TDS should apply to all property deals

The tax department and the real-estate industry have never really been brothers-in-arms.

To check the use of slush funds in the sector, the Government introduced a pre-emptive purchase of property scheme which mandated that any person selling a property in excess of Rs 25 lakh had to seek the prior permission of the Government.

If the Government suspected suppression, it could acquire the property. The law seemed pro-Government till a wily taxpayer sold a property for Rs 125 lakh but did not seek prior permission as he sold the property room-by-room through separate sale deeds with the value in each sale deed less than Rs 25 lakh.

The law was amended to take care of such ingenious ways but the industry seemed to have got the better of the taxman, resulting in the death of the scheme in 2001. This was replaced by Section 50C in the Income Tax Act 1961, which stated that if the value stated in the instrument of transfer is less than the valuation adopted or assessed by the stamp duty authorities, the valuation adopted by the latter would be considered the value for the purposes of bringing them to tax.

TDS clause

With effect from October 1, 2012, the Budget revisits this concept again by deducting tax at source. To collect tax at the earliest point of time and have a reporting mechanism of transactions in the real-estate sector, the Budget provisions provide that every transferee, at the time of making payment or crediting any sum by way of consideration for transfer of immovable property (other than agricultural land), shall deduct tax, at the rate of 1 per cent of such sum, if the consideration paid or payable for the transfer of such property exceeds

Rs 50 lakh in case such property is situated in a specified urban agglomeration; or

Rs 20 lakh in case such property is situated in any other area.

Where the consideration paid or payable for the transfer of such property is less than the value adopted or assessed or assessable by any authority of a State government for the purposes of payment of stamp duty, the value so adopted or assessed or assessable shall be deemed as consideration paid or payable for the transfer of such immovable property.

The Registrar shall not register the transfer of any immovable property where taxes are required to be deducted under this provision unless the transferee furnishes proof of deduction and payment of TDS. A simple one-page challan for payment of TDS would be prescribed containing details (including PAN) of transferor and transferee and also certain details of the property.

The transferee would not be required to obtain any Tax Deduction and Collection Account Number (TAN) or furnish any TDS statement as this would be mostly a one-time transaction. The transferor would get credit of TDS like any other pre-paid taxes on the basis of information furnished by the transferee in the challan of payment of TDS.

Effectiveness

Though the intention behind this proviso cannot be questioned, its implementation could leave the Government short-changed, yet again. The implementation date gives more than enough time for the industry to plan its affairs in such a manner that the high-value deals do not have to follow the new law.

The dichotomy in tax laws can't be starker — the Government is willing to roll back a tax provision 51 years to get Rs 11,000 crore, but gives six months to an industry to plan its tax affairs.

Since withholding tax is applicable on the payment of money, one would not be surprised if there are a lot of payments for property transactions prior to September.

Verifying payment

Putting the onus on the Registrar to verify the deduction of tax could be counter-productive. The interests of the tax department would certainly not be top priority for the registration authorities.

The Government seems to have put in this limit of Rs 50 lakh as a matter of habit and practice. Property agreements can be complex, circuitous and can be tweaked in a manner that transactions above this threshold too escape the withholding tax provisions. To be really effective, the provisions need to be applied to all real-estate registrations. If the golden rule of 70:30 for the different colours of money in a real-estate deal is applied, even property transfers of up to Rs 70 lakh can escape the tax deduction clause. The purpose of introduction of the TDS clause — to recover a portion of the money earlier and to develop a database of real-estate transactions — would be served to a limited extent in its present form. The Government would do well to review the compliance with this provision and make necessary changes to make the law robust.

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