• Aug
  • 24
  • 2013

TDS on Real estate Industry – Pain or Gain

CA. Bikash Bogi

Introduction: Real estate sector in India has come a long way by becoming one of the fastest growing markets in the world. Currently, the Indian Real Estate Market has a market size of approx USD 70 billion [INR 3.8 lakh crore] and is expected to touch the market size of USD 180 billion [INR 10 lakh crore] by the year 2020. The Real Estate sector contributes approx 5% of the national GDP. As per the recent global survey, India Ranked 20th among the top 20 Real Estate Investment markets globally with investment volume of USD 3.5 billion [INR 19000 crore] recorded in FY 2012-13 alone. Due to the magnitude of the transactions, Finance Ministers had given due weightage to systemize the taxing provisions specially related to Real Estate Sector.

Concept of TDS for Real Estate Industry:

Vide Finance Act 2013; concept of TDS on Real estate transactions was introduced in India. As per Newly inserted section 194IA, Any person, who purchases any immovable property (other than agricultural land) for a consideration, shall require to deduct tax at source @1% of the amount paid to resident seller; provided the consideration is INR 50 lakh or more.

Immovable property for this section means any land (other than agricultural land) or any building or part of a building. Further, this section puts burden on every buyers including non residents who are purchasing the property from the resident sellers. Further, property transaction between the real estate developers and individual assessee’s is also comes under the purview of this section i.e. the section will also apply on stock in trade. The section does not apply to for consideration received under the compulsory acquisition of the property as mentioned in section 194LA. Further this section does not apply in case the seller is the non- resident, as the same is covered by section 195 of the Income Tax Act.

TDS on real estate transaction (section 194LAA) was earlier proposed by Finance bill 2012, which was subsequently withdrawn for the reasons best known to the finance ministry. In comparison to earlier proposal, the scope of the newly inserted section has been diluted to a certain extent. The thrash hold exemption of INR 20 lakh for property situated in other than urban areas has not been incorporated in section 194IA; rather an exemption of INR 50 lakh for property situated in all areas has been provided. Due to this proposal, properties located in areas other than urban areas may be out of purview of this section. Further, proof of deposit of TDS which was mandatory for registration of property, as proposed in Finance bill 2012, has been ignored in section 194-IA.

Procedural Requirements:

Buyer of the property is required to deduct tax, at the time of credit of the consideration to the account of the seller or at the time of payment of such sum in cash, cheque, draft or any other mode.  A simple, one pager, Form 26QB has been introduced for compliance of this section. Buyer of the property is not required to obtain TAN no. Buyer is required to furnish information as prescribed in Form 26QB which includes

            — Full Name, Address & PAN of Buyer and seller

            — Address of the property

            — Value of property, Date of agreement / booking

            — Amount paid / Credited, payment in installments or lumpsum

            —  TDS etc.

Subsequently, Buyer can make the payment online or offline, within 7 days from the end of the month in which deduction is made. TDS certificate [Form 16B] will be issued by the buyer to the seller within 15 days from the due date of payment of taxes. The same needs to be generated from www. tdscpc.gov.in

Income Tax Department has issued “Frequently Asked Questions” [FAQ] on TDS of immovable property. The same can be accessed from the link ” TDS on Property – FAQ , Payment Procedure & Points to Remember “ . A brief reading of the FAQ will give a brief idea about procedural requirement.

Penal Provisions for non compliances:

As per section 201, In case assessee fails to comply with the procedural guidelines of TDS provisions [deduction or payment], then the assessee will be treated as an assessee in default.

As per section 201(1A), in case of failure to deduct Tax or short deduction of TDS, interest @1% will be levied for every month or part of the month, on the amount of tax, from the date on which tax was deductible to the date on which the same is  deducted. Further, when the buyer has failed to deposit wholly or partly tax so deducted, Interest @1.5% will be levied, for every month or part of the month, on the amount of tax, from the date of deduction till the date of actual payment.

As per section 271C of the Income Tax Act, penalty for non deduction / non-payment of TDS are equal to the amount of Tax which the assessee failed to deduct or pay [This penalty shall be imposed b the joint commissioner]. Further, Sec 221 provides for penalty to be paid as directed by the assessing officer which shall not exceed the amount of TDS.

Why TDS provisions is Special for Revenue Authorities:

Though as per memorandum explaining finance bill 2013, TDS concept was introduced to make parity with transaction of immovable property done by the non-residents, to have a full proof reporting mechanism for real estate transactions and also to make collection of taxes at the earliest possible time. Relevant extract is reproduced herein below:

On transfer of immovable property by a non-resident, tax is required to be deducted at source by the transferee. However, there is no such requirement on transfer of immovable property by a resident except in the case of compulsory acquisition of certain immovable properties. In order to have a reporting mechanism of transactions in the real estate sector and also to collect tax at the earliest point of time, it is proposed to insert a new section 194-IA…..

However, collection of taxes at the earliest possible time is seems to be the main reason for introduction of this concept for real estate industry. Presently approx 40% of the Direct Tax collections in India are coming from TDS. The data given in the table below is explaing the same

Financial Year

Gross Direct Tax Collection

(Rs. in crore )

Net Direct Tax Collection

(Rs. in crore )

TDS

(Rs. in crore )

% share of TDS (Net Direct Taxes)

2006-07

2,67,416/-

2,30,181/-

70,689/-

30.71%

2007-08

3,53,498/-

3,12,213/-

104,741/-

33.55%

2008-09

3,72,915/-

3,38,212/-

1,30,172/-

38.49%

2009-10

4,35,164/-

3,78,063/-

1,39,529/-

36.90%

2010-11

5,22,103/-

4,46,934/-

1,66,687/-

37.29%

2011-12

5,90,077/-

4,94,799/-

1,90,000/- #

38.00% ##

2012-13

6,31,549/-

5,48,845/-

2,30,188/-

41.18%

2013-14 ***

6,68,000/-***

                ***Budgeted Estimated        ### Apx number

Looking into the magnitude of the transactions volume, newly inserted provision will definitely help the government to achieve the budgeted estimate of Direct tax collection in FY 2013-14 in the global slowdown era.

Area of Concern / Controversial Issues: 

    i.            Should the buyer need to comply with TDS provisions if the agreement is entered before 1st June 2013 but the payments are made after 1st June 2013? What if when part payment has been made on or before the agreement date and agreement was made after 1st June 2013?

What if the part payment is made before 1st June and balance is paid after 1st June? Whether TDS to be deducted on the entire amount or the balance amount?

As there is no clarity on these issues till date, it is advisable for the buyers to deduct tax on every payment made after 1st June 2013, if total payment after 1st June 2013 is likely to be INR 50 lakh or more. A clarification is required on this issue.

  ii.            In case of cancellation of transaction / booking, procedure of claiming refund has not been prescribed.

 iii.            In case of payment in installments, TDS is required for every installment. It will increase the compliance burden on the buyers.

Normally 80% of the property value is financed by Banks / Financial institutions. Banks / FIs are issuing the cheque / DD etc in favour of the Builder / Buyer. In case of under construction property, payments are made in installments. Now the question here is whether the banks / FIs will deduct 1% tax and paid to the government or bank will pay the full installments and the buyer will pay the tax and get it refunded from the builder. I don’t think that Banks / FIs will take the addition administrative burden. In the absence of clarity, things are getting complicated.

iv.  As per section 199 (read with Rule 37BA) of the Income Tax Act, a person can avail credit of TDS in the year in which the income is assessable. In case of Real Estate Developers, who is following project completion method and recognized the revenue only when the project gets completed, claiming of TDS refund in the year of completion will be a procedural nightmare. They have to claim the TDS refund on each year during the construction stage.

  v.            In case of sellers claiming exemption u/s 54, 54EC, 54F, have to claim refund by filing the return of income. Till the time, their refund gets invested with the revenue authorities for a return of 6% per annuam, which is even lower than the treasury rates.

Like foreign payments, facility of lower or NIL deduction is not provided in this section.

vi. In case of joint ownership of property, applicability of the provision is not very clear. For example a property under joint ownership is sold for INR 80 lakh, where individual share of each of the seller is less than INR 50 lakh. In case of jointly purchase of property having a value of INR 80 lakh, where each buyer had contributed less than INR 50 lakh. In case of two or more buyers or two or more sellers, there is no clear guidance. Whether each buyer has to make compliance of the law as per their share or 1 buyer can make compliance for entire transactions?

Though, a bare reading of the section gives an impression for applicability of the section if the property value exceeds INR 50 lakh and hence each buyer have to comply the provision in respect of their share in property. Still the same needs clarification for preventing litigation.

vii. Whether deemed consideration, being stamp duty value as per section 50C / 43CA, can be replaced with actual consideration for compliance? In finance bill 2012, there was a proposal to take stamp duty value for TDS. However, the same is missing in the newly introduced section.

In case of property received from relatives, where there is no consideration, can stamp duty value be taken for compliance of this section?

viii. Whether the TDS provision will apply on Transfer of FSI / TDR as the same are immovable property? Applicability of TDS on Joint Development agreements as the same generally results into transfer of land also requires clarification. Further whether any right in a building such as tenancy right, leasehold right etc. will be subject to TDS provision or not may be a subject matter of future litigation.

ix. PAN of Sellers is mandatory, in the absence of which TDS will be 20% by application of Section 206AA of the Income Tax Act.

Conclusion:

The new law will definitely keep a proper track on all high value property transactions in the country and will give the taxing authorities the details in a systematic way. The provisions will also help the taxing authorities to achieve their yearly budgeted collection of Direct Taxes. There are various practical issues as discussed above, which needs to be clarified at the earliest to avoid future litigations. For property buyers, the newly inserted section puts additional compliance burden, which they have to be complied on a timely manner to prevent penal action. Concept of TDS provisions will definitely be a painful exercise for real estate buyers. Taxing authorities will be the only gainer.

( Author is a Partner with SBR & Co. Chartered Accountants, Mumbai and can be reached at bikashbogi@sbrca.in)

Sandeep Kanoi

12 Responses to “TDS on Real estate Industry – Pain or Gain”

  1. Jai says:

    Sir, is it applicable on total cnsideration amount including regisration amount?

  2. Vinay Joshi says:

    Dear CA Bikash Bogi,

    I’ve read with due diligence your valued post.
    As a matter of fact all aspects put by you were raised by me in this same forum long time back. Also to several leading advisors.

    Dear CA Bikash, not many have any answers as more & more clarifications required.

    As a layman, i know i have to claim 1% refund ONLY AFTER FILING RETURNS WHEN DUE.

    BUT when i fall short by 1% to fulfill my tax saving [LTCG], WHAT IS THE REMEDY?

    So i had suggested that instead – as within 15 days 26QB/16B —AMENDMENT REQUIRED SO – THE BUYER WILL GIVE A 1% DEPOSIT CERTIFICATE ISSUED BY PSU BANK WHICH WILL SUFFICE TO MEET LTCG NORMS & IF THE SELLER WANTS IT CAN BE ENCASHED OR TAKE CREDIT.

    If i can approach your opening para – YES REAL ESTATE SECTOR fastest growing BUT WITH HIGHEST CORRUPTION IN THE WORLD, ENVISAGED IN INDIA AIDED BY POLITICIANS & TAX ADVISORS! One of the biggest law firm partner wanted post FY13 budget announcement re manufacturing incentive of 100CR in capex, when i countered him on two counts 1] will you pay C.ExD? 2] show single project investors 5yr retention of said capital goods as ongoing manufacturing to produce goods as defined. There is no answer on this as his premise flattened.The only thing said was just comparison. [by the way this biggest law firm is advisor to the biggest realtors in India.]

    So in spirit 1941A is seeking to flush out undervalued deals WHICH IT NEVER CAN!
    Do pvt.ltd co’s sell property? They sell the co!? Where is your 1941A?

    So in a nutshell 1941A is harassment for a common person – be it buyer/seller.Of course WITH 1941A! It seems your only aspect is TDS.

    Regards,

  3. CA bikash Bogi says:

    @ Mr Manchanda : If the actual registered sale agreement is of Rs. 80 lakh, then TDS will apply…

  4. CA bikash Bogi says:

    @ Mr Alpesh Shah : Ideally TDS provision should not be applied on it but the same may be a subject matter of litigation.

  5. CA bikash Bogi says:

    @ Mr Thakur : It will apply for payment made in each installments if consideration exceeds Rs. 50 lakh in all cases….

  6. CA bikash Bogi says:

    @ Subhash Ji : We have to absorb the law….

  7. CA. Subhash Chandra Podder, says:

    Non sense Provision.
    CA. Subhash Chandra Podder, FCA
    Kolkata
    25/8/2013

  8. Pramod Thakar says:

    Please clarify, whether is applicable for the fresh bookings or purchases from Builder ? in that case Payment is to be made in Installment, further it is towards booking, Actual sale accrued upon the Completion / Possession.

    In this case what should be done ?

    Best Regards
    Pramod Thakar

  9. Alpesh Shah says:

    Whether TDS is applicable on Development agreement by builder with land owner ? Where land is never transferred to Developer, the title remains with Lans owner, he only gives right to develop the propery.

  10. vswami says:

    @vswami

    - Held : Section 54B is applicable only to individuals and not to any other assessee ; because the section uses the expression used by “his or a parent of his” which clearly indicate that the “assessee” refers to an individual. [CIT v Devarajalu (G.K.) (1991) 191 ITR 211 (Mad)].
    Sadly noted, that was TAX CASE NO. 291 OF 1980, but adjudicated on DECEMBER 19,1990; that is, almost after a decade. More sadly, as said,the amendment, of a truly common sense point, was realized to be necessarily called for, hence made after a lapse of ver two more decades.

  11. vswami says:

    The learned writer , so far as one could see, has not even touched upon the very basic area of controversy as to why the new TDS requirement should be taken to apply to a transfer of ‘flat’ or ‘apartment’.

    As brought out in detail in a couple of write-ups published on this website,the above referred so also certain other prima facie controversial points cry aloud for clarifications and remedial action by the government and its chief e4xecutive authority, the CBDT. The worrisome aspects have been highlighted, and urged for a speedy examination and suitable action for remedy/resolution, for fear of the otherwise possible disputes culminating in an endless litigation.

    On the premise that the viewpoints put across on the first mentioned basic point verging on a lacuna in law are to be taken to be not without substance or be illogical, in one’s conviction, there is no gainsaying that any payment / collection of TDS on transfers of flats or apartments will be tantamount to a payment / collection, not in accordance with / without the authority of law, in its profound sense.

    Why the prudent course for the government, in public interest,so as to avoid litigation, would be to plug in the suitable correctives, thereby leave no scope whatsoever for deficiencies in the legislation ? An answer may be readily found if one of past experiences is recalled and specially noted. That has something to do with section 54B. It was because of care not having been taken in firstly framing the provision,thereafter not caring but allowing the lacuna to continue that the scope for and ensuing litigation happened to be kept alive for decades.But it came to be remedied by amending the section as unbelievably late as only in the year 2013. Despite the fact that, meanwhile, the dispute had to be taken to and fought in courts. For knowing the absurdity of that point / issue, reference be made to the decided case =

  12. S.P. Manchanda says:

    What are implications if the actual market value of the property is about Rs.80 lakh but registered before the Sub-registrar at Rs.45 lakh?

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