformed;or
}completionofaphysicalproportionofthecontractwork.
lProgresspaymentsandadvancesreceivedfromcustomersmaynot
necessarilyreflecttheworkperformed.

ØContractcostswhichareexcludedare:
lcontract coststhat relate to future activity on the contract,such as
costs of materials that have been delivered to a contract site or set
aside for use in a contract but not yet installed, used or applied
duringcontractperformance,unlessthematerialshavebeenmade
especiallyforthecontract;and
lpayments made to subcontractors in advance of work performed
underthesubcontract.
ØWhen the outcome of a construction contract cannot be estimated
reliably:
lrevenue should be recognized only to the extent of contract costs
incurredofwhichrecoveryisprobable;and
lcontract costs should be recognized as an expense in the period in
whichtheyareincurred.
lanexpectedlossontheconstructioncontractshouldberecognized
asanexpenseimmediately.
lcontractcosts,recovery ofwhichisnotprobable,arerecognizedas
anexpenseimmediately.
ØRecognitionofexpectedlosses
lWhen it is probable that total contract costs will exceed total
contract revenue, the expected loss should be recognized as an
expenseimmediately.
ØChangeinestimates
lThe effect of a change in the estimate of contract revenue or
contract costs, or the effect of a change in the estimate of the
outcome of a contract, is accounted for as a change in accounting
estimate.
lThe changed estimates are used in determination of the amount of

revenue and expenses recognized in the statement of profit and
loss in the period in which the change is made and in subsequent
periods.
ØThisguidancenoteisapplicabletoallprojectswhicharecommencedonor
after 1 April 2012. However, this guidance note does not apply to real estate
transactionsofthenaturecoveredbyAS-10,AS-12,AS-19andAS-26.
ØIllustrativelistoftransactionscoveredisasunder:
lSale of plots of land (including long-term sale type leases) without
anydevelopment.
lSale of plots of land (including long-term sale type leases) with
development in the form of common facilities like laying of roads,
drainage lines and water pipelines, electrical lines, sewage tanks,
water storage tanks, sports facilities, gymnasium, club house,
landscapingetc.
lDevelopment and sale of residential and commercial units, row
houses, independent houses, with or without an undivided share in
land.
lAcquisition,utilisationandtransferofdevelopmentrights.
lRedevelopmentofexistingbuildingsandstructures.
lJointdevelopmentagreementsforanyoftheaboveactivities.
ØProject – Project is the smallest
group of units/plots/saleable spaces,
which are linked with a commonsetof
amenities in such a manner that
unless the common amenities are
9.3 GuidanceNoteOnAccountingForRealEstateTransaction(Revised2012)
9.3.1 Applicability
9.3.2 Definitions

85|
made available and functional, these units/plots/saleable spaces cannot
beputtotheirintendedeffectiveuse.
ØProjectCosts–Projectcostsinrelationtoaprojectordinarilycomprise:
lCostoflandandcostofdevelopmentrights-Allcostsrelatedtothe
acquisition of land, development rights in the land or property
including cost of land, cost of development rights, rehabilitation
costs, registration charges, stamp duty, brokerage costs and
incidentalexpenses.
lBorrowing Costs – In accordance with (AS)-16, borrowing costs
which are incurred directly in relation to a project or which are
apportionedtoaproject.
lConstruction and development costs – These would include costs
that relate directly to the specific project and costs that may be
attributable to project activity in general and can be allocated to
theproject.
ØProject revenues – Project revenues include revenue on sale of plots,
undivided share in land, sale of finished and semi-finished structures,
consideration for construction, consideration for amenities and interiors,
considerationforparkingspacesandsaleofdevelopmentrights.
ØReal estate activities and transactions take diverse forms. While some are
for sale of land (developed or undeveloped), others are for construction,
development or sale of units that are not complete at the time of entering
intoagreementsforconstruction,developmentorsale.
ØThetypical features ofmostconstruction/development ofcommercial and
residential units have all features of a construction contract – land
development, structural engineering, architectural design and
construction are all present. The natures of these activities are such that
often the date when the activity is commenced and the date when the
activity is completed usually fall into different accounting periods. It is not
unusualforsuchactivitiestospreadovertwoormoreaccountingperiods.
9.3.3 Accountingforrealestatetransactions

ØReal estate sales take place in a variety of ways and may be subject to
different terms and conditions as specified in the agreement for sale.
Accordingly, the point of time at which all significant risks and rewards of
ownership can be considered as transferred, is required to be determined
onthebasisofthetermsandconditionsoftheagreementforsale.
ØOnce the seller has transferred all the significant risks and rewards to the
buyer,anyactsontherealestateperformedbythesellerare,insubstance,
performed on behalf of the buyer in the manner similar to a contractor.
Accordingly, revenue in such cases is recognized by applying the
percentage of completion method on the basis of the methodology
explainedin(AS)-7ConstructionContracts.
ØWhere individual contracts are part of a single project, although risks and
rewards may have been transferred on signing of a legally enforceable
individual contract but significant performance in respect of remaining
components of the project is pending, revenue in respect of such an
individual contract should not be recognized until the performance on the
remaining components is considered to be completed on the basis of the
aforesaidprinciples.
9.3.4 Summary of principles to be followed for accounting of various types of real
estatetransactions
86 |
NatureofTransaction Key Principles / Conditions
ØPrinciples of (AS)-9 for recognizing revenue,
costs and profits from the transactions need to
beapplied,provided:
lThe seller has transferred to the buyer all
significant risks and rewards of ownership
andthesellerretainsnoeffectivecontrolof
the real estate to a degree usually
associatedwithownership;
lThe seller has effectively handed over
possessionoftherealestateunittothe
Sale of plots of land without
anydevelopment.
Transactions of real estate
which are in substance similar
todeliveryofgoods

87|
Nature of Transaction Key Principles / Conditions
buyerformingpartofthetransaction;
lNosignificantuncertaintyexists regarding
the amount of consideration that will be
derivedfromtherealestatesales;and
lIt is not unreasonable to expect ultimate
collectionofrevenuefrombuyers.
ØWhere the development activity is significant,
‘Percentage Completion Method’ to be applied,
providedtheoutcomeofarealestateprojectcan
be estimated reliably and when all the following
conditionsaresatisfied:
ltotal project revenues can be estimated
reliably;
lit is probable that the economic benefits
associated with the project will flow to the
enterprise;
lthe project costs to complete the project
and the stage of project completion at the
reporting date can be measured reliably;
and
ltheprojectcostsattributabletotheproject
can be clearly identified and measured
reliably so that actual project costs
incurred can be compared with prior
estimates.
ØRevenue should be recognized under the
percentage completion method only when the
eventsinbelowcasesarecompleted:
Saleofdevelopedplots.
Transactions and activities of
real estate which have the
same economic substance like
aconstructioncontract

88 |
Nature of Transaction Key Principles / Conditions
lAll critical approvals necessary for
commencement of the project have been
obtained. These include, wherever
applicable:
}Environmentalandotherclearances.
}Approvalofplans,designs,etc.
}Title to land or other rights to
development/construction.
}Changeinlanduse.
lWhenthestageofcompletionoftheproject
reachesa reasonablelevel ofdevelopment.
A reasonable level of development is not
achieved if the expenditure incurred on
construction and development costs is less
than 25 % of the construction and
development.
lAt least 25% of the saleable project area is
secured by contracts or agreements with
buyers.
lAt least 10% of the total revenue as per the
agreements of sale or any other legally
enforceable documents are realised at the
reporting date in respect of each of the
contracts and it is reasonable to expect
that the parties to such contracts will
comply with the payment terms as defined
inthecontracts.

89|
ØThus the application of the methods described above requires a careful
analysisoftheelementsofthetransaction,agreement,understandingand
conduct of the parties to the transaction to determine the economic
substanceofthetransaction.Theeconomicsubstanceofthetransactionis
not influenced or affected by the structure and/or legal form of the
transactionoragreement.
ØFor computation of revenue, the stage of completion is arrived at with
reference to the entire project costs incurred including land costs,
borrowingcostsandconstructionanddevelopmentcosts.
ØThe method of determination of stage of completion with reference to
projectcostsincurredisthepreferredmethod.
ØOthermethodsfordeterminationofstageofcompletionincludesurveysof
work done, technical estimation, etc. However, computation of revenue
with reference to other methods of determination of stage of completion
shouldnot,inanycase,exceedtherevenuecomputedwithreferencetothe
'projectcostsincurred'method.
ØThe project costs which are recognized in the statement of profit and loss
by referenceto the stage ofcompletion ofthe project activity are matched
with the revenues recognized resulting in the reporting of revenue,
expenses and profit, which can be attributed to the proportion of work
completed.
ØCosts incurred that relate to future activity on the project and payments
made to sub-contractors in advance of work performed under the sub-
contract are excluded and matched with revenues when the activity or
workisperformed.
ØTherecognitionofproject revenue by referenceto the stage ofcompletion
of the project activity should not at any point exceed the estimated total
revenues from 'eligible contracts’/other legally enforceable agreements
forsale.
9.3.5 Additionalconsiderationinapplicationofpercentagecompletionmethod

ØWhenit is probable that total project costswill exceedtotal eligible project
revenues, the expected loss should be recognized as an expense
immediately.Theamountofsuchalossisdeterminedirrespectiveof:
lcommencementofprojectwork;or
lthestageofcompletionofprojectactivity.
ØThe percentage of completion method is applied on a cumulative basis in
each reporting period to the current estimates of project revenues and
project costs. Therefore, the effect of a change in the estimate of project
costs, or the effect of a change in the estimate of the outcome of a project,
isaccountedforasachangeinaccountingestimate.
ØRevenues attributable to cancelled contracts and cases where the
property or part thereof is subsequently earmarked for own use or for
rental purposes, previously recognized revenue on such contracts should
be reversed and the costs in relation to property earmarked for own use
shall be carried forward and accounted in accordance with AS 10,
AccountingforFixedAssets.
ØIllustrationonapplicationofpercentagecompletionmethod
90 |
Total saleable area 20,000 Sq. ft.
Estimated project costs Rs. 600 lakhs
(This comprises land cost of Rs. 300 lakhs and
construction costs of Rs. 300 lakhs)
Cost incurred till end of reporting period Rs. 360 lakhs
(This includes land cost of Rs 300 lakhs and
construction cost of Rs 60 lakhs)
Total area sold till the date of reporting period 5,000 Sq. ft.
Total sale consideration as per agreements of Rs. 200 lakhs
sale executed
Amount realised till the end of the reporting Rs.50 lakhs
period
Percentage of completion of work 60% of total project
cost including land
cost or 20% of total
construction cost

91|
ØAt the end of the reporting period, the enterprise will not be able to
recognizeanyrevenueasreasonablelevelofconstruction,whichis25%of
the total construction cost, has not been achieved, though 10% of the
agreementamounthasbeenrealized.
Continuing the illustration
If the work completed till end of reporting Rs. 390 lakhs
period is (This includes land cost of
Rs 300 lakhs and construction cost of
Rs 90 lakhs)
Percentage of completion of work would be 65% of total project
cost including land
cost or 30% of
construction cost
The enterprise would be able to recognize revenues at the end of the
accountingperiod.Therevenuerecognitionandprofitswouldbeasunder:
Revenue recognized Rs. 130 lakhs
(65% of Rs 200 lakhs as per agreement of sale)
Proportionate cost Rs. 97.50 lakhs
(5000 square feet / 20,000 square feet) x 390
Income from the project Rs. 32.50 lakhs
Work in progress to be carried forward Rs. 292.50 lakhs
9.3.6 Transferabledevelopmentrights
ØTransferable Development Rights (TDRs)
are generally acquired in different ways
asmentionedhereunder:
lDirect purchase - cost of
acquisition would be the amount
spentonforbuyingthesaidcertificate.
lDevelopment and construction of built-up area - cost of
acquisition would be the cost of purchases or amount spent on
developmentorconstructionofbuilt-uparea,respectively.

lGiving up of rights over existing structures or open land - the
development rights should be recorded either at fair market value
or at the net book value of the portion of the asset given up
whicheverisless.
ØFor this purpose, fair market value may be determined by reference either
to the asset or portion thereof given up or to the fair market value of the
rightsacquired,whicheverismoreclearlyevident.
ØWhen development rights are utilized in a real estate project by an
enterprise,thecostofacquisitionshouldbeaddedtotheprojectcosts.
ØWhen development rights are sold or transferred, revenue should be
recognizedwhenboththefollowingconditionsarefulfilled:
ltitletothedevelopmentrightsistransferredtothebuyer;and
litisnotunreasonabletoexpectultimaterealizationofrevenue.
ØAn enterprise may contract with a buyer to deliver goods or services in
addition to the construction/development of real estate [e.g. property
management services, sale of decorative fittings (excluding fittings which
are an integral part ofthe unit to be delivered), rentalin lieu ofunoccupied
premises, etc.] In such cases, the contract consideration should be split
intoseparatelyidentifiablecomponentsincludingonefortheconstruction
anddeliveryofrealestateunits.
ØThe consideration received or receivable for the contract should be
allocated to each component on the basis of the fair market value of each
component.
ØIndiaiscommittedtoimplementIFRS.TheICAIand
the MCA have expressed their view that India
would converge to IFRS in a phased manned
starting 1 April 2011. In February 2011, MCA has also
9.3.7 Transactionswithmultipleelements
9.4 IndianAccountingStandard(IndAS)

93|
notified 35 Indian Accounting Standards converged with IFRS (Ind AS,) but
due to certain tax related issues, which needed to be resolved with the
concerned department, the date of implementation is still not notified.
9.4.1 Keydifferencesbetween(AS)-7andIndAS-11
(AS)-7 Ind AS-11
Applied in accounting for construction
contracts in the financial statements of
contractors.
Applied in accounting for construc-
tion contracts in the financial
statements of contractors including
the financial statements of real
estatedevelopers.
Is applicable to contracts specifically
negotiated for the construction of an
asset or a combination of assets that are
closely interrelated or interdependent in
terms of their design, technology and
functionortheirultimatepurposeoruse.
It also includes agreements of real
estate development to provide
services together with construction
material in order to perform
contractual obligation to deliver the
realestatetothebuyer.
(AS)-7 does not deal with accounting for
Service Concession Arrangements, i.e.,
the arrangement where private sector
entity (an operator) constructs or
upgrades the infrastructure to be used to
provide the public service and operates
and maintains that infrastructure for a
specifiedperiodoftime.
Appendix A of Ind AS 11 deals with
accounting aspects involved in such
arrangements.
Includes borrowing costs as per AS 16 -
Borrowing Costs, in the costs that may be
attributable to contract activity in
general and can be allocated to specific
contracts.
Doesnotspecificallymakereference
toIndAS23.
Contract revenue is measured at the
considerationreceivedorreceivable.
Contract revenue is measured at the
fair value of the consideration
receivedorreceivable.

10.1 Restriction On Transfer Of Land
Holding
10.1.1 MaharashtraLandRevenueCode,1966
10.1.2 BombayTenancyandAgriculturalLandsAct,1948
10.1.3 The Bombay Prevention of Fragmentation and Consolidation of Holdings Act,
1947
Right to property is a Constitutional
right. This is a transferable right.
However, the Government for various
social, political and economic reasons
restricts the transferability of land.
There are many laws which impose restriction on transfer of immovable property.
Theselawsaremeanttoprotecttheinterestofspecificclassofpeople.EveryState
has separate laws which protect its residents in one way or other. Before entering
intoanytransactionregardingimmovableproperty,onemustbesurethatnosuch
law is attracted to that particular transaction. The laws which restrict a person’s
rightsoftransferofthelandintheStateofMaharashtraareasfollows:
As per the Maharashtra Land Revenue Code, no land used for agriculture shall be
used for any non-agricultural purpose, and no land assessed for one non-
agricultural purpose shall be used for any other non-agricultural purpose or for
the same non-agricultural purpose but in relaxation of any of the conditions
imposed at the time of the grant or permission for non-agricultural purpose,
exceptwiththepermissionoftheCollector.
As per section 43 of this Act, no land purchased by a tenant under sections 32, 32F,
32I, 32O, 33C and 43ID or sold to any person under section 32P or 64 shall be
transferred by sale, gift, exchange, mortgage, lease or assignment without the
previous sanction of the Collector. Any transfer of land in contravention of
aforesaidprovisionshallbeinvalid.
This Act prohibits transfer of any fragment in respect of which a notice has been
givenundertheAct,excepttotheownerofacontiguoussurveynumber
CHAPTER 10: CERTAIN PROPERTY RELATED LAWS

(contiguous holder) or recognized sub-division of a survey number. Further, this
Act also prohibits subdivision of the land. Section 8 of the Act provides that no
landinanylocalareashallbetransferredorpartitionedsoastocreateafragment.
ThisActrestrictsthesizeofholdingswhichapersonorfamilycanown.Acquisition
oflandinexcessoftheceilingisprohibited.Landrenderedsurplustotheceilingis
takenoverbythestateanddistributedamongtheweakersectionsofthesociety.
Any person or family cannot hold land in excess of ceiling area fixed on 26
September 1961. A person or family cannot transfer surplus land until the land in
excess of the ceiling area is determined under the act (Section 8). A person
possessing land in excess of ceiling area cannot acquire land by transfer (Section
9). Theland held by individual or the family ofthe Maharashtra State or the part of
Indiaistobetakenintoconsiderationwhilecalculatingtheceilingarea.
Wakf is a permanent dedication of movable or immovable properties for religious,
pious or charitable purposes as recognized by Muslim Law. Board constituted
under the Act has the power to sanction any transfer of immovable property of a
wakf by way of sale, gift, mortgage, exchange or lease, in accordance with the
provisionsofAct,provided that no such sanctionshall be given unlessat leasttwo
thirdsofthemembersoftheBoardvoteinfavourofsuchtransaction.
Section 36 of this Act provides that notwithstanding anything contained in the
instrumentoftrust
lnosale,exchangeorgiftofanyimmovableproperty,and
lno lease for a period exceeding 10 years in the case of agricultural land or
for a period exceeding 3 years in the case of non-agricultural land or a
building belonging to a public trust, shall be valid without the previous
sanctionoftheCharityCommissioner.
If the Charity Commissioner is satisfied that in the interest of any public trust any
immovable property thereof should be disposed of, he may, on application,
authoriseany trustee to disposeofsuch propertysubject to such conditionsas he
10.1.4 TheMaharashtraAgriculturalLands(CeilingonHoldings)Act,1961
10.1.5 WakfAct,1995
10.1.6 BombayPublicTrustAct,1950

maythinkfittoimpose,regardbeinghadtotheinterestorbenefitorprotectionof
thetrust.
Section 3 and 4 of this Act provide for restoration of land held by non-tribal
transferee to tribal transferor by the collector either suo motto at any time or on
applicationoftribaltransferormadewithin30yearsfrom6July2004.
No company for which any land is acquired under
part 7, which deals with Acquisition of Land for
Companies, shall be entitled to transfer the said
land or any part thereof by sale, mortgage, gift,
and lease or otherwise except with the previous
sanctionoftheappropriateGovernment.
ØDefinitions
• Contractforsale
A contract for the sale of immovable property is a contract that a
sale of such property shall take place on terms settled between the
parties.Itdoesnot,ofitself,createanyinterestinorchargeonsuch
property.
• Sale
‘Sale’ is a transfer of ownership in exchange for a price paid or
promisedorpart-paidandpart-promised.
• Transferofproperty
TransferofpropertyhasbeendefinedinSection5oftheTransferof
Property Act meaning 'an act by which a living person conveys
property,inpresentorinfuturetooneormoreotherlivingpersons
and‘totransferproperty’istoperformsuchact'.'Livingperson'has
been defined to include a company or association or body of
individualswhetherincorporatedornot.
10.1.7 TheMaharashtraRestorationofLandstoScheduleTribesAct,1974
10.1.8 LandAcquisitionAct,1894
10.2 TransferOfPropertyAct,1882

• Immovableproperty
Thedefinitionof‘ImmovableProperty’giveninTransferofProperty
Act, 1882 is not exhaustive. It simply says: 'Immovable Property'
does not include standing timber, growing crops or grass. The
definitionof'ImmovableProperty'intheGeneralClausesActisalso
not exhaustive. Some of the things such as piece of land or
superstructure constructed thereon in all circumstances are
consideredasimmovableproperty.
• Interestsinproperty
As ownership consists of a bundle of rights,
the various rights and interests may be
vested in different persons. Absolute
ownership is an aggregate of component
rights such as the right of possession, the
right of enjoying the usufruct of the land,
and as on. These subordinate rights, the
aggregate of which make up absolute
ownership,arecalledinthisAct‘InterestsinProperty’.Atransferof
property is either a transfer of absolute ownership or a transfer of
oneormoreofthesesubordinaterights.
ØSalehowmade
Transfer, in the case of tangible immovable property of the value of Rs. 100
and upwards, or in the case of a reversion or other intangible thing, can be
madeonlybyaregisteredinstrument.
InthecaseoftangibleimmovablepropertyofavaluelessthanRs.100,such
transfer may be made either by a registered instrument or by delivery of
theproperty.
Deliveryoftangibleimmovablepropertytakesplacewhenthesellerplaces
thebuyerorsuchpersonashedirects,inpossessionoftheproperty.
ØPartperformance
Where any person contracts to transfer for consideration any immoveable
property by writing signed by him (from which the terms necessary to

98 |
constitute the transfer can be ascertained), and the transferee has, in part
performance of the contract, taken possession of the property and has
performed or is willing to perform his part of the contract, then in such
circumstances, the transferor is debarred from enforcing against the
transferee any right in respect of the property of which the transferee has
takenpossession.
ØRegistration
Thefollowingdocumentsshallberegistered:
lInstrumentsofgiftofimmovableproperty;
lOther non-testamentary instruments which purport or operate to
create, declare, assign, limit or extinguish, whether in present or in
future, any right, title or interest, whether vested or contingent, of
thevalueofRs.100,andupwards,toorinimmovableproperty;
lNon-testamentary instruments which acknowledge the receipt or
payment of any consideration on account of the creation,
declaration, assignment, limitation or extinction of any such right,
titleorinterest;and
lLeases of immovable property from year to year, or for any term
exceeding1year,orreservingayearlyrent.
ØTimeforpresentingdocumentsforregistration
NodocumentaffectingtransferofimmovablepropertyexecutedinIndiais
accepted for registration unless presented for that purpose to the proper
officerwithin4monthsfromthedateofitsexecution.
However if, owing to urgent necessity or unavoidable accident, any
document executed is not presented for registration till after the
expiration of 4 months, the Registrar, in cases where the delay in
presentation does not exceed 4 months, may direct that, on payment of a
fine not exceeding 10 times the amount of the proper registration-
fee, such document shall be accepted for registration.
ØEffectofnon-registrationofdocuments
If the document purporting to transfer immovable property is not

registeredinaccordancewiththeprovisionofRegistrationAct,1908thenit
will not affect any immovable property comprised therein or confer any
righttoadopt,orbereceivedasevidenceofanytransactionaffectingsuch
property.
10.3.1 Building and Other Construction
Worker Act, 1996 provides for
constant and adequate supervision
of any building or other
construction work in his
establishment as to ensure
compliance with the provisions of
this Act relating to safety and for
taking all practical steps to prevent
accidents. Further, this Act provides for responsibility of employer to provide
properfacilitiesasfollows:
leffectivearrangementstoprovidedrinkingwater
lsufficientlatrineandurinalaccommodation
ltemporarylivingaccommodationtoallbuildingworkersemployedbyhim
lin every place wherein, more than 50 female building workers are
ordinarily employed, there shall be provided and maintained a suitable
room or rooms for the use of children under the age of 6 years of such
femaleworkers.
lprovidefirst-aidfacilities
10.3.2 The Environment (Protection) Act, 1986 provides for the necessary safeguards
which need to be adhered to in handling any hazardous substance in case of
employerundertakingconstructionordevelopmentactivity.
10.3.3 The Indian Electricity Act, 2003 provides for various safeguards which should be
adheredtowhileinstallingelectricitylineinaparticulararea.
10.3.4 Bombay Lift Act, 1939 provides for the duty of person intending to install lift in a
buildingtocomplywiththeprescribedrequirements.
10.3 OtherSignificantLaws

10.3.5 ThePublic Liability InsuranceAct,1991 providesfor the liability ofthe employer, in
case of death or injury to any person (other than a workman) or damage to any
propertyhasresultedfromanaccident,liabilityasspecifiedintheact.
10.3.6 The Child Labour (Prohibition and
Regulation) Act, 1986 prohibits
employment of children below the age of
14 years in any specified occupation as
mentionedinScheduletotheaboveact.
10.3.7 The Indian Fatal Accidents Act, 1855
provides for obligation ofthe employer to pay compensation to the families ofthe
deceasedemployeecausedbyactionablewrong.
10.3.8 Payment of Bonus Act, 1965 provides for the payment of bonus to persons
employed in certain establishments on the basis of profits or on basis of
productionorproductivityandformattersconnectedtherewith.
10.3.9 The Payment of Gratuity Act, 1972 provides for payment of gratuity to every
employee who has rendered continuous service of not less than 5 years on his
superannuationorresignationordeath.Theemployershallbeunderanobligation
toobtaininsuranceforhisliabilityforpaymenttowardsthegratuityundertheact.
10.3.10 The Contract Labour (Regulation and Abolition) Act, 1970 provides for the duty of
theemployersasunder:
lTomakeanapplicationintheprescribedmannerforregistrationfortwenty
ormoreemployeesareemployed.
lTo nominatearepresentativetobepresentatthetimeofandtocertifythe
disbursementsofwagespaidbythecontractor.
10.3.11 The Employees Provident Funds and Miscellaneous Provisions Act, 1952 provides
for duty of employer (to whom the above Act applies) to contribute 12% of the
basicanddearnessallowancetotheprovidentfundwithin15daysofthelastdayof
calendarmonthinwhichthecontributionsfalldue.
10.3.12 The Maharashtra Shops and Establishments Act, 1948 provides for registration of
commercialestablishmentwhichcarriesonanybusiness,tradeorprofessionwith
respect to state of Maharashtra and regulation of conditions of work and
100| Real Estate Sector In India RSM Astute Consulting

employment.
10.3.13 Employees Compensation Act, 1923 provides for obligation of the employer to
provide compensation for injury by accident. Amount of compensation to be paid
shalldependuponthenatureofinjurysustainedwhichvariesfrom50%to60%of
monthlywages.
10.3.14 Employees State Insurance Act, 1948 provides for duty of the employers (to whom
the above Act applies) to contribute 4.75% of the wage payable to the employee
within21dayswiththeappropriateauthorities.
10.3.15 Maternity Benefit Act, 1961 provides for duty of the employers to provide for
maternitybenefitandcertainotherbenefitstowomenasunder:
lNo employer shall knowinglyemploy a woman in any establishment during
the 6 weeks immediately following the day of her delivery, miscarriage or
medicalterminationofpregnancy.
lNo womenshallworkinanyestablishmentduringthe6weeksimmediately
following the day of her delivery miscarriage or medical termination of
pregnancy.
10.3.16 Minimum Wages Act, 1948 provides for duty of employers to pay certain fixed
minimum wages to employees employed under scheduled employment which is
nearly equal to the cost of living index number applicable to such workers, all
inclusive rate allowing for the basic rate and cash value of the concessions.
10.3.17 Payment of Wages Act, 1936 is applicable in case of certain classes of persons
whose wage does not exceed Rs. 6,500/- per month and also provides for
responsibility of the employers to make payment of wages by cheque or crediting
in bank account of all those employees who are earning more than Rs. 3,000/- per
month and in continuous services under section 25B of the Industrial Dispute Act.
10.3.18 Employers Liability Act, 1938 provides for declaration from the employer that
certain defenses shall not be raised in suits for damages in respect of injuries
sustainedbyworkmen.

102| Real Estate Sector In India RSM Astute Consulting
MCA Ministry of Corporate Affairs
MOFA Maharashtra Ownership Flats
Act, 1963
MVAT Maharashtra Value Added Tax
NNPA Net Non-Performing assets
NOF Net Owned Fund
NRE Non Resident External (Account)
NRI Non-Resident Indian
PIO Person of Indian Origin
POTR Point of Taxation Rules
PPSR Place of Provision of Services
Rules
PTEC Professional Tax Enrollment
Certificate
PTRC Professional Tax Registration
Certificate
RBI Reserve Bank of India
RCM Reverse Charge Mechanism
SBRT Single Brand Retail Trading
SC Supreme Court
SEZ Special Economic Zone
SLP Special Leave Petition
STR Service Tax Rules
TAS Tax Accounting Standards
TCS Tax Collected at Source
TDR Transfer of Development Rights
TDS TaxDeductedatSource
TNVAT TamilNaduValueAddedTax
UT UnionTerritory
VAT ValueAddedTax
WBVAT WestBengalValueAddedTax
WCT WorksContractTax
WOS WhollyOwnedSubsidiary
WRT WithRespectTo
APR Annual Performance Report
APVAT Andhra Pradesh Value Added Tax
AS Accounting Standards
AY Assessment Year
CBDT Central Board of Direct Taxes
CENVAT Central Excise Value Added Tax
CST Central Sales Tax
DEPB Duty Entitlement Passbook
Scheme
DVAT Delhi Value Added Tax
ECB External Commercial Borrowing
EPF Employees Provident Fund
EPS Employees' Pension Scheme
FDI Foreign Direct Investment
FEMA The Foreign Exchange
Management Act, 1999
FII Foreign Institutional Investors
FIPB Foreign Investment Promotion
Board
FLA Foreign Liabilities and Assets
FSI Floor Space Index
GAAP Generally Accepted Accounting
Principles
GDP Gross Domestic Product
GVAT Gujarat Value Added Tax
HUF Hindu Undivided Family
ICAI Institute of Chartered
Accountants of India
IFRS International Financial Reporting
Standards
Income Tax Act The Income Tax Act, 1961
JV Joint Venture
KVAT Karnataka Value Added Tax
LRS Liberalised Remittance Scheme
MBRT Multi-Brand Retail Trading
ABBREVIATIONS

Real Estate Sector In India - Certain Tax and Regulatory Aspects (2013) - RSM India publication

Real Estate Sector In India - Certain Tax and Regulatory Aspects (2013) - RSM India publication

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