The Finance Minister in Finance Bill 2013 has proposed withholding tax at 1% to be deducted by every buyer from any sum payable to the resident seller if the sale consideration for transfer of immovable property, other than agricultural land,is Rs.50 lacs or more.

The reason mentioned for introduction of this TDS provision is not quoting of PAN number by seller or buyer in most of the transactions and significant transactions not being reported.

In order to track the real estate transactions more deeper and wider, the Finance Minister has introduced this new TDS provision by inserting section 194IA with the current TDS provisions contained under the Income Tax Act, 1961 (the ITA).

Presently, there is no requirement to deduct tax at source on purchase of immovable property except in case of compulsory acquisition of immovable property. Hence, a transferee of immovable property under compulsorily acquisition is excluded from this new provision.

The proposed TDS provision is to be applied to transferor of immovable property, wherein the ‘immovable property’ means:

  • any land (other than agricultural land) or
  • any building; or
  • part of a building.

The proposed amendment will be applicable from 1 June 2013.

It is interesting to note that somewhat similar provisions were also proposed by the Finance Bill, 2012; however due to much hue and cry, the said provisions were not incorporated when the final Bill was passed by the parliament. It is worthwhile to see how the current TDS provision which are applicable to sale of immovable property is different than proposed vide Finance Bill, 2012.

Finance Bill, 2012Finance Bill, 2013
TDS applicable only if

  • Sale consideration equal to or more than INR 5,000,000 for immovable property in specified areas
  • Sale consideration equal to or more than INR 2,000,000 for immovable property in other areas
TDS applicable only if consideration equal to or more than INR 5,000,000
Stamp duty value has to be considered for withholding of taxes where the consideration for transfer is less than the stamp duty valueNo such provisions
Proof of withholding of taxes to be furnished to the authority registering the document of transfer of immovable property, failing which the property will not be registeredNo such provisions
Purchaser of property is not required obtain Tax Deduction Account Number (TAN) to comply with the above provisionsNo such provisions

 From above comparison, it can be noted that instead of two threshold limit for applicability of TDS provision as proposed in last years proposal, it is now one threshold limit of Rs.50 lacs. This will certainly give some respite to buyers in rural areas or non-metro cities. Further, not linking the sale consideration with stamp duty value for applicability of this TDS provision also relieves a buyer from undue litigation. This is possibly in line with the intent behind insertion of this provision, to track the transactions at first and then probe further if required.

However, the difficult part is the implementation of this TDS provision that a buyer may have to face which could be as under:

  • Now, every buyer will have to obtain TAN number for complying with the provisions;
  • Deposit the taxes deducted within the specified time limit with the Government;
  • File the quarterly TDS returns and mention the Permanent Account Number (PAN) of seller;
  • Issue TDS certificate to the seller; and
  • May be subjected to scrutiny by the TDS officer

It may also be mentioned that the above rate of 1% may increase to 20% if seller does not provide PAN due to overriding provision of section 206AA of ITA.

The proposed TDS provision is required to be applied on gross transaction value rather than net gains which will have significant bearing on cash flow issues of the real estate industry. This may result in higher interest cost for the industry, consequently further contributing to the increase of cost of the property for the general public.  The good intent of FM of curbing the under reporting and/or non- reporting of real estate transactions will find larger acceptability if the above concerns are also addressed when the Bill is passed.

Authors:-

Nilesh BhagatNilesh Bhagat is Senior Manager at Deloitte Haskins & Sells.

Kalpesh KatiraKalpesh Katira is Deputy Manager at Deloitte Haskins & Sells.

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