While addressing investors at a conference before Union Budget 2013, finance minister P Chidambaram said, "...efforts to keep on increasing the tax base will continue... so that the ratio of tax revenue to GDP also remains robust..." One such step taken by him through the Finance Act, 2013, towards widening the tax base and improving transparency in real estate transactions, was the introduction of Section 194IA in the Income Tax Act, 1961. The said section mandated tax deduction on the transfer of immovable property.
With effect from June 1, 2013, the buyer has to deduct tax at 1% of the amount paid to a resident seller on purchase of immovable property where the total sales consideration is R50 lakh or more. The tax deduction should be made at the time of payment, or upon the credit of such sum in the account of the seller, whichever is earlier.
Upon the deduction of tax, the buyer has to deposit it with the government within seven days from the end of the month in which the tax has been deducted. The payment can be made online or by visiting any authorised bank. It needs to be accompanied by a new online Form 26QB, a challan-cum-statement for furnishing information such as PAN and address of both the buyer and seller as well as the amount of consideration involved. In addition, the buyer needs to issue a certificate for tax deducted in Form 16B to the seller within 15 days of the due date for filing Form 26QB.
To avoid hardship, the mandate to obtain the Tax Deduction Account Number has been removed for the buyer .
The language of Section 194IA raises certain issues that create ambiguity. For instance, where the buyer has obtained a bank loan to purchase immovable property and the consideration is being paid to the seller directly by the bank, the issue arises as to who is responsible for the deduction of tax. In such a case, the primary obligation to deduct and deposit the tax will remain with the buyer — the bank is acting merely as a disbursing agent for the buyer. To ensure withholding tax compliance, the bank may withhold and deposit tax on behalf of the buyer and release the payment, net of tax withholding, to the seller.
When there is property under construction, the issue arises as to whether Section 194IA will be applicable on the installment paid for such property. In such a case, tax may need to be deducted on the installments being made as the status of the property under construction may not impact the ownership rights of the buyer.
Where there is more than one buyer for a property and the individual purchase price is less than R50 lakh, the question arises as to whether each buyer is required to withhold tax. In such a case, given the intent of law, each buyer may be required to withhold tax. In absence of clarity, there are divergent views possible on the above and few other issues.
The initiative taken by the finance minister to improve transparency in transactions related to the real estate sector is a welcome move. At the same time, the new section requires further clarity to achieve the objective behind its introduction and to avoid controversies and litigations.