New Policy To Control Black Money Generation In Indian Real Estate Sector

The government is considering a number of measures to check the menace of black or unaccounted money in the economy, as the real estate sector is considered more vulnerable to it. However, experts say that these measures may cause a lot of problems for home buyers if they are not implemented properly.
In the recently-tabled white paper on black money, the government noted that sectors like real estate, the bullion and jewellery market, financial markets, public procurement, non-profit organizations, external trade, international transactions involving tax havens, and the informal service sector are prone to generating unaccounted money in the system.
The paper says that due to the rising prices of real estate, the tax incidence applicable on real estate transactions in the form of stamp duty and capital gains tax can create incentives for tax evasion through under-reporting of transaction price. This can lead to both generation and investment of black money.
The paper suggested a slew of measures to contain the menace of black money generation in the real estate sector. One of the measures for deterring use of the real estate sector for generation and investment of black money, the paper says, could be the provision of deducting tax at source on payments made on real estate transactions and mandating it as a pre-condition for registering of the transacted property. The paper also suggests extension of the provision to the primary market, where developers sell houses to buyers.
It says, “The provisions of tax collected at source on the developers of the property can also be considered as a possible policy measure.” However, it also proposes to develop a system of electronic payment and electronic reporting to mitigate the compliance burden. Further, the paper suggested that to reduce the element of black money in transactions relating to immovable property, the provision of no objection certificate (NOC) may be introduced in the income tax law with safeguards to reduce administrative complications and increased ease of compliance, so that an appropriate and uniform database is set up and a proper national-level regulation also put in place.
But to make the new system less cumbersome for end users, the paper says that the new system should be computer driven with minimal interface between the tax authorities and taxpayers, and enforced by a dedicated unit within the investigative machinery of the income tax department on the basis of pre-determined parameters and standard operating procedures.
Besides these measures, the government has already introduced a number of measures to curb the usage of black money in the real estate sector. The current provisions of the direct tax legislation provide for mandatory furnishing of the tax identification number by a buyer and the seller of an immovable property if the value exceeds Rs 5 lakh.
Also, every registry of property is required to furnish annual information regarding transactions in immovable property if the value exceeds Rs 30 lakh.
However, the paper noted that as many registrar offices still operate on a manual system, there are a number of gaps and lapses in the reporting of such transactions.
The paper suggests the evolution of a simple reporting systems that will facilitate the development of a nationwide database, in order to reduce the element of black money in transactions relating to immovable property and facilitate focused action based on actionable intelligence by monitoring agencies. Such a database should be computer driven with minimal interface between the authorities and the people, and accessible to all financial regulatory authorities, it says.
The confederation of Real Estate Developers Association of India (Credai) welcomed the government’s proposal to curb the usage of black money in the sector, and felt that a host of reforms should be introduced in the real estate sector, making it efficient and vibrant.
Lalit Kumar Jain, the national president of Credai, says: “The economic reforms initiated by Manmohan Singh as the finance minister in the early nineties saw the end of the Licence Raj, but the real estate sector is still governed by controls, which are only multiplying.”
Commenting on the ‘White Paper on Black Money’ presented by Union finance minister, Pranab Mukherjee, Jain says: “It is a good attempt at focusing the nation’s attention on the issue, but it unfortunately picks on the real estate and deals with just a couple of issues like the stamp duty as though that is the only cause of the problem.”
Jain says: “We are victims of the system, not the beneficiaries! We hate this system which makes us look ugly. We curse every person who exploits us to give us a legitimate permission, which we deserve instantly and without any illegitimate demand.”
The developer community and Credai have been pointing out that there are over 40 clearances that a developer is supposed to get which leads to human interaction with over 150 officials at various stages. Any delay at any stage obviously gives rise to “greasing of palms”, as the developer is always anxious to finish his project on time and avoid delays.
Jain says that the main factors that adversely impact the real estate sector are related to issues in land transactions, corruption related to approvals and licence process, power in the hands of officials and threats to stop work, the political system and above all the taxation system. “It is in this context that we appeal to the honourable Prime Minister to intervene and bring about a solution rather than indulge in a blame game.”
A McKinsey report to the government of India on cost of approval had clearly pointed out that the costs incurred on account of various approvals could constitute anything up to 40% of the sale value. Such is the enormity of the problem of approvals.
By the government’s own admission, the real estate sector in India constitutes about 11% of the GDP and as Mukherjee says, “A large number of transactions in the real estate sector are not reported on account of very high levels of property transaction taxes, commonly in the form of stamp duty.”
The minister said: “Investment in property is a common means of parking unaccounted money and a large number of transactions in real estate are not reported or are under-reported. This is mainly on account of very high levels of property transaction taxes, commonly in the form of stamp duty. High transaction taxes in property are one of the biggest impediments to the development of an efficient property market.” Therefore, the sector needs the intended reforms to be efficient, and implemented urgently, if the economy is to grow at around 8%.
Source – TOI

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