Clause 393 Tax to be deducted at source.

Income Tax Bill, 2025

Introduction

Clause 393(1)[Table: S.No. 3(ii)] of the Income Tax Bill, 2025 introduces a specific provision for tax deduction at source (TDS) on payments made as consideration, not being in kind, under the agreement referred to in section 67(14). This provision closely mirrors the existing Section 194IC of the Income-tax Act, 1961, which deals with TDS on payments made to residents under specified agreements, particularly those falling within the ambit of Joint Development Agreements (JDAs) as defined u/s 45(5A). The evolution of these provisions reflects the legislative intent to bring greater transparency and compliance in real estate transactions, especially those involving complex arrangements between landowners and developers. This commentary provides a comprehensive analysis of Clause 393(1)[Table: S.No. 3(ii)] of the Income Tax Bill, 2025, examining its structure, objectives, and practical implications. The analysis is then extended to a comparative study with Section 194IC of the Income-tax Act, 1961, highlighting similarities, differences, and the underlying policy rationale. The discussion is structured to address the legislative context, detailed breakdown of the provisions, interpretational issues, and the real-world impact on stakeholders.

Objective and Purpose

Legislative Intent and Policy Considerations

The primary objective of both Clause 393(1)[Table: S.No. 3(ii)] and Section 194IC is to ensure the collection of tax at source on monetary consideration paid to landowners under specified agreements, most notably JDAs. These agreements have historically posed challenges for tax administration due to the timing of capital gains taxation, the nature of consideration (monetary and in-kind), and the risk of tax evasion or deferment. Section 194IC was introduced by the Finance Act, 2017, in conjunction with Section 45(5A), to address the tax treatment of capital gains arising from JDAs, where landowners allow developers to develop land or buildings in exchange for a share in the developed property and/or monetary consideration. The TDS provision was intended to create a tax trail and ensure early tax collection on the monetary component, given the staggered nature of payments in such agreements. Clause 393(1)[Table: S.No. 3(ii)] in the Income Tax Bill, 2025, seeks to continue and refine this approach. It aims to provide clarity, close loopholes, and harmonize TDS provisions with broader reforms in the direct tax code, ensuring that tax deduction is aligned with the actual receipt of monetary consideration by the landowner.

Historical Background

Before the insertion of Section 194IC, there was significant ambiguity regarding the timing and mechanism of TDS on payments made under JDAs. The absence of a specific TDS provision led to practical difficulties, as existing sections (such as 194-IA, dealing with transfer of immovable property) did not adequately cover the nuances of JDAs, where consideration could be partly in kind. Section 194IC was thus a targeted response to a growing segment of real estate transactions, and Clause 393(1)[Table: S.No. 3(ii)] represents its continuation in the proposed new tax code.

Detailed Analysis of Clause 393(1)[Table: S.No. 3(ii)] of the Income Tax Bill, 2025

Text of the Provisions

Clause 393(1)[Table: S.No. 3(ii)] - Income Tax Bill, 2025:

• Nature of Income or Sum: Any consideration, not being consideration in kind, under the agreement referred to in section 67(14).
• Payer: Any person.
• Rate: 10%.
• Threshold Limit: Nil (i.e., TDS applies to all payments regardless of amount).
• Timing: At the time of credit or payment, whichever is earlier.
• Interaction with Other Provisions: If both S.No. 3(i) (general immovable property transfer) and 3(ii) apply, TDS is to be deducted only under 3(ii).

Key Elements

1. Nature of Payment:
   • The provision applies to "any consideration, not being consideration in kind," under the agreement referred to in section 67(14). This closely tracks the language of Section 194IC, which refers to "consideration, not being consideration in kind," under a specified agreement (u/s 45(5A)).
   • The focus is on monetary consideration, recognizing that JDAs often involve both monetary and in-kind payments (such as allocation of flats or constructed area).
2. Applicable Agreement:
   • section 67(14) in the new Bill corresponds to u/s 45(5A) in the 1961 Act, both dealing with capital gains in the context of development agreements. The cross-reference ensures that the TDS provision is tightly linked to the specific type of agreement that gives rise to deferred capital gains.
3. Rate of Deduction:
   • The specified rate is 10%, matching the rate u/s 194IC. This is higher than the 1% rate u/s 194-IA, reflecting the policy decision to ensure a more substantial upfront tax collection in these complex transactions.
4. Threshold Limit:
   • No threshold is specified. TDS applies irrespective of the quantum of consideration, ensuring comprehensive coverage and reducing the risk of tax leakage through splitting of payments.
5. Timing of Deduction:
   • TDS is to be deducted at the earlier of credit or payment, aligning with the general principle of TDS provisions and ensuring that tax is collected at the earliest point of accrual or disbursement.
6. Interaction with Other Provisions:
   • The note to the Table clarifies that if both S.No. 3(i) (general TDS on property transfer) and 3(ii) (TDS on consideration under specified agreement) apply, deduction is to be made only under 3(ii). This prevents double deduction and provides clarity on precedence.

Interpretational Issues and Ambiguities

1. Definition of "Consideration in Kind":
   • Both provisions exclude consideration in kind from the scope of TDS. However, complex JDAs may involve hybrid arrangements (e.g., partial cash, partial flats). The law is clear that only the monetary component is subject to TDS, but practical difficulties may arise in allocating values and timing deductions.
2. Overlap with Other TDS Provisions:
   • The explicit override of general provisions (such as section 194-IA or S.No. 3(i)) is essential. Without this, there would be a risk of confusion or double deduction. The new Bill addresses this by providing a clear note on precedence.
3. Scope of "Any Person":
   • The payer is "any person," ensuring wide applicability-whether the developer is an individual, company, partnership, or other entity.

Practical Implications

Impact on Stakeholders

1. Landowners:
   • Landowners entering into JDAs will have TDS deducted at 10% on the monetary component of consideration. This provides a tax credit but also creates a cash flow impact, especially if the actual tax liability is lower due to capital gains computation or exemptions.
   • Landowners must ensure proper documentation and timely filing of returns to claim credit or refunds as applicable.
2. Developers:
   • Developers are responsible for deducting and depositing TDS, maintaining compliance with reporting requirements, and issuing TDS certificates. Non-compliance may attract interest and penalties.
   • In hybrid consideration arrangements, developers must segregate monetary and in-kind components, ensuring TDS is deducted only on the former.
3. Tax Authorities:
   • The provision enhances traceability of transactions and aids in tax administration. The absence of a threshold reduces the risk of tax evasion through splitting or structuring of payments.

Compliance and Procedural Aspects

1. Deposit and Reporting:
   • Developers must deposit TDS with the government within the prescribed timelines and file TDS returns, furnishing details of the payee and the amount deducted.
   • Failure to deduct or deposit TDS may result in disallowance of expenditure u/s 40(a)(ia) (or its equivalent in the new Code) and levy of interest and penalties.
2. Documentation:
   • Clear documentation of the agreement, breakup of consideration, and TDS compliance is essential to avoid future disputes.

Comparative Analysis with Section 194IC of the Income-tax Act, 1961

Text of the provisions

Section 194IC - Income-tax Act, 1961:

• Scope: Payment to a resident by way of consideration (not in kind) under an agreement referred to in section 45(5A).
• Rate: 10% of such sum as income-tax.
• Timing: At the time of credit or payment, whichever is earlier.
• Threshold: No threshold specified; applies to all payments.
• Override: Applies notwithstanding anything in section 194-IA (which deals with TDS on transfer of immovable property).

Similarities

1. Scope: Both provisions apply to monetary consideration paid under a specified development agreement (JDA).
2. Rate: Both prescribe a 10% TDS rate.
3. Threshold: Neither provision specifies a monetary threshold; TDS applies irrespective of amount.
4. Timing: Deduction is to be made at the earlier of credit or payment.
5. Exclusion of Consideration in Kind: Only the monetary component is subject to TDS; in-kind consideration is excluded.
6. Override of General TDS on Property Transfer: Both provisions override the general TDS on property transfer (section 194-IA or S.No. 3(i)), ensuring that only one TDS provision applies.

Differences and Evolution

1. Reference to Underlying Agreement:
   • Section 194IC refers to the agreement u/s 45(5A) of the 1961 Act, while Clause 393(1)[Table: S.No. 3(ii)] refers to section 67(14) of the new Bill. The substance is the same, but the cross-reference reflects the new legislative framework.
2. Clarity on Precedence:
   • The new Bill explicitly notes that if both S.No. 3(i) and 3(ii) apply, TDS is to be deducted only under 3(ii). While Section 194IC achieves the same through a "notwithstanding" clause, the new format is arguably clearer and more accessible for taxpayers.
3. Terminology and Structure:
   • The tabular presentation in the new Bill enhances clarity, specifying payer, payee, rate, and threshold in a structured format. This is an improvement over the more narrative style of the 1961 Act.
4. Integration with Other Provisions:
   • The new Bill integrates TDS provisions for various payments into a single clause (Clause 393), facilitating easier reference and compliance. This structural reform addresses criticism of the fragmented nature of TDS provisions under the 1961 Act.

Potential Issues and Areas for Clarification

1. Hybrid Agreements:
   • In cases where consideration is partly in cash and partly in kind, practical difficulties may arise in determining the timing and quantum of TDS. Guidance may be required on allocation and valuation.
2. Refunds and Credit:
   • Given that TDS is deducted at 10% on the gross monetary consideration, landowners whose effective tax liability is lower (due to indexation, exemptions, or lower capital gains) may face refund situations. The administrative process for claiming refunds needs to be efficient to avoid hardship.
3. Interaction with GST and Stamp Duty:
   • JDAs often involve GST and stamp duty implications. The interaction between TDS on monetary consideration and these indirect taxes must be managed to avoid cascading effects or double taxation.

Conclusion

Clause 393(1)[Table: S.No. 3(ii)] of the Income Tax Bill, 2025, represents a continuation and refinement of the policy embodied in Section 194IC of the Income-tax Act, 1961. Both provisions are designed to ensure effective tax collection on monetary consideration paid to landowners under specified development agreements, with a focus on transparency, traceability, and compliance. The new Bill enhances clarity through structured presentation and explicit notes on precedence, addressing practical challenges observed under the 1961 Act. The provision has significant implications for landowners, developers, and tax authorities, necessitating robust compliance mechanisms and clear documentation. While the framework is largely robust, practical issues relating to hybrid consideration, timing, and refunds may require further administrative guidance. The integration of TDS provisions in the new Bill is a positive step towards simplifying tax compliance and ensuring that the objectives of tax policy are met in the evolving real estate sector.

Full Text:

Clause 393 Tax to be deducted at source.