When you sell land, building or a flat, normally the stamp duty on the sale agreement or deed is borne by the purchaser. Most sellers, therefore, rarely bother to enquire the amount of stamp duty payable on the sale transaction by the purchaser. Most states have notional property rates for different areas, called “ready reckoner rates”, “circle rates” or “guideline values”. The stamp duty is to be paid on the basis of the valuation of the property computed on the basis of such notional rates, or the sale price specified in the sale deed, whichever is higher.
You may be shocked to learn that paying stamp duty on a higher valuation than the specified sale price has greater tax consequences for you than for the purchaser. In most cases, the purchaser would be willing to pay the slightly higher stamp duty rather than fight the basis of valuation with the stamp duty authorities. In states such as Maharashtra, such stamp duty is at the most 5% of the difference in valuation between the ready reckoner rates and the sale price as per the agreement or deed. However, in the process of the purchaser paying stamp duty on a higher valuation, you may end up paying capital gains tax at 20% of the difference in valuation and sale price. How is that so?
Normally, income-tax is payable on the basis of actual income and not on notional income, which you could possibly have earned. Unfortunately, in the last few years, we are seeing tax provisions seeking to tax notional amounts. One such provision is section 50C of the Income-tax Act. Normally, capital gains are computed by deducting the indexed cost of acquisition and sale expenses from the sales price. Under section 50C, however, wherever the stamp duty valuation based on the ready reckoner is higher, in such computation, you have to substitute the higher stamp duty valuation for the actual sales proceeds. Of course, there is no problem if your sale price is higher than stamp duty valuation, as your capital gains are computed on the basis of your sale price.
These provisions apply even if the property is being sold consciously for a lower price to a close relative. It may be better to gift the property in such situations as the capital gains provisions do not apply on gifts. Last year, a provision was introduced to tax even the purchaser (or the recipient of gift) on such difference between valuation and sale price. Fortunately, in the recent Budget, the provision to tax the purchaser or recipient of gift has been done away with.
This provision was introduced to check black money transactions in real estate. The problem is that the stamp duty ready reckoner or circle rates are approximate rates for a general area. These rates do not factor in qualitative differences, such as quality of construction, amenities available or special location disadvantages. For instance, two adjoining flats in the same building in Mumbai could fetch drastically different prices if one flat has a sea view, while the other overlooks a slum or a busy road. The problem is aggravated by the fact that state governments, in their effort to raise higher revenues through stamp duty, have been substantially hiking the stamp duty ready reckoner or circle rates each year, making more and more genuine transactions susceptible to this provision.
While there are provisions for reference to a valuation officer by the tax authorities, these are not really effective in practice for the taxpayer. It is, therefore, essential that at the time of payment of the stamp duty, the valuation should be challenged before the authorities if it is higher than the sale price. Of course, one can also challenge the valuation arrived at by the valuation officer, but this would involve litigation.
A similar provision to tax notional capital gains on the basis of fair market value existed in the 1960s and 1970s. But the provision was deleted after the Supreme Court held that authorities could tax such notional gains only if they were able to prove that additional money had changed hands from the purchaser to the seller. Unfortunately, we have a similar provision in a new form. The validity of this provision has been challenged before high courts, but so far only one court has given a verdict on the issue, upholding the validity of the provision.
While the courts may ultimately decide the issue some time in the future, if you are a seller, to avoid litigation, you need to take precautions to ensure that stamp duty is not unnecessarily paid on a higher valuation than the sale price.
Gautam Nayak is a chartered accountant. Your comments, questions and reactions are welcome at firstname.lastname@example.org