TDS on transfer of Immovable property u/s 194IA by CA Bikash Bogi

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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. 


Coverage on Section 194IA
  • 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 buyer 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TDS on real estate transaction (section 194LAA) was earlier proposed by Finance bill 2012, which was subsequently withdrawn for the reasons best known to the finance ministry.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. 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 by 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: 

  1. 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. 
  2. In case of cancellation of transaction / booking, procedure of claiming refund has not been prescribed. 
  3. 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 additional administrative burden. In the absence of clarity, things are getting complicated. 
  4. 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. 
  5. 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 annum, which is even lower than the treasury rates. Like foreign payments, facility of lower or NIL deduction is not provided in this section. 
  6. 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. 
  7. Whether deemed consideration, being stamp duty value as per section 50C / 43CA, can be replaced with actual consideration for compliance? In case of property received from relatives, where there is no consideration, can stamp duty value be taken for compliance of this section? 
    • 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. 
  8. 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. 
  9. 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. 

By CA Bikash Bogi
(Partner)
SBR & CO. Chartered Accountants
For Any query write us at info@sbrca.in or visit www.sbrca.in

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