Buyers Beware; TDS is being made compulsory on the Immovable Property Sale w.e.f. 1st October 2012. an analysis by Adv. R. P. Rathod.

The Finance Minister Mr. Pranab Mukherjee’s have proposed an amendment to the Income Tax Laws thereby requiring home buyers to deduct 1% on the Sale Consideration or the value adopted by the Govt. for levy of Stamp Duty whichever is higher as Tax Deducted at Source (TDS). Adv. R. P. Rathod. states if this proposal is enacted it would be yet another hard blow on the already suffering Real Estate Sector.

Adv. R. P. Rathod. further explains that the criteria of applicability of TDS on immovable property (other than farm land) which becomes operational from October 1, 2012, is proposed at Rs. 50 Lakhs in Urban areas and Rs. 20 Lakhs in other areas. Further it has been mentioned in the proposal that the Sub-Registrar of assurance shall not register the said transaction unless and until the purchaser attaches proof of payment of TDS along with the respective agreement.

He says that the said provision could encourage black money component in real estate. Further it will also dampen the real estate sales figures in an already sluggish market.

According to Adv. R. P. Rathod. as per the existing laws a transaction of immovable property the value of which is above 30 lakhs is already being reported in the AIR along with the Pan details so the government can easily find out details of any deal from the Stamp duty and Registration data, which is available every month. So why this unnecessary harassment of levying TDS and then forcing the assessee to file returns and claim refund which involves a time lapse of more than a year.

Adv. R. P. Rathod. further states that in absence of clarification it is interpreted that the same shall apply both in case of a resale property as well as property booked or purchased from the Builders as well. Some of the small time developers to avoid from being reported and subjecting to the TDS would resort to either drawing up two agreements or reducing the agreement value with a majority being taken in cash. While the big builders and developers who are already suffering from the tightening of interest rates from the financing institutions would rather give a go ahead on increasing the property prices further, as substantial amount of their money would be unnecessarily be blocked for more than a year.

Further he states that a many of the property transactions involve sellers who are either upgrading or relocating their house. Since the sale proceeds are reinvested in new property, there is no tax implication as per Income Tax laws and even the seller who is out of the tax net would have to go through the unnecessary hassle of filing the returns and awaiting for more than one year for his refund.

Adv. R. P. Rathod. adds that this amendment to the Income Tax laws can further give rise to the already peaked property prices. As 1% of the ready reckoner rates or agreement value is a very large amount. In case of property valued @ 50 Lakhs the TDS amount would be 50,000/-, as majority of the sellers reinvest in the property market so they would try to recover this short fall by further increasing the property prices not only this but the new proposal would make the home purchase a complete tedious process and will confuse a salaried individual as to the numerous taxes he has to shell out.

He says that if you buy an under-construction flat, one has to pay Service tax, VAT, Registration fees and Stamp duty and now TDS. For a buyer who is not aware of the law, it will become very difficult for him to purchase a flat. Though this amendment does not introduce any fresh tax liability and is aimed on creating a reporting tool for property transactions. It would add-up to administrative hassle & unnecessary harassment of genuine buyers and sellers, which is unwanted especially when the AIR system is in place.

Further this would lead to complex situation and innumerous questions from the buyers like Is TDS to be charged also on the VAT, Service Tax, should we include Stamp duty also, will TDS apply on development charges, club house charges, etc charges paid to builders which the Finance Minister should have reasonably thought before proposing the said amendment, but what can we do when Mr. Pranab Mukherjee’s eyes are all set on collection of taxes Concludes Adv. R. P. Rathod.