How stamp duty authorities unlease a tyranny in real estate transactions
What needs to be done is restoration of preemptive purchase scheme under the income tax law.
TN Ninan in Business Standard of 8 August 2015 bemoans outrageous increases in circle rates unwarranted by the ground realities as being responsible for real estate transactions almost drying up in Delhi. When property changes hands, the seller has to pay capital gains tax under the income tax law and the buyer has to pay stamp duty to the state government where the property is situated. Both the authorities have zeroed in on circle rates or guideline value fixed by the stamp duty authorities as an effective bulwark against evasion. The commonality of the tool is not as bad as the tendency of stamp duty authorities to go for high pitched assessments of property values in their desire to cozy upto the powers that be. It is not bad as a tool because for both the taxes, the starting point i.e. the consideration is the same which is as it should be. When stamp duty value wasn’t the base for capital gains calculations, the seller insisted on undervaluation condemning the buyer to a double whammy -- paying the difference between the market value and the undervalued figure in cash in addition to paying stamp duty on the higher stamp duty value.
The perfect alignment between the income tax and stamp duty authorities has however resulted in whammy for both the sides as against double whammy for the buyer earlier -- on the outrageous stamp duty value, the seller has to pay capital gains tax after deducting cost and on the outrageous stamp duty value the buyer has to pay stamp duty. Of course the income tax law provides for appeal against the high-handedness of the stamp duty authorities but it locks the seller and the department in a prolonged and messy legal battle which the sellers fear. The vexed buyer and seller have stopped evincing interest as a result as Ninan points out. This is not the problem in Delhi alone. Chennai is not far behind with officers of revenue department administering stamp duty currying favor with the ruling regime. In Sriperembudur the guideline value for posh residential lands is Rs 600 per square foot though the ground reality is there are no buyers even at Rs 400. Suppose a transaction is done at Rs 350, the consequence for the buyer would be he would have to pay stamp duty on Rs 600 even though he bought for Rs 350 and for the seller capital gains on Rs 600 less cost even though he got only Rs 350.
Setting store by stamp duty valuations had its origins in undervaluation of properties so as to pay less stamp duty by the buyer and less capital gains tax by the seller. But from the days of cupidity of the parties to a transaction, we have shifted gears to avarice of the officials who not only like to suck up to their political bosses but also fear government auditors who are satisfied only with pro-revenue stance of the officials whereas fairness to both the government and the taxpayer ought to be the touchstone.
What needs to be done is restoration of preemptive purchase scheme under the income tax law. It was quietly abolished in 2001 but while it lasted it sent cold fear down the spines of the black money wallahs. The scheme was cunningly simple in its design and execution. In Mumbai if you sold your property for more than Rs 75 lakh you had to notify the prescribed authority. Let us say market value was Rs 3 crore but agreement was for Rs 1.80 crore. The prescribed authority can stump the seller and prevent him from getting the difference i.e. Rs 1.20 crore in cash by smugly presenting him with a cheque for Rs 1.80 crore and asking him to make over the property to income tax department. And suppose the unsuspecting buyer had parted with the cash already he would be at the jugular of the seller. In any case the government had fun from the sidelines, as it were, even though at times it may be driven to nursing unsold stock, the rationale trotted out for abolition of the scheme. Be that as it may, the result was dramatic reduction in black money transactions with the seller toning down his ambitions and the buyer getting to buy without having to find black money which is very difficult for the middle class especially in the service sector having no black money to boast.
The scheme must be restored and stamp duty valuations must cease to be the lynchpin. In such a milieu, income tax will lead from the front. Stamp duty authorities will have to fall in line, with sale price disclosed to income tax authorities now reflecting the ground realities. Guideline value or circle rate is a tyranny especially when the rates are determined from the comfort of an officer’s timid but avaricious chair. The new regime would call for both the authorities working in a coordinated fashion. Stamp duty authorities must change their role from harassers to information gatherers. Their take on value of an individual property would carry great weight with the income tax authorities who would then take a call whether to make a preemptive purchase or not.
The preemptive purchase scheme while it lasted was thwarted by signing multiple sale deeds. We Indians are past masters in splitting income and transaction size to get away with lower taxes. Multiple sale deeds came handy in ducking the preemptive purchase scheme. It is not a problem that is insurmountable if fear of God is put into the minds of those attempting it. Forexample if it turns out that a single flat or bungalow was deliberately divided into separate units and each unit was priced below the threshold limit fixed for preemptive purchase notification, a severe penalty that is deterrent enough must be prescribed. Sub-registrars must be roped in for this crusade. They must become alert if multiple sale deeds are submitted at the same time of contemporaneously with the buyer and seller being common in all the sale deeds.
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