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August 28, 2008

Apartment – not done yet.

Yesterday two landlords had assured me that they are OK with giving out PAN numbers and sticking to white money. They spoke too soon, and after some “consultations” gave me several options today:

  1. Pay some of the rent towards the flat itself, and rest of the money could be for furnishings, fittings etc.
    This is clearly illegal; tax law says that furnishings etc are part of “Rent” and cannot be separated from taxable component. I have web-links to prove this. I will do no such thing, and I am sure HP will not agree to this. My answer to most landlords about this is that they should speak directly with HP about it.
  2. Give us a check for the 16.99% tax that HP will deduct at source.
    I wonder why the tenant should be responsible for tax that the landlord is required to pay by law. My company cuts my salary at source. How would it look if I ask the company to pay a part of my income tax? Thankfully, reasonable people have not suggested this, and when others said that, I simply smiled and kept quite.
    A point to be noted here though; sales tax at shops is passed onto customers. In legal terms however, it appears that rent is considered as income earned by the landlord, and a tenant is not liable for tax. Also, HRA is not completely tax free.
  3. Can HP ignore the part of cutting TDS; we will do our own taxes?
    From my understanding, it is a mandatory requirement that TDS should be performed in a CLA. Maybe there is a clause out there that will let you get around TDS. If that is legal, let me know.
  4. Do a direct person to person lease without involving the company.
    First, I have too many financial commitments coming up due to which I cannot spare the money for security deposit. Second, I can borrow from savings, family, friends, and HP will also give me an interest-free loan. Third, I will not use the second option mainly because you would use the person to person lease to avoid tax. I am more determined to insist on a CLA now. If it is of any solace to the numerous landlords out there, I also pay more tax if I go through company lease.
  5. Why dont you pay Rs 10,000 as the white rent, and Rs 5,000 in cash. After going through points 1 through 4, I do not think a reasoning needs to be given against 5.

Most landlords have classic lines: “The system is like this only son. The Govt. has done little for us, they waste our money. You are thinking from a US perspective. We are already being assessed for Income Tax.” But people often fail to realize that tax evasion has huge cost implications. Let us consider a locality that has 200 rental premises. Further, if each one of them is priced at rents of Rs 15,000 and none of them pay tax, they evade about 2.5 K per month, or in conservative terms 20K per landlord per annum. This translates to about 40 lakh per annum in one locality. If one takes an estimate for 10 years, at a reasonable 3% simple interest rate, not counting inflation, the figure is nearly around 700 lakhs. Now let me ask; does it cost 700 lakhs to maintain roads, pipelines, electric network for 200 homes over 10 years. Even if we get conservative and take one-thrid of the cost (~250 lakhs), it still is a lot of tax evaded for 10 years. And even then it does not cost 250 lakhs to maintain a place that has 200 homes. Honestly, when landlords evade tax, they lose a lot in the long term.

You may think that the tax is not justified given the facilities provided. But I ask each landlord out there – It has been maybe 5-6 years since you are renting your property. For how may years have you honestly paid your tax on property/income earned on property? The Govt. has to get some money to start a project. Would you goto a car dealer and tell him: I will give you no money and you give me a car. If the car works for a year or so, I will pay you the cost.

Yes, you are being assessed for tax. But to provide an army at the border, build non-urban/non-obvious infrastructure (dams, ports, Indian embassies, roads between cities), the Govt. needs money. True, the Govt is corrupt, our representatives go off on expensive, unproductive trips to Japan, Australia etc. But evading tax is not the right way to fight such mis-governance. Do your duty, and then fight for your rights. India exists because we pay our income tax properly. Paying one type of tax does not discount you from other taxes. If you would not even do that, then maybe our neighboring countries are better places for you.

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