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TDS To Deduct On Transfer Of Property  Worth More Than Rs. 50 Lakhs

Be prepared for a new punch from CBDT as you will now have to deduct tax when you make the payment to the seller of an immovable property if the cost exceeds Rs 50 lakh. The CBDT has notified the new provision of tax deducted at source, or TDS, on transfer of immovable property effective from 1st June, 2013.

The Finance Act 2013 had provided that purchaser of an immovable property (other than agricultural land) worth over Rs 50 lakh is required to pay withholding tax at the rate of 1% from the consideration payable to a resident transferor.  The rate at which tax is to be cut is 1%, but it would go up to as high as 20% if the seller does not disclose his Permanent Account Number (PAN). 

Buyer will have to ensure either he himself or the Bank deducts tax in case of granting a loan to the seller before disbursement. The provision will apply in cases where buyer bought an under construction property prior to the provision coming into effect but has to make the balance payment after June 1st, 2013.

The tax deducted can be paid electronically on the Income-tax Department's website by filling a form online. If a person does not have the facility to pay tax online, he can take the printout of the duly filled form and make payment on any authorised branch.

The IT authorities have done away with the mandatory requirement of Tax deduction and account number for buyers. The buyer will be able to generate the TDS certificate from I-T Department's website and provide it to the seller. The seller would also be able to see the TDS credit in 26AS statement.

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 provided to insert a new section 194-IA effective from 01.06.2013 to provide that every transferee, at the time of making payment or crediting of any sum as consideration for transfer of immovable property other than agricultural land) to a resident transferor, shall deduct tax, at the rate of 1% of such sum.

In order to reduce the compliance burden on the small taxpayers, it was further provided that no deduction of tax under this provision shall be made where the total amount of consideration for the transfer of an immovable property is less than fifty lakh rupees.

For reducing the further compliance burden on the transferee, it is also provided that a simple one page challan for payment of TDS would be provided containing details including PAN of transferor and transferee and also certain details of the property. The transferee would not be required to obtain any Tax Deduction and Collection Account Number i.e. TAN or to furnish any TDS statement as this would be mostly a onetime transaction.  The transferor would get credit of TDS like any other pre-paid taxes on the basis of information furnished by the transferee in the challan of payment of TDS.

The New Payment Challan for TDS requires the Property Purchaser to furnish details in the form for payment of TDS like Permanent Account No. (PAN) of Transferee (Payer/Buyer), Permanent Account No: (PAN) of Transferor (Payee/Seller), Category of PAN of Transferee, Category of PAN of Transferor, Full Name of the Transferee, Full Name of the Transferor, Complete Address of the Transferee, Complete Address of the Transferor, Complete Address of the Property Transferred, Details of amount paid/Credited and Tax Deposit Details

 

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BUILDERS PLEA QUASHED ON VAT BY BOMBAY HIGH COURT

The Bombay High Court on 31st October, 2012 dismissed a bouquet of petitions challenging the State Government’s decision to charge Builders a 5% VAT on buildings that were under construction from June 20, 2006 to March 31, 2010. The ruling came a day before the October 31, 2012 which was deadline to pay the VAT.

The Judges ruled that there was no merit in the disputing the decision of the State and that a wide degree of latitude was enjoyed by the legislature in tax matters. The Court held that the composition scheme formulated by the State in two Circulars of August and September 2012 were not against the Constitution.

Builders had challenged the State’s decision on grounds that it discriminated between buildings built before and after 2010. As per the State’s formulated scheme, Builders of buildings under construction from 20th June, 2006 to 31st March, 2010 should pay VAT at 5% of the Works Contract which includes the Cost of Construction and excludes the Land Value, amount paid to Subcontractor, Service Charges, etc. But for buildings under construction from April 2010, builders have to pay VAT of only 1% of the entire Agreement Value.

Flats sold in buildings under construction from 20th June, 2006 to 31st March, 2010 will attract VAT of 5% of the Works Contract. Flats sold in buildings under construction from April 1, 2010 will attract VAT of 1% of the Agreement Value. Builders must pay VAT flats by today or pay annual 15% penalty. Builders have decided that they will pass on cost to buyers
and the Assessing officer would decide on Contract Type.

Buyers who purchased flats that were under construction from 20th June, 2006 to 31st March, 2010 are facing demand from Builders who have decided to pass on the costs to them. There have been reports of Builders demanding that flat Buyers deposit the money with them or face a penalty. While the Builders are supposed to pay VAT of 5% on just the Works Contract, experts say that flat buyers are being charged 5% on the entire Value of Agreement of the flat.

The VAT applies only to under construction buildings and not those that were ready with Occupation Certificates when flats were sold. On behalf of the Builders, the Maharashtra Chamber of Housing Industry (MCHI) and Confederation of Real Estate Developers Association of India (CREDAI) had taken the lead to the Bombay High Court. The Court further maintained that it was improper to assume that the State had applied the April 2010 date inadvertently. The Court ruled that the State had the right to frame a scheme and determine the cut-off date to bring it to the effect.

However, the Court held that the order would not restrict the State taking any decision to hear the pleas of Builders, who wanted the post-April 2010 scheme made applicable to buildings under construction from 20th June, 2006 to 31st March, 2010. The Court also held that, if the builder raised the issue, the Assessing Officer, Sales Tax, could decide on whether a particular type of Development Contract was not a Works Contract. VAT would not be applicable if it was not a Works Contract.

However, a point of debate here is that the Court held that every Agreement with a Builder need not be a works contract and that it is for the Assessing Officer of Sales Tax to verify each Agreement with Builders to determine if a particular Agreement is a Works Contract and VAT can be levied. It is a matter of skepticism whether VAT can be charged on such flats sales.

When a person signs the Sale Agreement, his intention is very clear and that is he is actually buying an immovable property and not cement and steel. Moreover, when the said Agreement is registered, the State Government Charges Stamp Duty at a higher rate (6%) considering the same as an immovable property.

Further, since the buyer is not hiring a Builder to construct a house for him, the Sale Agreement does not fulfill the criteria of a Works Contract. Hence, the State cannot assess the same Agreement on two different grounds and demand VAT and Stamp Duty. If VAT is levied, proportionate Stamp Duty should be refunded to the buyers. In a Work Contract, the buyer generally hires a Developer / Contractor to build a house based on his / her design and a requirement as he is the land owner.

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Fungible FSI in Redevelopment

The Maharashtra Government, in an attempt to provide balanced playing field to Developers and reduce arbitrary decision-making, has amended the Development Control Regulations (DCRs) for the State Capital City, Mumbai.

The new Development Control Regulations may not be a major bound in countering malpractices completely as we are all aware that many countries have beaten India in diverse fields. However, India has out-beaten all countries in one field and that is Realty and Construction activities where widespread corruption is on the pinnacle since ages. One of the areas of this majestic achievement by established interests of the corporate and politico field is redevelopment of old Housing Societies and Commercial Joints in Metro Cities.

According to the new DCR Amendments, Balconies, Flower Beds, Terraces, Voids and Niches would now be counted in the Floor Space Index (FSI). To compensate for the loss of free-of-FSI areas, Fungible FSI to the extent of 35 per cent for Residential Development and 20 per cent for Industrial and Commercial Developments has been allowed with premium.

Fungible FSI would be available at 60 per cent premium for Residential, 80 per cent for Industrial and 100 per cent for Commercial at the Ready Recknor Rates (RR Rates) which are revised from this January 1st, 2012 ranging between 5 per cent and 30 per cent in 716 zones of Mumbai. Fungible FSI can be used for making Flower-Beds or Voids; else used for constructing bigger habitable areas.

However, to protect the interests of the existing owners and occupiers so as to avoid the transfer of Fungible FSI in respect of existing building to the free sale portion by the Developers, it has also been further clarified that the Fungible FSI in respect of rehab portion would not be transferable to the free sale area of the Developer. No premium for Fungible FSI would be charged for the members whose flats were being redeveloped though the space restrictions would be the same.

The parking would be available as per the provisions of the DCR, but 25 per cent more at the option of the Developer. This would be without premium and without being counted in the FSI.

Beneficiaries of Redevelopment Projects:
One, there is no impact of this Fungible FSI method on rehabilitation. The Developer will not have to pay premium on the area used by the existing member while giving him space in the Redeveloped Project. He is free to use “Transfer of Development Right” (TDR) option.

Two, the fungible compensatory FSI cannot be used for the free sale component and shall be used to give additional area over and above the eligible area to existing members. This relates to many growing families in the cities, where 300 sq ft space currently given after redevelopment is hardly sufficient. The amendment restricts the Developer on selling the extra FSI at market rates. He will have to give additional 35 per cent i.e. 105 sq ft in this case, to the family by charging construction cost, at the most.

 

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