Undervaluation rife in realty deals to avoid capital gains tax

The practice of undervaluation in realty deals has spurted as sellers resort to this unfair means to avoid capital gains tax (CGT) that the government imposed on fixed assets from this fiscal year. This growing practice in the real estate business came to light after a quick study carried out by Inland Revenue Offices (IROs) found that most individuals selling land and the property dealers are compelling buyers either to pay the CGT involved or agree to the coveted undervaluation ploy. "We have collected fines of well over Rs 4.2 million from sellers attempting to evade taxes by undervaluing the transactions," said Shishir Kumar Dhungana, chief of LRO sector 1 in the Valley. Of that amount, Rs 4 million was collected from a single transaction, he told myrepublica.com.

The CGT on land applies to deals valued at over Rs 5 million and the rate of taxation stands at 10 percent for land that changes hands frequently and 5 percent for land being sold after duration of five years. So far, the government has already collected well over Rs 30 million in CGT. If the tricks used for evasion (as unearthed by the IRO study) are anything to go by, landholders are using two major legal loopholes to evade tax. First, they revalue their houses producing documents to show they spent huge sums on renovation.

For instance, a senior IRO official said he recently encountered a case wherein someone, whose property was valued at Rs 3 million in the original registration, claimed he had spent Rs 5 million on renovating his house. "When he sold the house at Rs 8 million, we could do nothing because he had the land tax office (LTO) revalue the property accordingly and he walked away without paying CGT," the official said.

Officials like Dhungana said there has to be a certain standard to gauge how much money one realistically spends while renovating houses of different ages. Under the second method, landholders transfer ownership to family members by way of a gift. Going by the existing laws, ownership transfers of land as gifts are not commercial deals and hence do not attract taxes. Prem Bahadur Khapung, chief of Dillibazar LTO, admitted that his office has encountered a few cases of such tax evasion. Following such revelations, the Inland Revenue Department (IRD) has instructed IROs to beef up inspections in the market to control undervaluation.
Source:Republica