BackTax deduction on purchase of immovable property
Tax is to be deducted either at the time of credit or payment of consideration, whichever is earlier.
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A recent amendment relating to tax deduction at source (TDS) on transfer of immovable property has become effective from 1 June. Since this requirement applies to all transactions of transfer of immovable property of 50 lakh or more, it would require compliance by and affect a large number of purchasers of such property, including individuals not carrying on business, who are normally not required to deduct TDS.
This new provision requires TDS to be deducted at 1% of the price being paid by the purchaser of an immovable property, irrespective of the quantum of capital gains. If the seller does not have a Permanent Account Number (PAN), the rate of TDS would be 20%. The property may be in the nature of land, buildings or flats. However, the deduction does not apply to purchase of agricultural land which is not located within municipal limits or within the specified distance from municipal limits.
Tax has to be deducted either at the time of credit or payment of consideration, whichever is earlier. Normally, in most cases of individuals purchasing immovable property, the question of credit of consideration in the books of account should not arise, as there would be no books of account maintained for such transactions. Therefore, effectively TDS would be required to be deducted at the time of payment. Such TDS would be deducted from the consideration being paid to the seller and have to be paid separately to the government by the purchaser.
Such tax would have to be deducted irrespective of who the seller is, whether a builder or a flat owner making a subsequent sale. However, where the seller is a non-resident, these provisions would not apply, and the earlier TDS provisions applicable to purchase of property from non-residents would continue to be applicable.
This provision would only apply to payments being made on or after 1 June 2013, and would not apply to payments made for the same property prior to 1 June 2013, when the relevant law was not in force. However, for the purposes of computation of the limit of 50 lakh, the total consideration, whether paid before 1 June 2013 or subsequently, would have to be considered. Therefore, for a property agreed to be purchased for 75 lakh, if payments of 30 lakh have been made before 1 June 2013, even if the payments being made after 1 June 2013 are less than 50 lakh, TDS would have to be deducted from the payments of 30 lakh as and when such payments are made.
Fortunately, the applicability of TDS is only to the actual consideration specified in the transfer documents, and is not on the basis of a notional fair market value, such as a stamp duty valuation, even though such valuation may be higher. The consideration would include various incidental payments required to be made to the seller, such as legal fees, contribution towards shares, payment for parking spaces. However, stamp duty required to be borne by the purchaser or registration fees or transfer fees borne by the purchaser would not be regarded as payments being made to the seller as consideration, and would therefore not be subject to TDS.
What is the position regarding joint purchasers or joint sellers? Is the limit of 50 lakh to be seen vis-a-vis payment made by each purchaser to each seller, or is it a composite limit of the total price of the property? From the language of the law, it seems that the limit would have to be seen vis-a-vis payment being made by each purchaser to each seller, though the matter is slightly debatable, particularly as the online form has questions to be answered as to whether there is more than one transferee as well as whether there is more than one transferor and the total value of consideration. In the absence of clarity, to err on the safer side, it may be advisable to deduct TDS wherever the consideration under a single agreement exceeds 50 lakh, irrespective of the number of transferors or transferees.
Fortunately, the purchaser deducting such TDS is not required to comply with the cumbersome TDS procedural requirements applicable to other TDS deductors, such as obtaining a Tax Deduction Account Number, filing a TDS return, issuing a TDS certificate, etc. All that she is required to do is fill in a form online (www.tin-nsdl.com), and either make an e-payment of the tax or physically make the payment in a bank branch. The seller would get credit for the TDS on the basis of his PAN, which is required to be mentioned in the form.
One practical difficulty which will arise in situations when the purchase of property will be financed through a loan from a bank or a housing finance company. In such cases, to the extent of the loan amount, the bank or finance company would directly make the payment to the seller, and not route the payment through the purchaser, who is the borrower.
Even in such cases, the bank is merely discharging the obligation of the purchaser who is responsible for making payment of the purchase price, and the purchaser is therefore required to deduct TDS in respect of such amount as well. The purchaser would therefore have to request the bank/finance company to pay the seller the loan amount net of TDS, the purchaser would then pay the TDS to the government, and claim reimbursement of the TDS from the bank/finance company. Of course, explaining this procedure to the bank/finance company and convincing them is a tall task in itself, particularly as these provisions are new.
There are many more issues which arise in respect of these provisions, particularly as to their applicability to development agreements where the consideration is in kind, or where the consideration is in the form of a revenue share of sale proceeds. It is only over a period of time that these issues will hopefully be clarified either by judicial decisions or by clarifications issued by the Central Board of Direct Taxes.
Gautam Nayak is a chartered accountant.
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