If you purchase a house under construction and the value of the property appreciates during the period of construction before you took possession, or if you were able to strike a good bargain for a ready house, you would consider yourself fortunate.
But before you count your blessings, remember that you are liable to pay tax on the difference between the valuation (under stamp duty laws) of the property on the date of possession and your purchase price.
You may feel that the difference is not your income, but unfortunately, the tax authorities look at it otherwise. The tax laws provide that from 1 October 2009, you would be liable to pay tax on the difference. Fortunately, wiser counsel seems to have prevailed, and the recent Budget proposes to amend the tax laws retrospectively.
Unfortunately, a similar provision continues for other assets, such as shares and securities, jewellery, works of art and archaeological collections. The law provides that if you receive such an asset for a price which is less than its fair market value and the total difference in the valuation of such assets received by you during the year exceeds Rs50,000, the difference in valuation is taxable as your income under “income from other sources”.
Illustration: Jayachandran / Mint
How does one determine the fair market value of such assets? The law provides that the method of valuation will be prescribed under income-tax rules. Though the law is currently applicable—the valuation rules have not yet been notified—it may be possible to claim that the provisions can’t apply in the absence of such rules.
The problem, however, lies in the fact that valuation is a highly subjective matter, particularly in the case of works of art. As the saying goes, “Beauty lies in the eyes of the beholder.” You may be fascinated by a painting and consider its value to be Rs5 lakh, while I may not like it much and consider its value to be as low as Rs1 lakh. Not only that, the market for art is highly illiquid and lacks depth. A distress sale may result in a low price. Prices vary widely, depending on the mode of sale. A painting that can be bought directly from an artist for Rs1 lakh may cost you Rs1.5 lakh if purchased from an art gallery. The price may go up to Rs3 lakh or more if the same painting is purchased at an auction. Under such circumstances, how do you arrive at the market value of the painting? Can one lay down any hard and fast formula to determine its value?
Frankly, the whole provision seems to stem from a misdirected belief of tax authorities that the wild fluctuations in art values are entirely the result of black money transactions in art. What the tax authorities need to keep in mind is that if the purchaser is paying black money for a work of art, he must have acquired that black money through some other means. The problem really is the presence of black money in the economy and is not restricted to the art market. Surely, there are better ways to tackle the issue of black money transactions in the art market rather than by penalizing all art buyers.
Art dealers would also have been affected by this provision, resulting in double taxation. If an art dealer pays a lower price, his purchases would be lower, resulting in higher profits. He would, therefore, in any case be paying tax on the difference between his sale price and his cost of purchase. Fortunately, the Budget is amending this anomaly by excluding trading transactions from the purview of this section.
Fortunately, transactions between relatives are excluded from the purview of this provision. The list of relatives from whom such an asset can be received without attracting this provision is given in the law. One has to be careful before concluding that the exclusion applies. For instance, if you acquire an asset from your uncle (brother of your mother or father), such a transaction is exempt. However, if the uncle acquires an asset from you, such a transaction is not excluded.
Though the provision was initially restricted to taxation of gifts of money, it has been extended to gifts in kind as well as notional gifts. Through this provision, effectively gift tax has been reintroduced by the back door, though officially abolished since 1998. One hopes that this entire concept of taxing notional gifts is totally done away with because it could lead to a large amount of litigation as to what is the fair market value of an asset. It taxes something which is really not in the nature of income. It also provides a tool to dishonest tax officers to harass honest taxpayers. The sooner it is done away with, the better.
Gautam Nayak is a chartered accountant. Your comments, questions and reactions to this column are welcome at email@example.com