TDS proposals can increase compliance burden

The finance minister was vocal enough in putting it on record that transactions in immovable property are generally undervalued and under-reported few would be able to articulate anything against this.

In addition,half of all property transactions are not supported with the PAN of the parties involved. With a view to improve reporting mechanism of such transactions and to collect revenue at the earliest point of time,the finance minister has proposed the introduction of a levy of TDS on immovable property transactions other than agricultural land transactions. This enables a buyer will be liable to deduct taxes at 1 per cent of consideration from a resident seller where the property value is in excess of Rs 50 lakh.

Introduction of the TDS provisions may have manifold repercussions,especially by increasing the compliance burden for buyers. Based on the current reading of the law proposed,the buyer will have to obtain Tax Deduction Account Number TAN,file TDS return and issue TDS certificate.

The provision introduced last year had a specific exemption from obtaining a TAN and filing a TDS return,on which the current proposals are silent. A salaried individual is likely to buy his dream home,only once in his life on account of soaring property rates especially in metro cities. Because of such provisions,he will be required to apply for a TAN,file a TDS return,issue TDS certificate,etc.,and more so,be prepared to answer queries of TDS officer in addition to the usual income-tax officer. This will surely increase his compliance burden and costs,and not to forget the possibility of additional scrutiny from income-tax authorities.

In case of resale of properties,where the PAN of the seller is not provided or an invalid PAN is quoted,then the buyer shall be liable to deduct taxes at a massive rate of 20 per cent as against 1 per cent. In such a scenario,if tax is not deducted at 20 per cent,the buyer may also be faced with levy of interest and penalty. On account of such onerous provisions,the buyers will have to be extra cautious about the genuineness of the PAN provided by the seller.

From sellers perspective,where the seller buys a new residential house upon sale of his existing house and thus,is not liable to pay tax on the capital gains earned,he will have no option but to claim the TDS as a refund in his return of income. No prizes for guessing when the refund will see the light of the day.

In the case of a property under construction,the developer will have to collect the TDS certificates from thousands of buyers and claim the TDS in its return of income. This may pose administrative issues for the developers which may also result in short grant of TDS credit. In addition to the administrative hassle,the amount withheld by the buyers will negatively impact the cash flow of the developers.

In case of purchase of under-construction property,where the buyer uses bank finance and payment to the developer is made directly by the bank on a staggered basis,the question that may arise is,who will deduct tax; the buyer or the bank?

Certainly,for better implementation of these proposals,clarity on certain aspects is awaited. Only time will tell whether the provisions are successful in creating a better reporting mechanism of such transactions or whether such provisions will cause undue hardship to the average home buyer.

The author is Associate Director Tax and Regulatory Services,PwC India. With inputs from Vishal S Shah,Senior Manager