Finance Bill 2013 seeks to introduce two new provisions dealing with transfer of immovable properties which may have serious consequences for property buyers.
It seeks to provide for tax deduction at source (TDS) at 1 per cent on consideration towards purchase of immovable property effective from June 1, 2013 if the value of the property is Rs 50 lakh or more. This is a major change since it would apply across length and breadth of rural and urban India.
ADMINISTRATIVE RESPONSIBILITY
The buyer has to obtain Tax Deduction Account Number (TAN), deduct and remit the TDS, file TDS returns and issue TDS certificate for the seller to claim credit of this amount. This is an onerous administrative responsibility on the taxpayers.
In the past, there have been issues in TDS credits as the Income Tax department was gearing up its IT infrastructure. While the infrastructure has considerably improved, the question is whether they are geared to handle such a massive fresh inflow of returns and data. More importantly, are the buyers ready?
There are provisions under the Income Tax Act which mandate sub-registrar to file an annual return capturing immovable property transactions with value of over Rs 30 lakh. So, do we need TDS provision to track these transactions? TDS provisions are being introduced due to non-quoting or wrong quoting of Permanent Account Number by the transacting parties while providing details to the sub-registrar. If tracking of the transaction is the fundamental reason for this new TDS provision, it would be better to fine-tune the existing system by introducing checks and balances rather than introducing TDS provisions as a substitute.
LEGAL ISSUES
Any new provision brings in host of legal and practical issues. For example, issues such as whether TDS would apply for transfer of property under scheme of amalgamation or demerger would arise. In joint development agreements, the landowner transfers land in consideration for cash and built up space. It is a settled law that TDS provisions would apply even when the consideration is in kind and the builder has to withhold tax by valuing the building, opening up valuation issues for the builder.
In such contracts, capital gains could arise even on allowing possession of the property, subject to certain conditions being fulfilled. In such a case, consideration would be received by the land owner later than the year of transfer, leading to issues of matching of TDS credits to income.
These provisions, if introduced for merely monitoring purposes, would lead to larger technical and practical issues, leading the contracting parties to transact in cash or indulge in splitting up the documents by registering undivided share of land in multiple names. It is best to sharpen the existing mechanism rather than inventing a new one. Similar provision was proposed in the Finance Bill 2012, but dropped based on the representations from various sectors when the Bill was enacted.
TRANSFER FOR INADEQUATE CONSIDERATION
Another amendment is the proposal to tax the buyer on the difference between consideration paid for buying immovable property and the stamp duty value of such property, if the former is lower than the latter. Currently, the law requires the seller to pay tax on the same difference under section 50C and if this new proposal is enacted, the same amount would be taxed in the hands of the buyer also. Section 50C of the Act itself is a tax on notional income and to double tax such notional income cannot be justified. A similar provision, though introduced originally in 2009, was removed retrospectively by Finance Act, 2010 considering this double taxation issue.
It would be welcome move if the Government drops these provisions, which would create hurdles in immovable property transactions.
(The author is a Partner in BMR & Associates LLP. Views expressed are personal)
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