The RERA has become law w.e.f. 1st May., 2017. In order to make RERA implementation easier, the government has come up with the draft Income Computation and Disclosure Standards (ICDS) for Real Estate Transactions. The government has sought stakeholders’ opinion to suggest the areas of improvement in the ICDS for the real estate sector. The draft is based on the standards issued by ICAI for the purpose of providing uniformity, certainty and harmonizing the same with the provisions of the Act. ICDS are a set of accounting policies and standard used for computing taxable income and not for maintaining books of accounts. The Central Board of Direct Taxes, on behalf of the government, will receive comments from stakeholders on the draft ICDS on real estate transactions till May 26, 2017.

“With the implementation of RERA from 1st May, 2017, the government has introduced the draft ICDS to monitor the accounting of Real estate transactions taking place. The ICDS on real estate transactions is all set to keep a check on the Real Estate Players in the market.”

ICDS contains provisions relating to valuation of inventory; construction contracts; effects in changes of foreign exchange rates, borrowing costs etc. These are applicable from assessment year 2017-18 for specified assesses to compute income under the head ‘profits and gains of business or profession’ or ‘income from other sources’.

Key Features of the Draft

The draft ICDS doesn’t mandate obtaining all critical approvals for revenue recognition after the Real Estate (Regulation and Development) Act, 2016, (RERA), came into effect. It also proposes recognition of transferable development rights (TDR) at the fair value against fair market value or net book value as per the guidance note prepared by the Institute of Chartered Accountants of India (ICAI).

• The Real Estate Project revenue and project cost shall be recognised as revenue and cost respectively by reference to the stage of completion of the project on the last date of the previous year for projects where the economic substance is similar to construction contracts;
• In case of Real Estate Projects, Percentage of completion method would be applicable;
• Direct Purchase, Development and Construction of built up area and Giving up rights over existing structures or open land are treated as Transferable Development Rights;
• When development rights are acquired by way of direct purchase or on development or construction of built-up area, cost of acquisition would be the cost of purchases or amount spent on development or construction of built- up area, respectively. Where development rights are acquired by way of giving up of rights over existing structures or open land, the development rights shall be recorded at fair value of the development rights so acquired; and
• When development rights are utilised in a real estate project by a person, the cost of acquisition shall be added to the project costs.
  

a)      title to the development rights is transferred to the buyer; and

b)      b) it is reasonable to expect that the revenue will be ultimately collected. 

The scope of this ICDS shall be to determine income from all type of real estate transactions, i.e. relating to land as well as buildings and rights in relation thereto, including:

a)      Sale of plots of land (including long term sale type leases) without any developments.

b)      Sale of plots of land (including long term sale type leases) with development in the form of common facilities.

c)       Development and sale of residential and commercial units, row houses, independent houses, with or without an undivided share in land

d)      Acquisition, utilization and transfer of development rights.

e)      Redevelopment of existing buildings and structures.

f)       Joint development agreements for any of the above activities.

Significant changes/ differences in draft ICDS vis-à-vis Guidance Note on Real Estate Transactions issued by the ICAI

The draft ICDS on Real Estate Transactions is based on Guidance Note on Accounting for Real Estate Transactions issued by the ICAI. While recommending the ICDS, the Committee suggested the following significant changes in the Guidance Note:

Guidance Note vis-a-vis ICDS :

The specific ICDS on real estate transactions intend to be a longed-for move as it will bring transparency and certainty in application of provisions of ICDS and computation of taxable income to the sector. The draft ICDS has made changes in five areas compared to the guidance note. These areas are definition of project and project cost, revenue recognition, application of percentage of completion method (POCM) for real estate projects and transferable development rights (TDRs). Most of the deviations from the guidance note issued by the ICAI will have the effect of accelerating revenue recognition for tax purposes. Specifically, the change requiring recording TDRs at fair value will create tax incidence on unrealised revenues.