Builders lose interest benefit

A Special Bench of the Income Tax Tribunal has ruled that builders and contractors will no longer be allowed to capitalise their interest expenses. This can impact property prices across the country.

The order, passed early this month, stated that builders and contractors would not be allowed to deduct interest on loans taken for projects from expenses every year during the entire gestation period of any project. The deduction of interest from taxable income will be permitted only after a project is completed.

At present, even though builders are taxed on their profits and losses from projects only after they are completed, there is a controversy regarding taxation of the interest paid on loans and advances taken for projects.

Builders and contractors are claiming this as a deduction every year while projects are being set up, but the income tax department has contested such claims.

The ruling has been passed by the Special Bench in the case involving Wall Street Construction Ltd and Patel Plaza Ltd. According to a rough estimate, the department can collect at least around Rs 800-Rs 1000 crore (Rs 8-10 billion) following this ruling.

Nayan Shah, managing director of Mayfair builders, said, "This will increase the cost of my funds but we will not be able to pass it on to end-users as the additional cost burden will place properties out of their reach. The only way out for us is to work with a lower. Only a few developers with very deep pockets will survive and the small and medium ones may go bankrupt."

Arun Goel, chief executive officer of Dewan Housing and Finance Ltd's venture funds, said, "This will obviously mean that the cost of property for end-users will go up as builders will pass on the increased cost to them."