Income tax pinch lurks in Budget for realty deals in India

Mumbai: Forget about doling out sops to prospective flat buyers. The Central government has instead, in the Union budget for 2013-14, mooted tax proposals that could make property deals more expensive for buyers and sellers if the properties are 'undervalued' when stamp duty is paid. Furthermore, those who are gifted properties face an income tax .      Realty experts said the amendments to Section 56 of the I-T Act, as proposed by Union finance minister P Chidambaram, would be farreaching, especially in a metro like Mumbai.      If a property has been bought for Rs 80 lakh, but the ready reckoner (RR) rate is Rs 1crore, realty experts said the buyer would have to pay a 30%  income tax on Rs 20 lakh (the difference between Rs 1 crore and Rs 80 lakh). This would be in addition to the stamp duty. Furthermore, when capital gains tax is computed, the seller would have to pay the difference between Rs 1 crore and the rate he originally purchased the property at.      If a person receives a property as a gift and it is valued at Rs 1 crore when paying stamp duty, he would have to pay I-T on Rs 1 crore. 'Budget proposal would hit realty, amounts to double taxation'  Govt Trying To Crack Down On Undervaluing Of Property      The amendments would apply to all deals that involve a stamp duty of more than Rs 50,000. The tax on gifted properties would be applicable only when the gift doesn't come from close relatives.      The government has decided to treat the difference between the rate on which stamp duty is paid and the Ready Reckoner (RR) value as a "concession", say experts. They added that the government may be trying to gather into the tax net those who undervalue property to pay less stamp duty.      However, critics have urged the government to rethink the proposal. Property experts and tax consultants said the impact would hit cities like Mumbai, where RR rates are extremely high. More importantly, the government does not use a standard formula for computing property value.      For example, if a flat in a poorly maintained building is sold for Rs 8,000 per sq ft (psf), the RR rate could be Rs 10,000 psf. Though the sale in such case would be genuine, the government would consider the difference of Rs 2,000 psf as a 'concession' and levy an I-T on it. This is in addition to the stamp duty the buyer has already paid. That's not all. The seller, in turn, would have to pay a hefty capital gains (CG) tax. The 22% CG tax, incidentally, would be computed on the RR value of Rs 10,000 psf.      Pranay Vakil, chairman of Praron Consultancy Pvt Ltd, said the government does not seem to have thoroughly thought of the implications that the amendment could have on the real estate industry. "This amendment clearly forfeits the rights of a buyer and seller to get a good deal merely because their agreement value is less than the Ready Reckoner value. This could amount to double taxation. It is unjust and would only further stagnate the real estate market in the city," said Vakil.      "What is also unclear is that if at a future date the buyer decided to sell the property, what would be the rate for him to compute capital gains when selling. Would it be the price at which he purchased, or the Ready Reckoner value at the time of purchase? This would create confusion," Vakil added.      Incidentally, this is the second time in three years that the government has mooted this proposal to tax 'concessions' in immovable properties. The proposal was earlier mooted in the 2010 Finance Act, but later removed.      Echoing Vakil's view, senior advocate K K Ramani said, "The provision obviously is designed to prevent revenue leakage through the practice of under-reporting of sales in real estate transactions. But the government has erred in one aspect. If the price of a property is different from the stamp duty value, it is not always a case of underreporting. Property values are not standardized. The values depend on a number of factors that are generally not considered while determining the RR rate."      Rajesh Mehta, of Raha Realtors, claimed there were various high court judgments that have clearly said that RR rates were merely indicators and not the final values of property in any area. "The Centre, by basing tax computation on the RR rates, is confirming the irregular manner in which the state fixes property prices in a location. In addition to VAT, service tax and property tax, it would now become very difficult for individuals to shell out such huge sums as RR rates keep increasing at an average of 17% every year," said Mehta.      Experts said there is also a lack of clarity on how the amendments would apply to redeveloped buildings.