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
- 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.
On Sale or Transfer of rights, the revenue shall be
recognized when both fulfills the following conditions, i.e.
to the development rights is transferred to the buyer; and
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:
of plots of land (including long term sale type leases) without any
of plots of land (including long term sale type leases) with development in the
form of common facilities.
and sale of residential and commercial units, row houses, independent houses,
with or without an undivided share in land
utilization and transfer of development rights.
of existing buildings and structures.
development agreements for any of the above activities.
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