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2015

TDS – Section 194IA – Concept and Issues

Introduction

  • The real estate sector in India is one of the largest drivers of the country’s economic growth.
  • Real estate in India contributes massively to the country’s GDP.
  • Currently, the Indian Real Estate Market has a market size of approx USD 70 billion [INR 3.8 lakh crore] and is expected to touch the market size of USD 180 billion [INR 10 lakh crore] by the year 2020.

Objective

  • While introducing TDS on immovable property the Finance Minister said that transactions of immovable property were usually undervalued and under-reported.
  • Almost half of the transactions did not even carry the PAN number of the parties concerned.
  • Thus, in order to prevent undervaluation and under-reporting of transactions in the real estate sector and to systematize tax provisions and ensure early collection of tax Section 191A has been introduced vide Finance Act, 2013.
  • This section is effective from 1st June 2013.

Concept of TDS u/s 194-IA

  • TDS is required to be deducted at source as per provisions of section 194-IA of the Income-tax Act, 1961 (the Act). The provisions of section 194-IA are as under:
    1. Any person, being a transferee, responsible for paying (other than the person referred to in section 194LA) to a resident transferor any sum by way of consideration for transfer of any immovable property (other than agricultural land), shall, at the time of credit of such sum to the account of the transferor or at the time of payment of such sum in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to one per cent of such sum as income-tax thereon.
    2. No deduction under sub-section (i) shall be made where the consideration for the transfer of an immovable property is less than fifty lakh rupees.
    3. The provisions of section 203A shall not apply to a person required to deduct tax in accordance with the provisions of this section.
  • The provision can be summarised as under:
    Transferor Resident
    Transferee Any person (Resident or Non Resident)
    Asset Transferred Immovable property except agricultural land
    Point of Deduction Payment or credit whichever is earlier
    Rate of Deduction 1% (if PAN available)
    Consideration paid/payable Rs. 50 Lacs or more
    TAN number Not required

Definitions

  • Immovable Property means any land (other than agricultural land) or any building or part of a building. Example; Shop, Godown, theater etc.
  • Agriculture land means agricultural land in India, not being land situated in any area referred to in items (a) and (b) of sub-clause (iii) of clause (14) of section 2 i.e.
    • It is situated within the jurisdiction of municipality which has population of not less than 10000; or
    • It is situated in any area mentioned below:
      Aerial Distance From Municipal Limits Population as per last Census
      Within 2 Kms >10,000 but <= 1,00,000
      Within 6 Kms >1,00,000 but <=10,00,000
      Within 8 Kms >10,00,000

Take Aways:

On analysis of above definition of agricultural land it can be said that

  • Urban agricultural land is not considered as agricultural land and thus is covered under provisions of section 194 IA.
  • Immovable property could be located in India or outside India.

Analysis of Section 194IA:

  • Provisions of section 194-IA are triggered when transaction has been entered after 01.06.2013 and payment consideration is ₹ 50,00,000 or above.
  • Section 194IA is applicable in case of gift from relatives also. However, if transfer is made without payment of any consideration, then provisions of this section will not apply.
  • Provisions of Section 194–A does not apply for consideration received under the compulsory acquisition of the property as mentioned in section 194-A.
  • In case the seller is the non-resident provisions of section 194-IA will not apply. The same is covered by section 195 of the Act.

Rate of TDS

  • Tax is deductible at the rate of 1% of the consideration payable to a resident transferor.
  • If a valid PAN is not provided by the seller then provisions of section 206AA would apply and the tax rate would be 20%.

Registration of transferred property only after proof of TDS

The registration for transfer of immovable properties cannot be done unless the transferee provides proof of deduction of tax at source and payment thereof to the registering officer.

Procedural Requirement:

  • Procedure for Payment of TDS:
    • Tax deductor (Buyer) has to furnish information regarding the transaction online in Form 26QB;
    • after furnishing of details of the transaction deductor (i.e. Buyer) is required to make online payment of tax withheld.
  • Time for depositing of TDS:
    • TDS is required to be deposited within a period of 7 days from the end of the month in which deduction is made.
  • Issuance of TDS Certificate to Seller:
    • Buyer is required to issue a TDS Certificate in Form No.16B within 15 days from the due date of furnishing the Challan cum statement in Form No. 26QB;
    • Seller can verify deposit of taxes deducted by the buyer in his Form 26AS [Annual Tax Statement].

Penal Provisions For Non – Compliance:

  • Interest:
    Section Default Rate of simple interest Amount on which interest is levied Interest beginning from date Interest Upto
    201(1A) Failure to deduct TDS 1% Per Month or part of month Amount on which short deduction / non-deduction of TDS Date when TDS was deductible TDS is deducted
    201(1A) Failure to pay tax after deduction 1.5% Per Month or part of month Amount on which TDS is not deposited Date when TDS was required to be deposited TDS Was actually paid
  • Penalty:
    • As per section 271C of the Act, penalty for non deduction / non-payment of TDS is equal to the amount of tax which the assessee failed to deduct or pay [This penalty shall be imposed by the Joint Commissioner].

Issues:

  1. Should the buyer need to comply with TDS provisions if the agreement is entered before 1st June 2013 but the payments are made after 1st June 2013?
    What if when part payment has been made on or before the agreement date and agreement was made after 1st June 2013?
    What if the part payment is made before 1st June and balance is paid after 1st June? Whether TDS to be deducted on the entire amount or the balance amount?
    On aforementioned issues there is judicial impasse. Thus, it is advisable for buyers to deduct tax on every payment made after 1st June 2013, if total payment after 1st June 2013 is likely to be INR 50 lakh or more.
  2. In case of payment in installments, tax is required to be deducted for every installment. The same will increase the compliance burden on the buyers.
  3. In case of under construction property and payments are made in installments.
    Now the question here is whether the banks/FIs will deduct tax @ 1% and pay to the government or bank will pay the full installments and the buyer will pay the tax and get it refunded from the builder. There is no clarity on this aspect till date. In my view, Banks/ FIs will not take the additional administrative burden and buyer should discharge these obligations.
  4. As per section 199 (read with Rule 37BA) of the Act, a person can avail credit of TDS in the year in which the income is assessable. In case of Real Estate Developers who are following project completion method, TDS refund has to be claimed each year during the construction stage.
  5. In case of sellers claiming exemption u/s 54, 54EC, 54F of the Act, Tax has to be deducted u/s 194-IA. They will be required to claim refund by filing the return of income. Till that time, their refund lies with the revenue authorities for a return of 6% per annum, which is even lower than the treasury rates. Facility of lower or NIL deduction is not provided under section 194-IA.
  6. In case of joint ownership of property. For example, a property under joint ownership is sold for INR 60 lakh, where individual share of each of the seller is less than INR 50 lakh. In case of jointly purchase of property having a value of INR 60 lakh, where each buyer had contributed less than INR 50 lakh, whether each buyer has to make comply with the provisions of the Act as per their share or 1 buyer can make compliance for entire transaction?
    In case of two or more buyers or two or more sellers, there is no clear guidance. Though, a bare reading of the section gives an impression for applicability of the section if the consideration for immovable property value in Rs. 50 Lacs or above. It is advisable that each buyer comply the provision in respect of their share in property. Still the same needs clarification for preventing litigation.
  7. Whether deemed consideration, being stamp duty value as per section 50C / 43CA, can be replaced with actual consideration for compliance?
    In Finance bill 2012, there was a proposal to take stamp duty value for TDS. However, the same is missing in the newly introduced section. Thus, actual consideration should be considered for compliance.
  8. In case of cancellation of transaction/booking, procedure of claiming refund has not been prescribed.
  9. Sellers cannot apply for lower deduction certificate as section 197 does not cover section 194-IA. This will lead to unwarranted exercise of tax and then claiming refund from government.
  10. There is no guidance regarding sale of immovable property as slump sale.

Conclusion

  • Section 194 IA puts additional compliance burden for property buyers.
  • The provisions are required to be complied by them timely in order to prevent penal action.
  • Moreover, the provision has acted as trail for government to trace the major property transactions and to ensure proper valuation and reporting of same to the government authorities leading to higher tax revenue for the government.
  • However, several issues need to be clarified in order to avoid future litigations.
Financial Management