Tax Authorities Unearth Multi-Crore Stamp Duty and Tax Evasion Scheme in Karnataka
The Income Tax Department’s directorate of intelligence and criminal investigation in Bengaluru has exposed a sophisticated modus operandi used by land buyers and local developers to evade stamp duty and income tax. Preliminary investigations into these illicit financial practices suggest that land transactions exceeding Rs 300 crore have been significantly undervalued, leading to massive revenue losses for both the state and central exchequers.
The Mechanism of Deception
The scheme relies on a dual-layer documentation process. Buyers and sellers execute a registered sale deed that reflects a purchase price substantially lower than the actual market value. To bypass the legal requirements of full disclosure, the parties enter into separate, unregistered “full and final settlement deeds.” While the primary sale deed is used to calculate the stamp duty and registration fees paid to the state government, the remaining balance of the transaction—which constitutes the bulk of the payment—is transferred via formal banking channels under the cover of these unofficial settlement agreements.
This strategy serves two primary purposes for the unscrupulous parties involved: it artificially depresses the stamp duty liability and effectively masks the true value of the land assets from tax scrutiny. Local builders, who frequently purchase large land parcels for residential or commercial development, have been identified as primary users of this illicit method.
Tax Evasion and TDS Compliance Failures
Beyond the evasion of stamp duty, the investigation has highlighted a systemic failure in tax compliance. Tax authorities found that in many instances involving the purchase of “urban agricultural land,” buyers failed to deduct Tax Deducted at Source (TDS). By keeping the additional consideration outside the official registered deed, the participants ensured that the transaction remained invisible to the tax department’s monitoring systems.
Furthermore, a significant number of sellers have claimed capital gains exemptions under the guise of selling agricultural land. In many of these cases, the sellers have neglected to file mandatory income tax returns, effectively avoiding any tax liability on the profits earned from the land sales. Officials also noted that several registered property exchanges were deliberately undervalued to justify the payment of lower registration fees, with the “top-up” payments being settled off-the-books.
Call for Policy Reform
The prevalence of this evasion tactic has prompted experts and officials to call for a comprehensive overhaul of how land values are determined. Currently, the disparity between the official “guidance value” (or circle rate) and the actual prevailing market price creates an environment ripe for manipulation.
“The circle rate is significantly lower than the market rate, which is providing the primary incentive for these kinds of transactions,” an official familiar with the probe stated. To curb these practices, authorities are pushing for a revision of guidance values to better align them with real-world market prices.
The income tax department has formally alerted the Karnataka registration department regarding these findings. Given the severity of the evasion, the state is expected to impose stringent penalties on those involved in undervalued transactions, as the government seeks to plug the revenue leakage and bring more transparency to the real estate sector. The implications of this probe may soon extend beyond Karnataka, as similar practices could potentially be occurring in other states with significant real estate activity.
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