Expert Corner


Mr. K.R. Girish, Senior Partner (Tax), B S R & Co.
Widening tax net on immovable property transactions - Curbing Speculation?

The Hon’ble Finance Minister had a very daunting task this time, on one hand he had to keep in mind the elections due next year and on the other hand the interest of the foreign investors.

Against this backdrop and in an attempt to address the fiscal deficit and increase revenue collection, the Finance Minister laid out the tax proposals.

Certain key proposals were made from a direct tax perspective in connection with sale & purchase transactions of immovable properties.

Sale of immovable properties within the ambit of TDS

As per the existing tax laws, payments made to non-residents for transfer of immovable property were liable to TDS.  However, transactions for sale of immovable properties to residents were outside the purview of TDS except in the case of compulsory acquisition of immovable properties.

Owing to the lack of appropriate provisions and with a view to improve the reporting of such sale transactions and prevent leakage of revenue for the exchequer, it has been proposed to insert section 194?IA which provides that every transferee, at the time of payment or crediting any sum as consideration for transfer of immovable property to a resident transferor, shall deduct tax at the rate of 1% on such consideration.

The proposed amendments are not applicable to transfer of agricultural land and transactions where the total amount of consideration for the transfer of an immovable property is less than INR 50 lacs.

Practical difficulties are likely to be faced by the deductors as they would be required to obtain a TAN even if for a single transaction, to file e-TDS statements.

The aforesaid amendment shall be effective from 1 June 2013.

Valuation mechanism for sale of land or building held as stock-in-trade prescribed

The existing tax laws have enabling provisions to tax the event regarding conversion of capital assets into stock-in-trade.  Once such stock-in-trade (i.e. converted assets) are transferred, the gains arising is taxable as business income as per the provisions of section 45(2) read with section 28. Further, any transfer of capital asset being land or building was subjected to valuation by the stamp valuation authorities in view of the express provisions of section 50C.

In transactions involving sale / purchase of immovable property (other than capital asset), the Finance Minister has proposed to insert section 43CA which states that where consideration for transfer of land or building or both not being a capital asset is less than the stamp duty value (adopted, assessed or assessable), then such stamp duty value shall be deemed to be the full value of consideration. Where the agreement for fixing the consideration for transfer and registration of such transfer is on different dates, then stamp duty value on the date of agreement for transfer is to be considered.

Further, it has also been proposed that if any consideration or a part thereof is received on or before the date of agreement for transfer, then the stamp duty value to be adopted, would be the value applicable on the date of the agreement of transfer.

The assessing officer may refer the matter to the Valuation Officer if the assessee claims that the stamp duty value exceeds the fair market value of the property and such stamp duty valuation has not been disputed before any court or authority.

The aforesaid section shall be effective from assessment years 2014-15 and subsequent assessment years.

Immovable property for inadequate consideration received by an individual or HUF brought back in the tax net

Before the Finance Act 2010, the provisions of section 56(2)(vii)(b) which provided for taxing an event of transfer of immovable property at a lower or for Nil consideration, is summarized as under:

Sl. No.

Events

Taxable as ‘income from other sources’ in the hands of transferee individual or HUF

(i)


Transfer at Nil consideration

Stamp duty value of such property exceeding Rs 50,000

(ii)


Transfer at consideration lower than stamp duty value of such property by an amount exceeding Rs 50,000

Stamp duty value of such property as exceeds such consideration

The Finance Act 2010 had deleted the above clause (ii) and accordingly, amended the provisions of section 56(2)(vii)(b) to tax the event of transfer of any immovable property in the hands of recipient as income from other sources if the property has been received without consideration and the stamp duty value of such property exceeded fifty thousand rupees.

The Finance Bill 2013 has restored the above provisions for taxing transfer of immovable properties for inadequate consideration by an individual or HUF.

Where the agreement for fixing the consideration for transfer and the registration of such transfer is on different dates, then stamp duty value on the date of agreement for transfer is to be considered.

Further, it has also been proposed that if any consideration or a part thereof is received on or before the date of agreement for transfer, then the stamp duty value to be adopted, would be the value applicable on the date of the agreement for transfer.

The aforesaid amendment shall be effective from assessment years 2014-15 and subsequent assessment years.

Definition of agricultural land amended

Presently, for the purposes of defining ‘agricultural income’ and ‘capital asset’, land is inter-alia considered to be ‘agricultural land’ if the same is located:

Sl. No.

Location of agricultural land

(i)


Within the jurisdiction of a municipality or cantonment board having a population > 10,000

(ii)


Not more than 8 kilometres from local limits of a municipality or cantonment board as notified by the Government.

The second clause stated above is proposed to be amended to provide that a land will be considered as agricultural land if it is located in any area, within the aerially measured distance of:

Sl. No.

Location from a municipality or cantonment board

Population limit

(i)


Upto 2 kilometres

10,000 – 1 lakh

(ii)


More than 2 kilometres but less than 6 kilometres

1 lakh to 10 lakhs

(iii)


More than 6 kilometres but less than 8 kilometres

More than 10 lakhs

The term ‘population’ has also been defined to mean population according to the last preceding census of which the relevant figures have been published before the first day of the previous year.

Similar amendments have also been proposed in respect of the definition of urban land in the Wealth-tax Act, 1957.

In fact this is a good measure on the part of the Finance Minister to stop any tax leakage on people taking recourse to exclusion of agricultural land!

The aforesaid amendment shall be effective from assessment years 2014-15 and subsequent assessment years.

Some of the above amendments are an obvious move to curb speculation and bring about improved reporting and accountability in high-value immovable property transactions.  Considering that the TDS is to be charged on the gross transaction value rather than net gains, sellers will have a cash-flow impact in situations where the sales are at a loss or at zero / negligible gains. 

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