Sunday, September 8, 2013

Solutions for reducing the uninterrupted influx of black money into the real estate sector

Author: Sachin Gupta | Find me on Twitter
Talking to any common man on the street about real estate sector would draw animated conversations on how the sector is riddled with black money, corruption, and political maneuvering. In this section, we will focus on how the black money enters the real estate sector, its effects on economy, and ways to tackle it.

How black money enters the market?

1. Parking place:
Real estate has become the parking place for businesses to park their unaccounted cash in real estate particularly in residential real estate asset class. Most business houses, small or large, even though claims to be doing the business by rule of law but would under-report their profits to save on tax. And that under-reported income would land in the real estate sector which tends to raise the prices of real estate in a land scarce country like ours.

2. High rates of stamp duty and registration charges:
Stamp duty and registration charges account for 12.5 to 15% of property value in most states across the country. As an example, the property with market value of Rs. 1 Crore would elicit Rs. 12.5 to 15 Lacs for stamp duty and registration charges. However, the circle rates (or government decided rates) of property in most cities are much lower as compared to the market value of the property. There lies the incentive to under-report the true market value of the property to save on stamp duty and registration charges. The amount saved is paid in cash to the seller and that cash is again ploughed back into the real estate sector giving rise to a vicious circle leading to ridiculously exorbitant property prices.

3. Capital Gains Tax:
Most of us have observed the real estate deals wherein cash forms the significant part of whole deal. There are instances when cash constitutes as high as 75% of the total property value. Now, cash transactions are encouraged in real estate sector to save on capital gains tax which is 30% of the total gains. There is data available which suggests that more than 70% of that cash is again ploughed back into the real estate sector leading to rapid appreciation is real estate prices. The comprehensive knowledge of capital gains tax including exemption on profit from home sale can be found from following sources.
Capital gains tax exemption makes sale of house more profitable
Tax exemption on profit from home sale

Effects of black money

1. Unaffordable prices of property:
The entering of black money leads to irrational prices in real estate sector. In a country, where demand for affordable property is high and land supply is limited, the whole influx of black money spirals out the prices of property to a level which is almost unreachable for the middle class families. We all have seen how housing prices have multiplied in many cities across the country in the past decade and yet the rental prices haven’t kept the same pace of appreciation.

2. Negative impact on economy:
Real estate is an asset class where money is invested; it sits there and over a period of time produce capital value appreciation on account of true demand in a rational economy. However, when black money or the excess money enters the sector, it not only drives the property prices to irrational level but also leads to deviation of funds from productive sectors. This excess money which has been the subject of greed could have been invested in entrepreneurial ventures, business expansion plans, or if reported genuinely can be collected by government in the form of tax revenues. This would result in circulation of that money into the economy and subsequently expansion of economy creating more jobs, more demand, and production of goods and services.

Ways to eliminate the black money

1. Decrease of stamp duty and registration charges:
The reduction in stamp duty and registration charges can result in proper reporting of the true market value of the property. Even though, government revenues may get affected on account of reduced stamp duty and registration charges, it can however be compensated on accounts of capital gains tax.

2. Paying in Cheques:
We all have been inspired by Anna Hazare movement against corruption; however, we would do that cause a great justice by doing our bit when it comes to property transactions. What can we do? Well, quite simple, Stop paying or accepting in cash when it comes to property buying or selling. The simple yet practical step would reduce the entering of black money into the property sector and would drive away the speculators from entering the market to make quick bucks.

Have any Questions?


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