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The opening up of Indian economy has led to free inflow of foreign direct investment (FDI) along with modern cutting edge technology, which increased the importance of private sector in Indian economy considerably. Previously, the Indian market were ruled by the government enterprises but the scene in Indian market changed as soon as the markets were opened for investments. This saw the rise of the Indian private sector companies, which prioritized customer's need and speedy service. This further fueled competition amongst same industry players and even in government organizations. The post 1990 era witnessed total investment in favor of Indian private sector. The investment quantum grew from 56% in the first half of 1990 to 71 % in the second half of 1990. This trend of investment continued for over a considerable period of time. These investments were especially made in sector like financial services, transport and social services. The late 1990s and the period thereafter witnessed investments in sector like manufacturing, infrastructure, agriculture products and most importantly in Information technology and telecommunication. The present trend shows a marked increase in investment in areas covering pharmaceutical, biotechnology, semiconductor, contract research and product research and development. The importance of private sector in Indian economy has been very commendable in generating employment and thus eliminating poverty. Further, it also effected the following Increased quality of life Increased access to essential items Increased production opportunities Lowered prices of essential items Increased value of human capital Improved social life of the middle class Indian Decreased the percentage of people living below the poverty line in India Changed the age old perception of poor agriculture based country to a rising manufacturing based country Effected increased research and development activity and spending Effected better higher education facilities especially in technical fields Ensured fair competition amongst market players Dissolved the concept of monopoly and thus neutralized market manipulation practices The importance of private sector in Indian economy can be witnessed from the tremendous growth of Indian BPOs, Indian software companies, Indian private banks and financial service companies. The manufacturing industry of India is flooded with private Indian companies and in fact they dominate the said industry. Manufacturing companies covering sectors like automobile, chemicals, textiles, agri-foods, computer hardware, telecommunication equipment, and petrochemical products were the main driver of growth.
It is estimated. as a business model has been in vogue for a couple of years in the real estate sector. whether the land owner by parting with the land under the JDA is engaging himself in the business of real estate is also relevant question and is dependent upon the specific facts. consideration is discharged in the form of upfront payment. This conversion is often attempted to be disregarded by the revenue authorities. JDA concept encompasses complex interplay between the parties involved. whether constitutes a stock in trade or capital asset? Since the scheme of taxability is different for business income and capital gains. Many a times. Each model offers its unique challenges and its implications also differ variedly.e. The point of transfer is a matter of debate i. Typically. cash or built-up area or share in revenue / profits. sharing of gross revenue. Slum Rehabilitation projects. whether at the time of entering into a JDA or handing over of possession or receipt of consideration (i. Certainly. The KPO sector is engaged in delivering knowledge based high-end services to clients. Given these commercial. different tax positions (basis the specific facts) are adopted. in practice we have observed conversion of capital asset into stock in trade before participation by the land owner into a JDA to achieve tax efficiency and defer the incidence of taxation on transfer of development rights in the land. roles and responsibilities undertaken by each participant. Joint Development Arrangement – gaining importance and posing significant challenges Introduction The Joint Development Arrangement (JDA). Key tax and regulatory challenges faced by the land owner and developers are highlighted below: In the hands of land owner The land parted by the land owner. JDA model poses various challenges from tax (direct and indirect). that out of the total US $ 15 billion KPO service business around US $ 12 billion of business would be outsourced to India by the end of 2010. As such. opening up FDI for the sector and increased corporatization.The Indian BPO sector is more concentrated with rendering services to overseas clients. regulatory and tax facets of the JDA various innovative JDA models are being structured. JDA concept has also evolved and gained importance. financial risks undertaken. Depending upon various factors such as land prices. By its very nature. Further. There is no uniform principle or guideline for determining point of accrual of capital gains (if land is capital asset) and taxability of income in the hands of land owner. The key feature of JDA is that the land owner contributes land and developer undertakes the responsibility of obtaining approvals. products to be developed on the land. The land owner expects much higher consideration in return for providing development rights to the developer. sharing of constructed area or a combination thereof.e Specific POA and General POA are executed by land owner in favor of the developer. launching and marketing the project with its financial resources. . stamp duty and accounting perspective. etc. JDA model is structured.e. With the evolution of the sector.) or eventual sale of built-up area received by the land owner. the complexities have also increased due to the use of JDA model in newer opportunities of Redevelopment projects. this issue is quite relevant. Matter gets further complicated when varied forms of Power of Attorney (POA) i. Further. property development. these tax positions are subject to challenge from revenue authorities and we are observing significant litigation on some of the issues common to any JDA. The key challenges from tax and regulatory perspective are summarised below: Tax and Regulatory Challenges Considering the complexities involved.
complexities surrounding JDA are also bound to increase with parties adopting more innovative and varied forms of JDAs. there are various other downsides of being taxed as AOP. whether service tax or VAT is applicable on the basis that land owner is appointing developer for construction of its share is another tricky issue. Union Budget 2012 has proposed a new withholding tax provision on the sale of immoveable property. Further. which makes the arrangement tax inefficient for the parties to the JDA. In the hands of land owner JDA poses another important challenge from the service tax regime. In case of area sharing. Further. in cases where the land owner receives built-up area. Further. Applicability of stamp duty on JDA and provisions of section 50C of the Income-tax Act is another challenge. In the hands of the Developer Manner in which JDA is structured also exposes parties to Association of Persons (AOP) Exposure. This consequently impacts the quantum of taxability in the hands of the land owner. Further. Whether the JDA per se is subject to service tax or not a moot question. but in today’s time tax cost cannot be ignored and all possibilities of optimizing tax cost should be evaluated. Land assembly . In case of area sharing without consideration being capped. it would be taxed as a separate entity. Accounting of construction cost for the built-up area to be provided to the land owner or share of revenue / profit to the land owner is also quite complex and different parties adopt different accounting principles Summing Up While there exist tax and regulatory challenges. it is generally said that tax cannot be driving the business. it is extremely important that the parties should undertake efficient preplanning and structuring the JDA post evaluating all possible tax and regulatory aspects. In other words. whether rights in land are being transferred or land itself is being transferred needs to be determined. If JDA is treated as an AOP. the land owner could be exposed to significant taxation as the revenue authorities could apply the valuation rules as deemed fit in the absence of any specific rules. The changes proposed in the Finance Bill 2012 have further complicated the subject of levy of service tax given the introduction of negative list. The challenge which arises is whether withholding tax would be applicable to JDA. the value on which tax would have to be deducted is also unclear. the developer too faces challenges namely what should be the cost of development right that he should claim while computing business income over the life cycle of the project. While. business realities and commercial advantages / necessities would require parties to adopt varied JDA models depending upon commercial aspects. Therefore. Basis of computation of consideration received in the form of built-up area or sharing of revenue/ profits is again a disputed area. Two more important proposals in the Finance Bill 2012 namely GAAR and domestic Transfer Pricing provision would significantly impact the JDA structuring especially when the arrangement is entered into between the related entities.
buildings or housing. along with its natural resources such as crops. Real estate is "Property consisting of land and the buildings on it. when required. (also) an item of real property. selling. or renting land. from occupiers. usually for eventual development or redevelopment. or water. removal or discharge of any restrictive covenants or other encumbrances and obtaining physical possession. an interest vested in this. immovable property of this nature. This will include acquisition of individual interest and the eventual development or redevelopment. minerals. Also: the business of real estate. the profession of buying.The process of forming a single site from a number of lands. (more generally) buildings or housing in general." .