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Friday, January 10, 2014

6 steps that can make real estate efficient and corruption free in India

We have been writing a lot about the inefficiencies and mal practices in real estate sector in India. A lot of focus of our writing has been on highlighting the issues that plague the industry and how those issues can be tackled. While other ideas such as RTI; Aadhar; and recently Jan Lokpal bill has seen the light of the day, issues in real estate sector still remains unresolved. There is no denying that implementation of RTI, Aadhar, and Jan Lokpal bill will help in eliminating corruption from the government-public interface. But, what about real estate, where most of the cash finds its way? Why is the government not bringing in policy measures to cure the sector? We list some of the measures that can help in eliminating corruption from the real estate sector. In no way, these are the only measures, but, we are confident that implementation of the following measures will certainly help the sector.

  • Equalize market rate and circle rates

As the name suggests, market rates are determined by the economics of demand and supply equilibrium. Buyers and sellers participate in the market and transactions take place fairly & without any stimulus. Circle rates are the minimum rates fixed by the state government and a buyer of the property is entitled to pay stamp duty charges on these rates whenever a transaction takes place. For example, in Gurgaon, the market rate of an apartment in a multistory building is 7000 Rs/sqft, while the circle rate for the same apartment as fixed by the state government is 4000 Rs/sqft. For a 1000 sqft apartment, the stamp duty charges as per the circle rate would be Rs. 320000. While the stamp duty charges as per the market rates would be Rs. 560000. Therefore, it presents an opportunity for the buyer to under report the apartment value on papers in order to save on stamp duty charges. Equalizing market rates and circle rates would eliminate the practice of under-reporting of the property value. However, this may affect the growth of real estate sector because of fewer transactions between buyer and seller. And this can lead to an adverse impact on GDP of the state as well as the country. Well, the move to equalize market rates with circle rates should also be complemented with reduction in stamp duty charges.

  • Reduce stamp duty charges:

Stamp duty charges are exorbitant in most states across India. Stamp duty charges are least in Madhya Pradesh at 0.5%, while they are about 8% in states like Haryana, Punjab, Rajasthan, UP. Now, let’s say stamp duty charges are brought down in all states to a uniform level of 1%. Therefore, one would now pay Rs. 70000 as stamp duty charges on a flat of 1000 sqft with a market price of Rs 7000 per sqft. This move will not only encourage buyers to report market value of the property but will also lead to more and more transactions. Research based on past transactions can result in the optimum value of stamp duty charges which incentivizes true reporting as well as increased velocity of transactions across states in India.

  • Cap on property transfer on government sponsored schemes

On government sponsored schemes such as the recent DDA flats scheme, there should be a tenure cap. In other words, people who applied for the scheme and got allocation should not be able to sell the allocated apartment in secondary market for a fixed time period (say, 5 years). This happens in many countries in EU. The tenure cap will drive away speculators and only the real needy people will participate in the whole process. Can you imagine for 15000 DDA flats, some 15 Lacs application came. But this one looks impractical because banks, government bodies, and agencies all made money by issuing a lottery system. And then, they would say, we are pro-poor and these schemes help poor of the country. We came across a property dealer in Delhi who filled 8 forms for the DDA scheme. He called in various relatives and friends from his native Bihar and he made sure that at-least 8-9 forms were filled. He paid for the whole process and in return if a flat was allotted to any of those 8-9 members, he would share 50% of the proceeds. Everyone knows what a big lottery this whole flat allocation system is, yet government is not changing the policy. And who is benefitting? Government bodies by charging a fee for every form sold; banks for providing upfront money to the customer at an interest; and the rich who already owns multiple properties.

  • Cap on home ownership in certain cities

Certain cities such as Mumbai, Delhi, and other major metros have become unaffordable for the masses. A basic 2BHK is virtually out of the reach for a salaried person and he/she has to go to the outskirts of the city to fulfill his/her dream of home ownership. People with deep pockets own multiple properties in these cities. Housing is considered an investment vehicle first and then the basic need. In China, the government has moved in recent years to quell home price amid worry that surging costs could lead to social unrest and has set Home-Ownership Curbs in Shanghai and Beijing. Can it be done in India?

  • Computerization of property titles across the country

E-governance is the need of the hour. When there is no dearth of talent in the country when it comes to software development and technology, why don’t we see the computerization of property records? In many instances, a single property is registered under 2 or 3 names and this leads to disputes. Computerization of property titles will not only eliminate property disputes but it will also help in land acquisition processes for mass urbanization.

  • Make it easy as far as capital gains tax are concerned

An individual is liable to pay capital gains tax whenever there is significant gain over the buying price. Applicability of long term and short term Capital gains taxes should be made simple. In order to reduce or avoid being liable to pay capital gains tax, an assessee can either purchase a house within a period of one year before or two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer. Why can’t we have a common wealth tax instead of so many complicated tax structures?

Is it desirable as far as real estate is concerned or are we just getting too ahead of ourselves?



7 comments:

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  2. you have rightly said. the property rates are already so high and upon that the taxes levied by the government and developers. the summation of this taxes is almost one forth of your total property cost. common man just can't afford to own a home this days and upon that the houses available in under various housing schemes are gifted to the relatives and friends of various politicians. and who knows where the hell the tax amount paid by us goes?

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  3. Thanks for this blog,very much informative and hope it will make difference in other people thinking as well regarding stopping corruption in Real Estate Sector .

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