Land lease sales in Mumbai may attract 10% tax

The Income Tax department has sent letters to real estate companies, MMRDA, CIDCO stating that all land lease sales or transfers attract a 10% tax, sources said. The IT department states that tax should be cut with retrospective effect from FY08 and estimates suggest they could raise Rs 1000 crores in the process. Real estate developers said they will contest this tax liability as it will have a negative impact on their cash flows and cost of land.

According to the IT department, the tax on land lease transfers is an obligation on the payee and will be deductible at source (TDS). These will be applicable on all long lease land sales or transfers in Mumbai, sources said. Industry experts say all the land auctions by government agencies and private lease transfer deals like Lodha’s Wadal land deal, RIL-Wadhwa lease transfer, Jet Airways-Godrej Properties deal could fall under the tax net. There have been many such land deals in Mumbai in the last 4 years.

On the legal front, Ketan Kothari, Director at Khaitan & Co said, “It is likely to be covered by IT Act provision 194 (i). The tax liability, however, will depend on the way the land deal documents are structured.” Legal experts also said that there is a debate between treating it like a ‘transfer of lease’ or ‘transfer of capital gains.’

While the debate is on, sources said final decision on whether this tax will be applicable or not will be clear in the next few days.