Real Estate: Demonetisation may not weed out corruption; attacking its underlying sources can

Real estate sector is susceptible to black money because of its own flaws. For commoners, the demonetisation shaker has been enough to make them want to blend their black into whites and no more accepting in black’s attitude!

In real estate, while demonetisation has handcuffed a lot many illegal deals because of the absence of lubricating cash, demonetisation by itself is powerless to arrest the corruption that grips the sector, and keeping it flowing with black money.

As per syndicated reports, black money constitutes 25-30 percent of India’s GDP indicating that the size of the parallel economy could be about Rs 28 lakh crore.

Reuters

Reuters

Now the demonetisation shake has made the black visible, as the corrupting layer making the going forward task somewhat easy in real estate. Some noteworthy observations from across the society on tackling black money in real estate.

“Demonetisation will not stop the corruption that creates black money. For this you have to attack its underlying sources.” Prominent commentator Gurcharan Das said so in an article “Ten ways to save demonetisation and stop the economy from choking” published in Times of India, suggesting to PM Narendra Modi that one way is to focus on real estate. Das said, “In real estate, every step is mired in corruption – from buying land to getting approvals.”

Black money in real estate is also the result of excessive stamp duty. NITI Aayog Vice-Chairman Arvind Panagariya has spoken about the possibility of easing off the stamp duty rates, “Stamp duties vary widely across the states and there is need to look at that. If you keep the stamp duties too high, that encourages under the table real estate transactions. Tax reforms like reduction in stamp duty are necessary to stop generation of black money in the system and that this should be done at the earliest following the demonetisation of high value banknotes. The government is beefing up enforcement against tax cheats in the real estate sector.”

“Property can be sorted out easily and cleaning up property transactions is not tough,” sociologist and public intellectual Dipankar Gupta pointed out in his article “Making a Quick Black Buck” in TOI. “Just equalise the circle rate with the market rate and watch how it impacts real estate like an instant whitener. Bleaches will be bleaches and will cause some corrosion, but the net result is worth it. Add a twist to it by merging GST with stamp duty and you can dry your clean linen in public,” he says.

The global real estate services and investment management firm Jones Lang LaSalle’s (JLL) Chairman & Country Head Anuj Puri too feels the same: “Circle rates – the minimum value at which the sale or transfer of a plot, built-up house, apartment or a commercial property can occur – usually set by the state government’s revenue department or the local development authorities – need to be made dynamic so that they are marked to the market price. This will reduce the difference between reported rates and transacted rates. The Benami Act will make it difficult to park unaccounted wealth into real estate.”

“The way to tackle real estate corruption and black money is to make all processes — building and environmental permissions, floor-space index (FSI) rules — transparent and time-bound. If you attack benami real estate aggressively, property prices will crash, and banks will have to force home buyers to either pay more EMIs or shorten their tenures or bring in more margin money. Moreover, their bad loan problem will get worse. And let’s not forget, the entire core sector — from cement to steel and power — is linked to real estate and construction. So real estate black money will have to be defanged in stages.

When these decisions are made rule-based and non-discretionary, netas and babus will lose their ability to demand bribes, most of which comes in the form of benami property ownership. Unfortunately, as these reforms depend on states, they have to move faster on this front,” explained R Jagannathan, an economic commentator and editorial director Swarajya, in an article in HT.

“There are several ways to minimise, if not eliminate the possibility of future generation of unaccounted money in the sector” says Sachin Sandhir, Global Managing Director – Emerging Business, RICS – “notably by instituting regulatory controls that can change the dynamics of demand in favour of real users as opposed to investors looking for capital gains, and taking steps to rationalise supply and make real estate a generally accessible market. And by replacing a regressive tax regime with something that is more equitable and is not as such hurting in terms of its overall impact on pricing or money flows.”

Sandhir says that the game plan should be to remove the conditions that foster the need for black money in real estate. Real estate development is linked very closely to local economic development – a mandate that local governments are empowered (and supposed) to foster, but do not address in the first place! So – the only place where monies are meant to be made is within the production of real estate itself. In a way, this is also ‘rent seeking behaviour’ legitimised by law. The second step should be to foster spatial planning and development in such a manner that the need for seeking so many different kinds of permissions is minimised, if not eliminated (though elimination is actually possible – many countries have done this).

Steps like controlling benaami transactions is good – Sandhir points out provided it allows for lands to be brought into the development market faster. “We are still struggling with several aspects of land reforms, notably property title certification, which is what makes benaami holdings easier to hold, and there is thus far no safeguards against real estate which is ‘donated’ or assigned to another on a ‘general power of attorney’ (which is not regarded as a ‘transfer’ per se). The core idea should be to discourage people from holding land or property for capital gains only, i.e. hoarding it without developing or using it, not being a ‘dead asset’ like gold, which has intrinsic value only.”

Hopefully, the rooting out of black money from real estate will rid the sector of its corrupt image. But the buyers and sellers should see to it that they do not overlook small transgressions. According to Puri, the dynamic circle rates and the Benami Act will help, as will making it mandatory for the entire payments to be made in white. However, regarding eradication of black money he says, “Just like in any other industry, this depends on the intent of all stakeholders in the real estate industry to eliminate black money.”

Panagariya has rightly commented, “On real estate, we need to begin to enforce it better”.

[Source: Firstpost]