Finance Act 2017 has introduced sub-section 5A to Sec 45 which provides for chargeability of capital gains on transfer of capital asset being land or building or both under a specified agreement in the hands of assessee being individual or HUF(here in after referred as eligible transferor).
This section overrides the provisions of section 45(1) to the extent of year of chargeability as it is postponed to the year in which Certificate of Completion (COC) for whole or part of the project is issued rather than the year in which capital asset was transferred.
Further, provisions of Sec 45(5A) modified the provisions of Sec 48 to the extent of considering the Stamp Duty Value on the date of issue of COC for the share of eligible transferor in the project increased by monetary consideration received shall be deemed to be the full value consideration accruing or received as a result of transfer, that is to say, the consideration in the hands of eligible transferor would be equal to sum of stamp duty value on date of COC + monetary consideration received by the eligible transferor
Consideration = Stamp Duty Value as on COC + Monetary Consideration
The provisions of Sec 45(5A) shall apply provided eligible transferor has not transferred his share in the project before the issue of COC. That is to say, the transferor should not transfer any of his share before the builder/developer obtains the COC for the project.
With the above background of Sec 45(5A), let us now proceed to analyse the impact from the angle of tax deduction at source to be made by builder/developer when payments were made to the eligible transferor.
If the eligible transferor is Resident:
Section 194-IC inserted by Finance Act 2017 provides that any person responsible for paying to any resident any monetary consideration under specified agreement referred to in Sec 45(5A) shall deduct tax@10% on such sum. It should be deducted at the time of credit of such sum to the account of payee or payment, whichever is earlier. However, there would be a mismatch between the tax offered and tax credits. Since the income of the eligible transferor is offered to tax in the year of obtaining COC, the eligible transferor would not show any income when monetary consideration is received from the builder/developer. However, in light of Section 194-IC, the tax has to be deducted at the earliest of payment or credit, the builder/developer would deduct tax on payment of monetary consideration to the eligible transferor. Hence, in all cases, there would be a mismatch of tax credits. The eligible transferor would have tax credit in a year which would be different from the year in which his income is offered for tax.
In such a situation, the eligible transferor can carry forward the tax credit in accordance with Section 199 of Income Tax Act read with Rule 37BA(3)(i) of Income Tax Rules, 1962.
If the eligible transferor is Non- Resident:
There is no restriction on applicability of Section45(5A) to the Non-Resident Indian who has entered specified agreement as owner of the capital asset. The section does not distinguish between the resident and non-resident eligible transferor and accordingly the non-resident Indian can avail the benefit of Section 45(5A) subject to the conditions enshrined therein.
However, if the eligible transferor is a non-resident Indian, the tax deduction at source has to be done under section 195 instead of Section 194-IC. The tax has to be deducted by the builder/developer on monetary consideration paid to the eligible transferor who is a non-resident Indian.
As per the provisions of Sec 195(1) any person responsible paying to non-resident any interest or other sum chargeable to tax (other than salary) shall deduct tax at the rates in force. Tax should be deducted at the earliest of credit or payment to the non-resident.
The issue for consideration is, whether TDS should be made under Section 195 at the time of payment of monetary consideration to the non-resident under the specified agreement though capital gain is not chargeable to tax in the year of payment? In other words, as stated supra, there is always a timing difference between the tax deduction at source and income offered to tax by the eligible transferor. In such a scenario, whether the builder/developer is constrained to deduct tax on monetary consideration payable to the eligible transferor despite, the latter’s income is not subjected to tax in such year when he receives payment from builder/developer? Let us proceed to analyse the provisions to arrive at a conclusion.
Section 195(1) mandates deduction of tax only the sum chargeable under the provisions of the Income tax Act. In other words, if the income is not chargeable to tax under the provisions of the Income Tax Act, there would be no applicability of Section 195. This is also blessed by the apex court in the case of GE India Technology Cen. (P.) Ltd vs Commissioner of Income Tax, [2010] 193 Taxman 234 (SC). Para 9 of the said judgment is reproduced hereunder for ready reference:
This reasoning flows from the words "sum chargeable under the provisions of the Act" in section 195(1). The fact that the revenue has not obtained any information per se cannot be a ground to construe section 195 widely so as to require deduction of TAS even in a case where an amount paid is not chargeable to tax in India at all. We cannot read section 195, as suggested by the Department, namely, that the moment there is remittance the obligation to deduct TAS arises. If we were to accept such a contention it would mean that on mere payment income would be said to arise or accrue in India. Therefore, as stated earlier, if the contention of the Department was accepted it would mean obliteration of the expression "sum chargeable under the provisions of the Act" from section 195(1). While interpreting a section one has to give weightage to every word used in that section.
The year of taxability as per Sec 45(5A) is the year in which COC for the whole or part of project is issued. The monetary consideration received as a part of consideration under specified agreement will be chargeable to tax in the later year in which COC is issued.
So, one would argue that when monetary payment was made, no TDS is required under Section 195 as income is not chargeable to tax in India at that time because of provisions of Sec 45(5A) and reading with the apex court judgment.
Hence, the payer that is builder/developer can delay the deduction of tax under Section 195 when payment of monetary consideration is made to eligible transferor. However, this would present another problem.
Let us assume, the builder/developer does not deduct tax in the year of payment of monetary consideration and plans to deduct in the year when the non-resident Indian transferor income is offered to tax that is in the year when COC Is obtained. In such a case, the builder/developer has to deduct tax on the Capital Gain (if the cost of acquisition is known to him, otherwise on the net consideration).
However, a situation may arise where in the year of issue of COC builder/developer is not required to pay any monetary consideration (as explained in the below example) as such,it will be difficult to comply with TDS provisions.
Ex: Mr. A, NRI has entered in to Specified agreement with a developer in India. As per the agreement the NRI will receive Rs. 1Crore and 10flats in the developed property.
Consideration is as follows:-
|
Year I |
Year II |
Year III/ Year of issue of COC |
|
Monetary Consideration of |
Monetary Consideration of |
10 Flats. Stamp Duty Value is Rs. 40 Lakhs |
|
Rs. 30,00,000/- |
Rs.70,00,000/- |
per flat. Total non-monetary consideration |
Assume the cost of acquisition of property transferred is Rs. 1.5 Cr the resultant capital gain is Rs. 3.5 Cr (Rs.1 Cr monetary consideration and Rs. 4 Cr non-monetary consideration minus Rs. 1.5 Cr cost of acquisition).
Assume TDS rate is 20% total amount of tax to be deducted in the year III, year of chargeability, is Rs.70,00,000/. But there is no monetary consideration from which the tax to be deducted.
In order to resolve the issue, one may consider deduction of tax whenever monetary consideration is paid, despite the fact that deduction is not required to be done on strict reading of the Section 195. In the third year the eligible transferor pay the balance amount of tax Rs. 50,00,000/-(Rs. 70,00,000/- (Rs. 6,00,000+Rs.14,00,000) by way of advance tax.
Another Issue is, whether Form 15CB is required to be filed along with Form 15CA while remitting the amount to Non-resident though it is not taxed in India?
This matter is not free from doubt. Two views are possible. One view is that since the payment is not taxable at the time of remittance, no form 15CB is required though TDS deducted with abundant caution. According to the second view form 15CB required to be filed whenever TDS was made under the Act.
It is advisable to file form 27Q for deduction of tax made from the monetary consideration by the deductor.
GST Aspects:
The benefit of Section 45(5A) of Income Tax Act, 1961 comes with a rider that the eligible transferor should not part away with his share until the builder/developer obtains COC for the project.
The eligible transferor while choosing the option to avail the benefit under Section 45(5A) has also taken into consideration the impact under the GST laws on sale of his portion in the developed property.
Continuing with the above example, the eligible transferor obtains 10 flats in the developed property. For such supply of development and construction services, the builder/developer charges GST in accordance with the GST laws since such supply attracts the levy under GST laws1 . As per the Joint development agreement, assuming, if the eligible transferor is liable to pay GST on such services to the builder/developer, then there will be an outflow of GST from the eligible transferor.
The eligible transferor can avail the same as input tax credit under GST laws and use the same against the GST payable when the eligible transferor sells his share of flats. However, the eligible transferor can avail the input tax credit only if the flats are sold prior to builder/developer obtaining COC.
If sale is happening after obtaining COC, then on such sale of flats, there would not be any levy of GST, since the same is treated as sale of immovable property under GST laws. Hence, the eligible transferor has to make a calculated decision as to whether the benefit under Section 45(5A) has to be availed or not. If the same is availed, he should be sure that either the joint development agreement pushes the GST liability on builder or prepare his mind to take the GST paid to builder/developer as cost.
Hence, it is advisable to take a holistic view before opting for the benefit enshrined in Section 45(5A) of Income Tax Act, 1961. No doubt, Section 45(5A) is a relief to the individuals or HUFs, however, one need to consider the potential loss under the GST laws for better tax planning.
