Income tax planning for a land developer

TAX PLANNING FOR A LAND DEVELOPER

There is no specific exemption is available in Income Tax Law to non-individual assesses to save tax on Gain on Sale of Immovable Property. This article is written mainly for Land Developers to do proper tax planning. There is no way to escape tax but by proper tax planning, we can shift tax liability to future years.

What are the Land Development and Land Development Costs?

Land Development includes activities to make Infrastructure for basic facilities including water, electricity, road, drainage, sewerage etc. It increases the value of land and it makes the land livable by the human being. It also includes activities to take various approvals from government departments. So all costs associated with land development are land development costs but it doesn’t include the basic cost of land. Land Development can be done by private builders. Government Authorities are also widely involved in land development.

There are mainly three different ways to show the expenditure done on Land Development by a developer and taxability depends on the accounting treatment of the transaction:

Option-1: First one is to show the cost of development as non-depreciable assets i.e. investments
- Sale of non-depreciable fixed assets will result in capital gain. Capital Gain is two type:
  - Short Term Capital Gain (STCG) arises if capital asset is held for less than 36 months
  - Long Term Capital Gain (LTCG) arises if capital asset is held for 36 months or more
    - Indexation benefit is available in case of LTCG
Option-2: Second option is to show developed land as depreciable fixed assets
- Depreciation can be claimed @10% p.a.
- Please be noted that land cannot be a depreciable asset
- But expenditure on development can be capitalized as building
- Sale of depreciable assets will result in STCG only
- But no benefit of Indexation is available in case of sale of depreciable assets even if held for more than 3 years
- Business expenditure can be claimed against STCG
Option-3: the Third option is to show developed land as stock in trade
- To show the business profit on the sale of such stock in trade
  - Neither depreciation nor indexation benefit will be available
  - Gain on sale of stock-in-trade is normal business income

One important thing to note is the benefit of both indexation and depreciation cannot be taken simultaneously. Now the question arises: Is it really beneficial to claim depreciation when we have the option to take benefit of indexation?

Indexation v/s Deprecation

One most important thing to be noted is that depreciation is not a permanent benefit. Whatever amount claimed as depreciation will increase future STCG whenever it occurs. While indexation is a permanent benefit and will never be reversed.

In case of Depreciable fixed assets, Sale proceeds are deducted from WDV (Written Down Value) of that block only unless WDV becomes NIL or all of the assets in that block is disposed of. Therefore by this method, we can postpone our tax liability provided there is some value left in WDV of that block or some assets remain undisposed.

While option 3 (to show stock-in-trade) is not suggested unless there is a statutory liability to show stock-in-trade, option 1 and option 2 can be chosen depending on various factors including below:

Expected Sale amount as compared to the cost
- STCG may arise when WDV becomes NIL
- Tax can be postponed till unlimited years if WDV doesn't become NIL
Profitability of the Business
- LTCG cannot be set-off against business loss while STCG can be set-off against business loss
Expected holding period