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Capital gains tax on development rights may go up
November, 10th 2006

Landowners giving development rights for their property may have to pay more tax on their capital gains, if the government accepts a proposal mooted by top income tax authorities in the coming Budget.

To curb undervaluation in property deals, the Western zone has proposed bringing transfer of rights including development rights under the ambit of a provision in the income tax legislation known as 50C.

This provision allows tax authorities to adopt the valuation made by stamp authorities as the basis for computing capital gains in transactions where the sale consideration is lower than the government-determined rates.

Transfer of development rights entails giving all rights except the ownership right on paper. This means conveyance is not done in such transactions. The provision in the I-T Act was introduced to check black money transactions in property deals.

Under-valuation is assumed to happen when the sale consideration of a capital asset is lower than the rates (or valuation) determined by state government authorities. Stamp authorities value the capital asset for charging stamp duty. A capital asset includes land, building or both under the income tax law. It, however, does not include development right.

Transfer of development rights is not clearly covered under Section 50 C, though it is liable to capital gains tax because it is covered under the definition of transfer in the Income Tax Act.

Tax authorities may want to monitor the transactions relating to transfer of development rights and also collect higher capital gains tax in cases where the sale consideration is lower than the stamp value, said Sanjiv Chaudhary, partner, RSM&Co.

Experts reckon that the surge in demand for commercial and residential property has led to a spurt in deals entailing transfer of development rights. The move may also help in raising stamp duty collections, according to Om Prakash Gupta, controller of stamps, Maharashtra.

Rohit Gera, director, operations, Gera Developments, views this as a positive plan that will go a long way in bringing on par rates paid by developers for their properties relative to the ready reckoner.

Lalit Kumar Jain, chairman, Kumar Builders, however, contends that it may create further hardship for land owners. Normally, the valuation of few properties is much less than ready reckoner prices. Bringing development rights will only compound the burden for land owners, he said.

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