TDS on Real estate Industry Pain or Gain

24.08.2013

CA. Bikash Bogi

Introduction: Real estate sector in India has come a long way by becoming
one of the fastest growing markets in the world. 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. The Real Estate sector
contributes approx 5% of the national GDP. As per the recent global survey, India Ranked
20th among the top 20 Real Estate Investment markets globally with investment volume of
USD 3.5 billion [INR 19000 crore] recorded in FY 2012-13 alone. Due to the magnitude of
the transactions, Finance Ministers had given due weightage to systemize the taxing
provisions specially related to Real Estate Sector.
Concept of TDS for Real Estate Industry:
Vide Finance Act 2013; concept of TDS on Real estate transactions was introduced in India.
As per Newly inserted section 194IA, Any person, who purchases any immovable property
(other than agricultural land) for a consideration, shall require to deduct tax at source @1%
of the amount paid to resident seller; provided the consideration is INR 50 lakh or more.
Immovable property for this section means any land (other than agricultural land) or any
building or part of a building. Further, this section puts burden on every buyers including non
residents who are purchasing the property from the resident sellers. Further, property
transaction between the real estate developers and individual assessees is also comes under
the purview of this section i.e. the section will also apply on stock in trade. The section
does not apply to for consideration received under the compulsory acquisition of the property
as mentioned in section 194LA. Further this section does not apply in case the seller is the
non- resident, as the same is covered by section 195 of the Income Tax Act.
TDS on real estate transaction (section 194LAA) was earlier proposed by Finance bill
2012, which was subsequently withdrawn for the reasons best known to the finance ministry.
In comparison to earlier proposal, the scope of the newly inserted section has been diluted to
a certain extent. The thrash hold exemption of INR 20 lakh for property situated in other than
urban areas has not been incorporated in section 194IA; rather an exemption of INR 50 lakh
for property situated in all areas has been provided. Due to this proposal, properties located in
areas other than urban areas may be out of purview of this section. Further, proof of deposit
of TDS which was mandatory for registration of property, as proposed in Finance bill 2012,
has been ignored in section 194-IA.
Procedural Requirements:

Buyer of the property is required to deduct tax, at the time of credit of the consideration to the
account of the seller or at the time of payment of such sum in cash, cheque, draft or any other
mode. A simple, one pager, Form 26QB has been introduced for compliance of this section.
Buyer of the property is not required to obtain TAN no. Buyer is required to furnish
information as prescribed in Form 26QB which includes
Full Name, Address & PAN of Buyer and seller
Address of the property
Value of property, Date of agreement / booking
Amount paid / Credited, payment in installments or lumpsum
TDS etc.
Subsequently, Buyer can make the payment online or offline, within 7 days from the end of
the month in which deduction is made. TDS certificate [Form 16B] will be issued by the
buyer to the seller within 15 days from the due date of payment of taxes. The same needs to
be generated from www. tdscpc.gov.in
Income Tax Department has issued Frequently Asked Questions [FAQ] on TDS of
immovable property. The same can be accessed from the link TDS on Property FAQ ,
Payment Procedure & Points to Remember . A brief reading of the FAQ will give a brief
idea about procedural requirement.
Penal Provisions for non compliances:
As per section 201, In case assessee fails to comply with the procedural guidelines of TDS
provisions [deduction or payment], then the assessee will be treated as an assessee in default.
As per section 201(1A), in case of failure to deduct Tax or short deduction of TDS, interest
@1% will be levied for every month or part of the month, on the amount of tax, from the date
on which tax was deductible to the date on which the same is deducted. Further, when the
buyer has failed to deposit wholly or partly tax so deducted, Interest @1.5% will be levied,
for every month or part of the month, on the amount of tax, from the date of deduction till the
date of actual payment.
As per section 271C of the Income Tax Act, penalty for non deduction / non-payment of TDS
are equal to the amount of Tax which the assessee failed to deduct or pay [This penalty shall
be imposed b the joint commissioner]. Further, Sec 221 provides for penalty to be paid as
directed by the assessing officer which shall not exceed the amount of TDS.
Why TDS provisions is Special for Revenue Authorities:
Though as per memorandum explaining finance bill 2013, TDS concept was introduced to
make parity with transaction of immovable property done by the non-residents, to have a full
proof reporting mechanism for real estate transactions and also to make collection of taxes at
the earliest possible time. Relevant extract is reproduced herein below:

On transfer of immovable property by a non-resident, tax is required to be deducted at source

by the transferee. However, there is no such requirement on transfer of immovable property
by a resident except in the case of compulsory acquisition of certain immovable properties. In
order to have a reporting mechanism of transactions in the real estate sector and also to
collect tax at the earliest point of time, it is proposed to insert a new section 194-IA..
However, collection of taxes at the earliest possible time is seems to be the main reason for
introduction of this concept for real estate industry. Presently approx 40% of the Direct Tax
collections in India are coming from TDS. The data given in the table below is explaing the
same

Financial
Year

Gross Direct Net Direct Tax

Tax Collection Collection

TDS

% share of TDS
(Net Direct Taxes)

(Rs. in crore )
(Rs. in crore ) (Rs. in crore )

2006-07

2,67,416/-

2,30,181/-

70,689/-

30.71%

2007-08

3,53,498/-

3,12,213/-

104,741/-

33.55%

2008-09

3,72,915/-

3,38,212/-

1,30,172/-

38.49%

2009-10

4,35,164/-

3,78,063/-

1,39,529/-

36.90%

2010-11

5,22,103/-

4,46,934/-

1,66,687/-

37.29%

2011-12

5,90,077/-

4,94,799/-

1,90,000/- #

38.00% ##

2012-13

6,31,549/-

5,48,845/-

2,30,188/-

41.18%

2013-14 ***

6,68,000/-***

***Budgeted Estimated

### Apx number

Looking into the magnitude of the transactions volume, newly inserted provision will
definitely help the government to achieve the budgeted estimate of Direct tax collection in
FY 2013-14 in the global slowdown era.

Area of Concern / Controversial Issues:

i.
Should the buyer need to comply with TDS provisions if the agreement is entered
st
before 1 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 1 st
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?
As there is no clarity on these issues till date, it is advisable for the buyers to deduct tax on
every payment made after 1st June 2013, if total payment after 1 st June 2013 is likely to be
INR 50 lakh or more. A clarification is required on this issue.
ii.
In case of cancellation of transaction / booking, procedure of claiming refund has
not been prescribed.
iii.
In case of payment in installments, TDS is required for every installment. It will
increase the compliance burden on the buyers.
Normally 80% of the property value is financed by Banks / Financial institutions. Banks / FIs
are issuing the cheque / DD etc in favour of the Builder / Buyer. In case of under construction
property, payments are made in installments. Now the question here is whether the banks /
FIs will deduct 1% tax and paid to the government or bank will pay the full installments and
the buyer will pay the tax and get it refunded from the builder. I dont think that Banks / FIs
will take the addition administrative burden. In the absence of clarity, things are getting
complicated.
iv. As per section 199 (read with Rule 37BA) of the Income Tax Act, a person can avail
credit of TDS in the year in which the income is assessable. In case of Real Estate
Developers, who is following project completion method and recognized the revenue only
when the project gets completed, claiming of TDS refund in the year of completion will be a
procedural nightmare. They have to claim the TDS refund on each year during the
construction stage.
v.
In case of sellers claiming exemption u/s 54, 54EC, 54F, have to claim refund by
filing the return of income. Till the time, their refund gets invested with the revenue
authorities for a return of 6% per annuam, which is even lower than the treasury rates.
Like foreign payments, facility of lower or NIL deduction is not provided in this section.
vi. In case of joint ownership of property, applicability of the provision is not very clear. For
example a property under joint ownership is sold for INR 80 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 80 lakh, where each buyer had contributed less than INR 50 lakh. In case of two
or more buyers or two or more sellers, there is no clear guidance. Whether each buyer has to
make compliance of the law as per their share or 1 buyer can make compliance for entire
transactions?

Though, a bare reading of the section gives an impression for applicability of the section if
the property value exceeds INR 50 lakh and hence each buyer have to comply the provision
in respect of their share in property. Still the same needs clarification for preventing litigation.
vii. 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.
In case of property received from relatives, where there is no consideration, can stamp duty
value be taken for compliance of this section?
viii. Whether the TDS provision will apply on Transfer of FSI / TDR as the same are
immovable property? Applicability of TDS on Joint Development agreements as the same
generally results into transfer of land also requires clarification. Further whether any right in
a building such as tenancy right, leasehold right etc. will be subject to TDS provision or not
may be a subject matter of future litigation.
ix. PAN of Sellers is mandatory, in the absence of which TDS will be 20% by application of
Section 206AA of the Income Tax Act.
Conclusion:
The new law will definitely keep a proper track on all high value property transactions in the
country and will give the taxing authorities the details in a systematic way. The provisions
will also help the taxing authorities to achieve their yearly budgeted collection of Direct
Taxes. There are various practical issues as discussed above, which needs to be clarified at
the earliest to avoid future litigations. For property buyers, the newly inserted section puts
additional compliance burden, which they have to be complied on a timely manner to prevent
penal action. Concept of TDS provisions will definitely be a painful exercise for real estate
buyers. Taxing authorities will be the only gainer.
( Author is a Partner with SBR & Co. Chartered Accountants, Mumbai and can be reached at
[email protected])