Finance Bill, 2022 has amended the provisions of the Income-tax Act, 1961 (‘Act’) to provide for deduction of tax on the higher value of actual consideration or stamp duty valuation (‘Circle Rate’) with effect from 1st April 2022 on the transfer of immovable property other than agricultural land.
It is proposed to provide that where the consideration paid or payable for the transfer of immovable property other than agricultural land is less than the value adopted or assessed or assessable by any authority of a State Government for the purposes of payment of stamp duty, the value so adopted or assessed or assessable shall be deemed as consideration paid or payable for the transfer of such immovable property and tax is required to be deducted accordingly, subject to the specified threshold limit.
Introduction to section 194-IA - TDS on transfer of immovable property
Section 194-IA of the Act provides for deduction of tax on payment on transfer of certain immovable property other than agricultural land.
Section 194-IA(1) provides for deduction of tax by any person responsible for paying to a resident any sum by way of consideration for transfer of any immovable property (other than agricultural land) at the time of credit or payment of such sum to the resident at the rate of 1% of such sum as income-tax thereon. Sub-section (2) provides that no deduction of tax shall be made where the consideration for the transfer of immovable property is less than fifty lakh rupees.
Proposed amendments to section 194-IA
It is proposed to amend section 194-IA of the Act to provide that in case of transfer of an immovable property (other than agricultural land), TDS is to be deducted at the rate of 1% of such sum paid or credited to the resident or the stamp duty value of such property, whichever is higher. In case the consideration paid for the transfer of immovable property and the stamp duty value of such property are both less than fifty lakh rupees, then no tax is to be deducted under section 194-IA.
For this purpose, section 194-IA is proposed to be amended by Clause 56 of the Finance Bill, 2022.
Amendment of section 194-IA.
56. In section 194-IA of the Income-tax Act,–
(i) in sub-section (1), after the words “one per cent. of such sum”, the words “or the stamp duty value of such property, whichever is higher,” shall be inserted;
(ii) in sub-section (2), for the words “immovable property is”, the words “immovable property and the stamp duty value of such property, are both,” shall be inserted;
(iii) in the Explanation, after clause (b), the following clause shall be inserted, namely:–
‘(c) “stamp duty value” shall have the same meaning as assigned to it in clause (f) of the Explanation to clause (vii) of sub-section (2) of section 56.’.
Explaining the proposed amendments in Section 194-IA
Clause 56 seeks to amend section 194-IA of the Act relating to payment on transfer of certain immovable property other than agricultural land.
It is proposed to amend sub-section (1) of section 194-IA to provide that the person responsible for paying to a resident any sum by way of consideration for transfer of any immovable property (other than agricultural land) shall at the time of credit or payment of such sum to the resident deduct tax at the rate of one per cent of such sum or the stamp duty value of such property, whichever is higher, as income-tax thereon.
It is further proposed to amend sub-section (2) of the said section to provide that no deduction of tax shall be made where the consideration for the transfer of immovable property and the stamp duty value of such property, are both less than Rs. 50 Lakh.
It is also proposed to insert clause (c) to the Explanation to define “stamp duty value”. Stamp duty value shall have the meaning assigned to it in clause (f) of the Explanation to clause (vii) of sub-section (2) of section 56.
These amendments will take effect from 1st April, 2022.
Pre-amended and post amended provisions discussed
Presently, a buyer needs to deduct TDS on the transfer of immovable property only on the actual consideration if the same is Rs. 50 Lakh or more. There is no need to take into cognizance the stamp duty value of the property, even if the stamp duty value of the immovable property exceeds Rs. 50 Lakh. In other words, where the actual consideration of the property is Rs. 45 Lakh and if the stamp duty value is Rs. 51 Lakh, the buyer is not required to deduct any TDS as the actual consideration does not exceed Rs. 50 Lakh. This position will prevail till 31st March 2022.
The position is going to change from 1st April, 2022.
From 1st April onwards, in the above case, the buyer is required to deduct TDS on the purchase of immovable property although the consideration is only Rs. 45 Lakh and does not exceed the threshold limit of Rs. 50 Lakh. This is because the stamp duty value, in this case, exceeds Rs. 50 Lakh, which stands at Rs. 51 Lakh.
Interestingly, the buyer needs to deduct the tax under section 194-IA on the value of Rs. 51 Lakh and not on the consideration amount of Rs. 45 Lakh. Thus, the buyer will pay Rs. 44,49,000 to the seller of the immovable property and the rest Rs. 51,000 (being 1% of stamp duty value of Rs. 51,00,000) to the government by way of TDS.
The amendments in section 194-IA are carried on in sub-section (1) and sub-section (2) of section 194-IA. Sub-section (1) of the said section provides for deduction of tax on the amount of consideration @ 1% of such sum. It is proposed to amend the deduction of tax @ 1% of such sum (i.e. actual consideration) or stamp duty value, whichever is higher. In other words, it means, if the stamp duty value is higher than the consideration amount, tax is required to be deducted on the stamp duty value.
Sub-section (2) of the said section provides that no tax is required to be deducted on purchase of the immovable property if the consideration is less than Rs. 50 Lakh. It is proposed to amend the requirement of non-deduction of tax if the actual consideration and stamp duty value do not exceed Rs. 50 Lakh.
On a conjoint reading of sub-sections (1) and (2) of section 194-IA, it follows that no tax is required to be deducted under section 194-IA if the consideration paid for the transfer of immovable property and the stamp duty value of such property are both less than Rs. 50 Lakh.
In case any one of the amounts being the consideration amount and stamp duty value is Rs. 50 Lakh or more, tax is required to be deducted under section 194-IA.
Illustrations explaining the amended provisions
Background of section 194-IA requiring TDS on transfer of immovable property
Earlier, Union Budget 2012 attempted to impose TDS obligation on the buyer of immovable property based on comparative stamp duty value. However, these provisions were omitted from the Finance Bill, 2012 when it was passed by the Parliament and hence never became part of the Income-tax Act.
At that time, it was cited that the obligation to deduct tax on the transfer of immovable property by the buyer on the higher value of actual consideration or stamp duty would cause inconvenience or undue hardships and thus the idea to bring the transfer of immovable property within the purview of TDS was dropped. During the debate on the Finance Bill, 2012 in the Lok Sabha, the then Finance Minister Pranab Mukherjee said the government had decided to roll back the levy after receiving various representations. He said that he had received a number of representations pointing out the additional compliance burden that measure would impose. He, therefore, proposed to withdraw that provision for levy of TDS on transfer of immovable property.
These provisions were added in a bid to tighten the screw on corruption and black money in the property markets
However, in the immediately following year and by the Finance Bill, 2013, the present provisions of section 194-IA related to TDS on transfer of immovable property was reintroduced. This time the TDS was prescribed on the actual consideration of the immovable property and the reference to stamp duty value was omitted.
In this manner, the existing section 194-IA related to TDS on transfer of immovable property finds a place in the statute.
Rationale for the proposed amendment
The Explanatory Memorandum to Finance Bill, 2022 states that section 194-IA does not take into account the stamp duty value of the immovable property, whereas, as the provisions of section per 43CA and 50C of the Act, for the computation of income under the head "Profits and gains from business or profession" and "capital gains" respectively, the stamp duty value is also to be considered.
Thus there is inconsistency in the provisions of section 194-IA and sections 43CA and 50C of the Act.
In order to remove inconsistency, it is proposed to amend section 194-IA of the Act to provide that in case of transfer of an immovable property (other than agricultural land), TDS is to be deducted at the rate of one per cent of such sum paid or credited to the resident or the stamp duty value of such property, whichever is higher.
In case the consideration paid for the transfer of immovable property and the stamp duty value of such property are both less than fifty lakh rupees, then no tax is to be deducted under section 194-IA.
Meaning of Stamp Duty Value for section 194-IA
The meaning of Stamp Duty Value is imported from section 56. The proposed amendment states that “stamp duty value” shall have the same meaning as assigned to it in clause (f) of the Explanation to clause (vii) of sub-section (2) of section 56.
Explanation (f) to Section 56(2)(vii) defines “stamp duty value” to mean the value adopted or assessed or assessable by any authority of the Central Government or a State Government for the purpose of payment of stamp duty in respect of an immovable property.
Proposed Amendment in section 194-IA to align with provisions of section 50 and section 43CA
The memorandum clearly states the objective of introducing the concept of stamp duty value within the purview of section 194-IA for the purpose of deduction of tax on the transfer of immovable property to align it with the provisions of section 50C and section 43CA.
Section 50C provides for deeming of the stamp duty value (circle rate) as sale consideration for transfer of land and/or building in the case the circle rate exceeded the declared consideration. Consequentially, stamp duty value was deemed as purchase consideration.
Section 50C is a deeming provision that replaces the actual consideration with stamp duty value if the consideration is less than the stamp duty value, subject to safe harbour rate.
Section 43CA contains similar provisions in case of transfer of land and/or building.
Section 50C applies where the land and/or building is held as a capital asset and the income from transfer of such immovable properties is chargeable to tax under the head ‘Capital Gains’.
Section 43CA is applicable when the land and/or building is held as stock-in-trade and the income from transfer of such immovable properties is chargeable to tax under the head ‘Business Income’.
In both cases, actual consideration is replaced by the stamp duty value if the former is lower than the latter. Further, section 50C and section 43CA applies to the seller of the immovable property.
In contrast, as per the extant provisions of section 194-IA, tax is required to be deducted by the buyer on the actual consideration only.
This brings inconsistency in the taxation on the transfer of immovable property. In case stamp duty value is higher than the actual consideration, the seller offers the capital gains or business income tax on the basis of stamp duty value whereas the buyer still deducts TDS on actual consideration.
It is illustrated with the following example.
Suppose, a Building is sold to a buyer for Rs. 55,00,000. The stamp duty value of the property is Rs. 69,00,000. In this case, the buyer will deduct tax @ 1% under section 194-IA on Rs. 55,00,000 only. Hence, the TDS amount will be Rs. 55,000/-.
On the other hand, the seller of the property will compute the income therefrom (capital gains or business income) on Rs. 69,00,000/-.
The Memorandum states that the amendment in section 194-IA is proposed to remove this inconsistency.
Issues that are emerging after the proposed amendment in section 194-IA which needs further clarification or suitable amendment
Relevant date of stamp duty value
The first issue is which stamp duty value is required to be adopted for the purpose of section 194-IA. There are situations in the case of transfer of immovable property where the date of agreement of sale and date of registration is different.
In the case of section 50C, the first proviso thereto clearly states that where the date of the agreement fixing the amount of consideration and the date of registration for the transfer of the immovable property is not the same, the stamp duty value on the date of agreement shall prevail. A similar provision is contained in section 43CA(3) of the Act.
No such provision is proposed in section 194-IA. Thus it is not clear which stamp duty shall be considered by the buyer for the purpose of deduction of tax under section 194-IA. Whether the stamp duty prevailing on the date of the agreement or at the time of registration of the immovable property shall be applicable is still not clear.
If the buyer deducts tax under section 194-IA on the stamp duty value as on the date of registration and if the seller adopts such value as on the date of the agreement, the inconsistency between the provisions shall continue even after the proposed amendment.
One may argue that since the objective of the proposed amendment is to align the provisions of section 194-IA and section 50C/43CA and to remove the inconsistency, the adoption of stamp duty value as on the date of agreement shall be considered by the buyer and not as on the date of registration. This will bring consistency in the amount on which tax is deducted and the amount which is offered to tax.
A clarification from the CBDT or a suitable amendment in the line of section 50C/43CA may be inserted in section 194-IA in order to remove any ambiguity in the law.
Safe harbour rate of 10%
The third proviso to section 50C and the first proviso to section 43CA provides for a safe harbour rate of 10%. In other words, the rate of variation that will be allowed between the actual sale consideration value and the stamp duty value of the transferred immovable property is 10%.
The deeming provisions triggered only where the difference between the sale consideration and the stamp duty value is more than 10%. If the stamp duty value does not exceed 110% of the consideration (i.e within the limit of 10% of the consideration), the deeming provision shall not trigger and the seller has to consider the actual sale consideration for the purpose of computing the capital gains/business income.
However, there is no safe harbour rate is prescribed in section 194-IA. The buyer needs to deduct tax on stamp duty value even if the same is higher by one rupee.
This is illustrated with an example. A building is transferred for Rs. 51,00,000. The Circle rate of the property is Rs. 52,00,000. Since the circle rate is within the safe harbour limit of 10%, the seller will consider Rs. 51,00,000 as the full value of consideration/sale price for computation of income under section 50C/43CA.
However, the buyer is under an obligation to deduct the tax under section 194-IA on the circle rate of Rs. 52,00,000.
In another example, suppose a building is sold for Rs. 49,00,000 whereas the circle rate of the same is Rs. 53,00,000.
In these cases, inconsistency will be there as the seller will consider Rs. 51,00,000 or Rs. 49,00,000 as the sale consideration whereas the buyer will deduct TDS @ 1% on Rs. 52,00,000 or Rs. 53,00,000.
Unless an appropriate amendment is introduced in section 194-IA in line with the safe harbour provisions of section 50C/43CA, this inconsistency will prevail and continue.
Reference to Valuation Officer
Section 50C(2) provides that where the assessee disputes the stamp duty value before the Assessing Officer then the Assessing Officer is bound to refer the valuation to the valuation officer. This happens when the seller perceives that the stamp duty value is exorbitantly high and does not reflect the true picture of market value.
This leeway is missing in the case of section 194-IA. The buyer has to blindly deduct the tax on the circle rate if it happens to be higher than the consideration and is Rs. 50 Lakh or more.
Analysis of the amended provisions of section 194-IA
Now a buyer is compelled to deduct TDS on the stamp duty value if it is higher than the actual consideration and any of the value exceeds Rs. 50 Lakh. Hence, a buyer is required to ascertain the stamp duty value of the immovable property before he concludes the transaction.
In those cities where there is a published circle rate for the purpose of stamp duty valuation, there won’t be much difficulty in ascertaining the stamp duty value of the immovable property in question. However, this will be a tedious task where there is no published circle rate of the immovable property and is ascertained only at the time of final registration of the property. Deduction of TDS and making the payment draft for the seller, at that time, would become tedious for the buyer. This will indeed bring undue hardships to the buyer.
Further, there will be difficulty in accounting also. Presently, it is a straightforward calculation of TDS vis-a-vis purchase consideration. Now it would not be so easy.
Further, if the stamp duty value as on the date of registration is considered by the buyer, there will be a difference in the amount of TDS in different instalments where the consideration is paid in instalments and is spread to two to three years or more though the actual consideration remains the same.
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