The Finance Bill 2013 has introduced a new Section 194 IA which provides that with effect from June 1, 2013, the buyer of property will have to deduct tax at source at one per cent from the payment to be made to the seller, if the sale consideration is 50 lakhs or more. This will further complicate the process of buying a property as the buyers will now have to comply with various provisions with regards to TDS and deposit thereof, with the government. Typically, whenever tax is deducted at source, the person deducting the tax has to:
• Apply for and obtain a Tax deduction Account No.
• Depositing the tax deducted with the government.
• File quarterly TDS returns.
• Issue TDS certificate to payee from whom tax is deducted.
Delay or non-compliance with any of the above would attract interest and/or penalty. Considering the fact that the above procedure would cause undue hardship to the property buyers, the government has, to some extent, simplified the same for the purpose of this provision. The property buyer is not required to obtain a TAN. He can simply deposit the tax online by going to the website and furnishing the relevant details about the buyer, seller, and the property.
Those who are not in a position to make the payment online, can do so by filling up a form and making the payment at the branch of an authorised bank. While this will make life easier to some extent, for the property buyers, there are still a number of issues on which there is still no clarity. A property can be purchased either directly from the developer or from the secondary market, from an existing owner.
Section 194 IA provides that any transferee (buyer), responsible for making a payment to a resident transferor (seller) by way of consideration for transfer of any immovable property, shall at the time of credit or payment of such sum whichever is earlier, deduct tax at the rate of one per cent of such sum.
A plain reading of Section 194 IA indicates that TDS will also be applicable when payment is made to the developer for purchase of property.
Typically, whenever a property is purchased from the developer, the payments are usually made in installments over the construction period. Also, installments may be paid before as well as after the agreement is made. Further, the possession of the property is given only after construction is completed and the full payment is made. Hence, the following questions may arise:
When does the transfer of property take place? On first payment, on agreement or on possession? From which payment should one deduct the tax – first payment, all payments, payment before agreement, payment on agreement, payment before possession or payment on possession? Whether tax is to be deducted where the initial payment and/or the agreement is made before June 1, 2013, for installments payable thereafter.
Further, in case of underconstruction property purchased from the developer, service tax is also payable. Hence, it can be argued that developer is providing construction service and not transferring property therefore, TDS provision is not applicable.
As we know that in case of such property transactions, initially a token amount is paid. Thereafter, payments are made in one or more installments, by the buyer and/or his bank (in case of loan). In such cases, questions would arise as to from which payment should one deduct the tax – first payment, all payments, payment before agreement, payment on agreement, payment on possession?
We know that very often even after the token amount is paid, the deal does not go through and the token amount has to be refunded. In such case, it would be very difficult to get the refund of TDS. Hence, it would be practical to deduct tax at source from payment made after there is reasonable certainty of the deal going through. One may, at the most, have to pay interest for delay which in any case will be a very small amount.
In case of a home loan, the initial payment is made by the buyer and subsequent payments are made by the loan provider. Is the loan provider liable to deduct tax? This will depend upon the above question as to when tax is to be deducted. If tax is deducted before the loan disbursement starts, loan provider will not be liable.
Since tax is deductable from the payment to be made; it would be fair to interpret that it will have to be deducted from all people to whom payments are made.
Also, should tax be deducted even if the seller says that he is not to liable to income tax on account of Section 54 (exemption from capital gains tax) or otherwise. Section 194 IA talks of payments made for transfer of property. It does not talk about capital gains or exemption from tax. Hence, the buyer will have to deduct tax. The seller will have to file the income tax return and claim refund.
It is to be noted that this provision is not applicable in case of an NRI seller because in case of NRIs, provisions of Section 195 (TDS at higher rate) would be applicable.
It is also pertinent to note that in case the seller does not provide his/her PAN number, tax will have to be deducted at the rate of 20 percent of the sale consideration, instead of one per cent. Hence, as it can be seen from the above that introduction of this provision of TDS on transfer of immovable property, is likely to create some practical difficulties and confusion, particularly in the initial years since there is a lot of ambiguity with regards to its interpretation and implementation.
Nevertheless, the onus of deducting the tax is on the buyer and he should take reasonable care in discharging his duty as envisaged in this provision.
Alok Kumar Upadhayay