Real estate accounts for about 5% of India’s Gross Domestic Product (GDP) and is the second largest employment generating sector next to agriculture.The report by the High-level Committee – “The White Paper on Black Money” highlighted that the real estate sector is one of the biggest source and mode for generating and consuming black money in India as most of the transactions are either unreported or under reported. To deal with this revenue menace, the Finance Bill 2013 has proposed to cast an obligation on the buyer of a property to withhold taxes on payments to the resident seller. A similar proposal was made inthe Budget 2012 but was rolled back during the budget discussions.
Currently, tax deduction obligation is imposed on a buyer purchasing immovable property from a non-resident seller under Section 195 of the Act and on a person compensating for compulsory acquisition of immovable property (other than an agricultural land) under Section 194LA. Following this, Budget 2013 proposal requires buyers to deduct tax at 1% on the sale consideration payable to resident sellers. However, there is no obligation on the buyer to deduct tax when the immovable property is an agricultural land. In order to avoid the compliance hassles for small tax payers this requirement will not apply if the total consideration is less than fifty lakh rupees. This will be effective 1st June 2013 once assented by the Honourable President of India.
In Budget 2012, a lower exemption ceiling was prescribed for properties located other than in specified urban areas. There was also a clarification that stamp duty value will be regarded as consideration if the property value is less than value adopted/assessed for stamp duty purposes. Besides this, it was also provided that the registration will not be carried out in the absence of proof for tax deduction.In comparison, the budget 2013 has now presented the diluted version to drive the proposal to the next stage. Lesser will be the distress, if the Government notifies the one page challan proposed last time to facilitate tax credit through Permanent Account Number.
On the flip side, those who claim exemption from long-term capital gains through re-investment in house property/ bonds will now be required to file a tax return to claim refund of the tax deducted at 1%. Any seller not in possession of Permanent Account Number may be subject to tax deduction at a higher rate of 20%. Despite this hiccup, with the Centralised Processing Centre (CPC) in place, one can anticipate quicker refund.
Adam Smith, in his book “Wealth of Nations” had insisted “convenience of tax payment” as one of the principles of an ideal tax system. If the Government notifies easy procedures and the same is supported by a technology driven administration, the proposed regulation will ensure collection of taxes in advance besides putting a reporting mechanism in place for real estate transactions.
(Author is a Manager at Deloitte Haskins & Sells)