DTC and its impact on properties

Feb. 21, 2010 - PRLog -- The Direct Tax Code (DTC) is a major evolutionary step in the direct tax history of the country, which is all set to change the entire financial landscape of India. As it spells major change, it will require a fairly in-depth study before all its implications can be understood and assimilated. On the face of it, DTC may have benefited Indian tax payers due to some of its moves, but it looks like a dampener for the Indian realty industry. Moreover, it is likely to undergo many changes and corrections before it is finally enacted. Hence commenting on DTC is a minefield. With these qualifications let us analyse some aspects that will apparently impact the property market. First, there is a significant change in the way income from house property is calculated under DTC, most of which is adverse from the point of view of residential property investments.

1. Tax on every property: Current tax provisions provide for paying tax with respect to every property (except a self-occupied property) whether let out or not, based on contractual rent and where that is not available then based on a reasonable rent. There is also provision for a vacancy allowance in case of property that has been previously let out at any time.Under the DTC Bill, tax is payable on all properties on the basis of a higher contractual rent or presumptive rent. The provision for vacancy allowance has also been deleted. In most cases the local authorities have now moved to a market value based rateable value. Possibly the presumptive rate has been kept at a middle value of 6 per cent considering that commercial properties can be rented out at around 8 per cent of the market value. Of course this simplicity works against residential property ownership. Since the income is higher of contractual rent or presumptive rent the end result will be taking completely non-existent income as income. Thus whether or not a tenant is available for the premises, it forces the owner to pay tax on income.Without the protection of the vacancy allowance that is available under the current tax laws this single change will drive investors out of the market. Some may argue that not having investors may not necessarily be a bad thing but it may not be an ideal situation either.

2. Unclear clause: The words for not applying this income clause to one non-let-out property (equivalent to a self-occupied property under the current provisions) are a little unclear and if left unchanged can jeopardise even this small relief.

3. Gross rent: For let out properties the standard deduction has been reduced from 30 per cent to 20 per cent of the gross rent.

4. Deduction: Deduction is available on all properties for local taxes and service tax to the extent paid.

5. No deduction for interest: There is no deduction for interest for non-let-out properties where the income is taken as nil unlike the current provision where this is available up to Rs 1, 50,000.

6. Principal payment: There is no provision for deduction on the principal payment of the loan taken to buy a home. ......http://www.maaproperties.com/Pages/ModuleContent.aspx?Mod...

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