Undermining the stamp duty authority

The Direct Taxes Code Bill, 2010 (DTC) gives a no-holds-barred impetus to black money generation from immovable properties considered to be its fount head by one and all almost consensually. First, while computing income from house property, it dumps the time-honoured concept of fair market rent. As it is, in respect of rented properties, if the market rent is greater than the actual rent, it becomes the basis of taxation. But no longer when the DTC kicks in.

In such a milieu, taking a part of the rent outside the banking channels in cash surreptitiously would be back with a vengeance. It is not as if people do not resort to this subterfuge now. They do. They brazen it out secure in the knowledge that the assessing officer does not always bestir to call their bluff. But in the wake of DTC, all restraints would vaporise universally.

And when the time comes for disposal of a house property once again one can shed his fears because once again it would be the assessee's word that would prevail. As it is, the assessing officer can plump for the stamp duty value fixed by the stamp duty authority in case he suspects under-disclosure of the true consideration which is the norm. Before this regime kicked in, there was a more effective regime that called the seller's bluff f— pre-emptive purchase.

The income-tax authorities were required to be notified whenever one wanted to sell his immovable property for a consideration in excess of the specified threshold. On receipt of such notice, the income-tax authorities were empowered to buy the property for the sum stated in the agreement. To wit, if a property was proposed to be sold through an agreement to sell at Rs 1.5 crore with the actual consideration being Rs 2.5 crore and the difference settled in cash outside the books and banking channels, the tax authorities could pre-empt the deal after proper enquiries by issuing a cheque for Rs 1.5 crore and thus putting paid to the devious stratagem of the seller.

The DTC commits the cardinal sin of neither restoring the regime of pre-emptive purchase nor persisting with the regime of resorting to stamp duty valuation, thus opening the floodgates of black money generation from this fecund source. One wonders why the DTC is casting all caution to the wind while dealing with immovable properties, the bugbear of any assessing officer. The stamp duty regime is discredited because the stamp duty authorities lean on the side of caution to curry favour with government auditors and go for high-pitched assessments but the regime of pre-emptive purchase was quite fair and transparent. The reason why it was dumped was that the government was saddled with a lot of properties that remained unsold in a falling market.

Buyer to be penalised

It appears that the DTC has left the seller off the hook deliberately because the subsequent provisions dealing with receipt of gifts among other things say that if a person gets an immovable property at a consideration that is less than what the stamp duty authorities say, the difference would be taxable as his income by way of gift. Thus if the stamp duty authorities say that the value of the property that has changed hands is Rs 2 crore whereas the seller has got only Rs 1.75 crore from the buyer, the buyer would have to pay tax on Rs 25 lakh. This is a sudden and complete disavowal of the existing law and its complete reversal - at present the seller would have paid capital gains tax on Rs 25 lakh in the above example. Perhaps the upending of the law could bring greater revenue to the exchequer given the fact that there are a number of tax shelters available for long-term capital gains and none for income from other sources, the head under which gifts are taxable.

But it would be downright inequitable to penalise the buyer for the shenanigans of the seller. In a sellers' market, the buyer possibly has no choice but to submit to the wishes of the seller. It goes against another canon of taxation — the beneficiary should be taxed. Admittedly, when consideration is fixed in such a manner to bail out the seller, the tax authorities ought to get at the bottom of the transaction to tax him rather than to tax the buyer who often happens to be an innocent accomplice to the whole deal. At best, he should be penalised for paying a part of the consideration in cash surreptitiously. But to say that he got the property cheap and hence has to pay a gift tax pro tanto is patently unfair to him. It may be contended that the new scheme is designed to catch bribes guised as undervalued properties. This possibly cannot be ruled out, but it is wrong to penalise all buyers just to catch a few crooks.

The DTC is still before Parliament, and before it is signed into law it must be ensured that glitches therein are removed. The stamp duty authority's role is in taxing capital gains rather than in taxing gifts. And the time honoured concept of market rent, wart and all, should be restored while computing income from house property. Alternatively, the government could think in terms of restoring the scheme of pre-emptive purchase.

(The author is a Delhi-based chartered accountant).

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