Income Tax Act – 1961 and the Problem of Black Money in Real Estate Transactions

“Black money is so much a part of our white economy, a tumour in the centre of the brain – try to remove it and you kill the patient.”

Though India has come a long way in implementing a modern tax regime yet some pressing issues continue to create obstacles for its future growth. One such issue is that of black money transactions that create havoc in the Indian economy.

There are many areas where black money transactions take place, for example in real estate transactions. The shadow of black money looms large on the real estate scenario as the tax rate on real estate transactions is very high.

At present, the policy planners of the nation is concerned with the prevention of black money in real estate. For prevention of black money being used in real estate transactions, the Indian government has taken certain measures with the insertion of sections 43CA and 194 IA and with the reintroduction of earlier provisions by amendment of section 56(2) (vii)(b) in the Finance Act of 2013 which has given the Income Tax Act, 1961 more teeth to prevent the use and generation of black money in real estate transactions throughout the length and breadth of the country (except Jammu and Kashmir).

In this regard, the Indian government has signed the Double Taxation Avoidance Agreement (DTAA) with almost 85 nations of the world. But, black money continues to rotate in real estate transactions on a large scale that creates havoc in the Indian tax sphere.

Estimation of black money is extremely difficult; however Table 1 shows the proportion of black money in the real sector in the time period 1986-1991.

Table 1: Proportion of Black to White Money (in percentage)

Source: NIPFP (1985) ³ & Tandon (1987) ⁴