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Play it safe: Transparency is crucial in real estate deals

In a democratic State, the citizens’ right to amass wealth is an accepted right, though it may not be treated as a fundamental one. If it is so, why do the law enforcers view money transactions, especially high value items, with circumspection? On the face of it, it looks like a simple check of the nature of the deal, but when one goes into the modus operandi of processes adopted such as notices under Section 142 or 143 of the Income Tax Act, 1961, which can be followed by other administrative measures such as searches, raids, sealing of bank lockers etc, one is tempted to think that predetermined action is set to follow.

Recently, there was a news item to the effect that the tax collection during the first quarter of the current year has been good, which may point to achieving the target for the whole year and hence searches and raids may not be resorted to by the department. This leads one to believe that the objective of searches and raids are to ensure increased collections!

Tax laws in India have been in existence from time immemorial and there are various legislations on the subject. The Income Tax Act, 1961 (Act 43 of 1961), is the most important and which can also be considered the first updated law on taxing income from various entities/sources. This Act has undergone innumerable amendments since then. The annual Central budgets tinker with the various provisions through the Finance Acts, consequent to introduction of new provisions and amendments to existing ones. The Finance Ministry is reported to be drafting new tax codes which are likely to be introduced in the year 2008 in Parliament for adoption. The objective is to make the laws simple and transparent. It is also understood that the new laws may restrict the powers of the Central Board of Direct Taxes (CBDT), in line with those prevalent in the U.K., the U.S. and Australia. In this background, let us try to understand the taxmen’s special interest in property deals.

Scrutiny of the correctness of information contained in tax returns is nothing new in India, though in recent years ‘voluntary disclosure’ has replaced the ‘scrutiny’ to a large extent, leaving the onus of furnishing the correct information and particulars on the person or entity filing the return. Historically, each and every return of income filed used to be checked and satisfied, calling for additional information wherever required. Due to various reasons, such as the number of returns filed, increase in volume of income involved, dependence on ‘self supervision’ etc, the practice of offering correct data in one’s tax return has gained popular acceptance in administrative corridors. Further, the belief now across the world is that liberalisation of tax laws and assessing procedures, apart from simple rules, leads to higher collection of taxes.

The above changes and test- check of large deals linked to PAN have contributed to concentration by the Tax Department on suspected cases. The reason for suspicion, in recent times, has been the sudden increase in large property deals, either by individual landholders or property developers and builders in the face of skyrocketing property prices. Again, transparency in public administration has been the current coin, which can even be related to the Right To Information laws. Value-based scrutiny is, therefore, here to stay.

It is reported that the current instructions of the Income Tax Department on special combing operations is to check tax evasion. All deals worth more than five times an assessee’s gross income face the special scrutiny. Apart from this, those deals showing losses are to be placed under the lens. Some guidelines/benchmarks are stated to be:

Purchase of apartments worth Rs. 1 crore, but gross income is shown as less than Rs. 20 lakh.

Sale of house worth Rs. 30 lakh showing no capital gain.

Loss of house property shown as Rs. 2.5 lakh or above.

Loss from house property is shown but no rental income is reported, despite seeking relief of interest on home loans.

Returns relating to those borrowing large home loans.

Searchessare also ordered on commodity brokers’ offices.

A IT raid is a painful experience. Why cannot we think of avoiding the needle of suspicion and treat the tax payer as an honest citizen? A regulator, like SEBI for the stock market, might be a good idea for the property market. If an IPO by a corporate entity is permitted various expenditures incidental to the issue, why cannot a property dealer/firm receive the same kind of treatment?

If expenses relating to appointment of advisors, registrars, marketing agents and the like can be allowed, agents/ brokers, developers and marketing men in a property promotion work can receive the same treatment.

If expenses of road shows can be claimed, why not the same treatment for publicity expenses of property developers? If incentives can be given to bankers and subscription collectors, why not discounts to early birds?

If positioning of regulators is going to take some time, why not think of following the examples of the benefits and tax exemptions available to real estate owners in the U.S.? The anxiety to prevent evasion of income to exchequer can, perhaps, be counter balanced by a liberal and ‘open’ approach to the sector.

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