TDS at the Rate of 1 Percent Applied on the Value of Transfer of Immovable Property Exceeding Rs.50 Lakh
The Finance Bill 2013-14 proposes levy of TDS at the rate of 1 percent on the value of the transfer of immovable property where the consideration exceeds Rs.50 lakh or Rs 5 millon. However, agricultural land will be exempt.
Presenting the Union Budget in the Lok Sabha today, the Finance Minister Shri P.Chidambaram said that transactions in immovable properties are usually undervalued and under-reported. One half of the transactions do not carry the PAN of the parties concerned.
The Finance Minister said that the proposal to apply TDS was aimed at improving the reporting of such transactions and the taxation of capital gains.
There are certain amendments to nullify the judicial decisions and one amendment meant to widen the tax base and which may have significant impact relates to introduction of tax deduction at source in respect of transactions in immovable properties. The Budget 2012 contained a similar provision in section 194LAA which was withdrawn after representation and now the Budget 2013 has the same provision in section 194-IA.
Features of Section 194-IA
- This provision will be applicable in respect of transactions effected on or after 01.06.2013.
- It seeks deduction of tax at source on transfer of certain immovable property other than agricultural land referred to in section 2(14).
- Any person being a transferee who is liable to pay to a resident by way of consideration for transfer of any immovable property shall at the time of credit of such sum to the account of the transferor or at the time of payment in whatever manner, has to deduct tax at source at 1 percent.
- The liability to deduct tax at source is at the time of actual payment or credit of such sum to the account of the transferor whichever is earlier.
- The threshold limit for application of tax deduction at source is Rs.50 lakhs. Where the transaction is less than Rs. 50 lakhs, the liability to deduct tax at source will not be applicable.
- Since the expression used in the section is “any sum by way of consideration” the provisions of section 50C will not interfere. Hence, tax deduction at source will be with reference to apparent consideration only.
Reincarnation of the provision
What difference did the Budget 2013 make with regard to the TDS on immovable property transactions? The apparent difference is firstly with placing of the section in statute book. The Budget 2012 numbered it as section 194LAA and whereas the honorable Finance Minister while presenting 2013 Budget has inserted the same provision in section 194-IA.
The Finance Bill, 2012 contained some complexity by making reference to stamp valuation adopted by the State Stamp Valuation Authority as the basis for deduction of tax at source. In the Finance Bill, 2013 there is no such reference to the valuation adopted by the stamp valuation authority, for deduction of tax at source.
The Finance Bill, 2012 gave applicability of the section to only certain specified areas and was not applicable to the length and breadth of the country. In the Finance Bill, 2013 there is no such discrimination between big metropolises viz-a-viz the urban lands situated in other parts of India.
In effect, any transaction other than agricultural land involving apparent consideration of Rs.50 lakhs or more is liable for tax deduction at source under section 194-IA.
Impact of the Amendment
The memorandum provides that while under Section 139A, there is a mandatory requirement to quote the Permanent Account Number for property transactions exceeding Rs 5 Lakhs, in many cases, there is no quotation of the Permanent Account Number even for property transactions exceeding Rs 30 Lakhs (basis the Annual Information Return filed by the Registrar/Sub-registrars). Due to this, many immovable property transactions are left unreported.
Further, while there is a tax deduction at source requirement on various payments made to residents e.g., salary, interest, etc, transfer of immovable property has no such requirement. Therefore, the Finance Minister has proposed that 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, tax deduction at source also be mandated for transfer of immovable property (other than agricultural land) to a resident transferor at the rate of 1 percent of the transfer consideration.
It should be noted that a similar attempt to cover transfer of immovable property under the tax deduction at source compliance was also made in the past but the same was not passed. The Finance Minister has once again made this proposal, albeit keeping the tax deduction at source procedure simpler than the previously.
With effect from June 1, 2013, any person who acquires an immovable property (other than agricultural land) from a resident transferor and where the value of consideration exceeds Rs 50 Lakhs, shall be required to deduct tax at source at the rate of 1 percent.
It is still not clear whether the transferee shall be required to comply with all the other compliances of tax deduction at source, e.g., filing of TDS returns, issue of TDS certificates, etc. This could prove cumbersome as well as burdensome.
The reason for introducing section 194-IA is for widening of tax base and to check tax avoidance measures. The move of the Finance Minister is to place check on real estate sector but when the wheels of economy are in downward trend, the timing of the decision is debatable. However, removing the discrimination in applicability of the provision between certain select places is acceptable.
There is no pinning of responsibility on the registering authorities in section 194-IA which was there in the envisaged and dropped section 194-LAA. Will the provision be dropped before be enacted as law or if it survives in the statute book, Will it be effective in reality when there is no mandate to the registering authorities is a million dollar question.