Withhold TDS when purchasing property from builder

When I met my friend Ameya Joshi last weekend over coffee, he excitedly informed me that he had recently booked a four-bedroom apartment in an upcoming scheme of a reputed builder. He went on to explain how good a deal he had bagged, both from the builder and the bank financing his loan, and how he had no need to worry at all since the bank had taken full responsibility to disburse the loan instalments to the builder as and when the project was completed over the next couple of years.

My tax brain immediately spun into action and I asked him whether he had made any provision to withholding income tax on the payments to be made to the builder. Upon finding that he was completely unaware about this requirement, I went on to explain. Effective June 1, 2013, the income tax rules require the purchaser of any immovable property (except of agricultural land) of value exceeding Rs 50 lakh to withhold income tax at the rate of 1 per cent and deposit it with the government at the time of credit or payment of such sum (whichever was earlier) to a seller who was a tax resident of India. This provision was introduced by the government to improve reporting in the real estate sector and to collect income tax at the earliest.

TDS RULES

• Tax-at-source has to be deducted when you make payments to the seller for property worth over Rs 50 lakh
• Non-deduction of tax at source when making payments to builders might attract penalties
• Buyers have to withhold tax at source even when the payment is made through housing finance companies
• One does not require to have a tax-deduction account number to file taxes, but just has to fill the requisite challan

Hearing this, Joshi mentioned that since his bank would make direct payment to the builder, he need not worry about this statutory requirement even though the value of his apartment crossed Rs 50 lakh. I duly warned him, nevertheless, that the law casts the responsibility on the 'transferee', that is, the buyer, to withhold income tax at source. And that the bank might not always withhold the tax since it was only acting as his disbursing agent. Since, non-deduction of tax at source might attract penalties, it was Joshi's duty to ensure that the tax was paid.

Seeing that Joshi was turning worried about the number of compliances he would need to undertake, I assured him that the government had already considered this, and that he would not be required to obtain a tax-deduction account number (TAN) nor to file a quarterly tax withholding statement. Instead, he would simply be required to fill up the requisite challan in Form 26QB and deposit the appropriate tax within seven days from the end of the month in which the amount was deducted.

I further explained that in Form 26QB, one needed to indicate relevant particulars such as name, address and PAN of the buyer and seller; particulars of transaction such as date of agreement, value of property, date and amount of tax deducted. The good thing is that the tax so withheld could also be paid electronically by logging onto this website https://onlineservices.tin.egovnsdl.com/etaxnew/tdsnontds.jsp, selecting Form 26QB and following the instructions.

I also asked Joshi to check with his bank whether it would agree to deposit an amount equal to the withholding tax to the Government Treasury on his behalf and release the net instalment due to the seller.

Joshi then shot the following questions at me:
Is this new provision (i.e., Section 194-IA of the Act) applicable to agreements entered into prior to June 1, 2013?
The new provision applies to agreements entered prior to June 1, 2013 (where the value of the immovable property is more than Rs 50 lakh) only for payments made on or after June 1, 2013. The provision is applicable even if the payments to be made on or after June 1, 2013 are less than Rs 50 lakh, when the overall consideration is more than Rs 50 lakh.

Is the tax needed to be deducted on the entire amount at one time or on payment of instalments?
The tax is required to be deducted on earlier payment or credit of such sum to the account of the seller. Thus, in payment by instalment, tax needed to be deducted at the time of every instalment.

Is the tax needed to be deducted on the amount paid towards indirect taxes (such as service tax, VAT, etc)?
Conservatively, tax is required to be deducted on the full sale consideration including the indirect tax component.

Is there any other provision which needs to be complied with in addition to payment of income tax in Form 26QB?

Yes, the purchaser (of the property) is required to issue to the seller a "certificate of tax deducted at source" in Form 16B, which can be downloaded from https://www.tdscpc.gov.in/ after allowing the system about a week from payment in order to process the matter. Of course, one needs, however, to first register on this website.

Does this provisions apply to a non-resident Indian purchaser?
Yes. It applies to all persons purchasing such property from a resident seller.

By the time we had been thoroughly caffeinated, Joshi had come to the conclusion that the procedure would not be too difficult to implement.

The author is Tax Partner, Ernst&Young. The views expressed are personal