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Real estate: An industry built on black

money
As real estate is about a tenth of the Indian economy, the extent of black
money floating around in the sector is huge - many times more than
what is said to be stashed away abroad
At the moment these are just allegations, and the charges of political patronage and
caste vendetta have really muddied the waters, but it could well be yet another
instance of black money finding its way into real estate. A few days before the Singh
affair blew up, Cobrapost had disclosed the findings of a sting operation codenamed
"Black Ninja": 35 real estatedevelopers from all over the country were ready to
accept black money from buyers and convert it into white. It found their CEOs and
mid-level executives alike ready to accept 10 to 90% of the payment in cash. Some
were willing even to accept money abroad through hawala. We all have known that
payment in cash is the norm in the secondary market; the Cobrapost investigation
shows the practice is no less prevalent in the primary market.
It is not difficult to find out why builders accept cash. While obtaining the various
clearances for their projects, they need to grease many a palm - all in cash. Speed
money, a Gurgaon builder had told me, can add 10-20% to the land cost. And since
land accounts for 30-50% of the project cost, it escalates overall cost by three to
10%. The builder recovers this cash from customers. So if black money has to be
curtailed in real estate, the processes need to be made transparent and
discretionary powers need to end. But so much money is involved here that I doubt
if any political leader will ever dare to clean up the Augean stables.
According to Liases Foras, a real estate consultancy, about 30% of all property
transactions in the year to June 2012, were in black. As real estate is about a tenth
of the Indian economy, the extent of back money floating around in the sector is
huge - many times more than what is said to be stashed away abroad. Pankaj
Kapoor, the managing director of Liases Foras, says cash transactions are the
highest in the National Capital Region. The cash component, according to him, is the
lowest in affordable housing, high in the luxury segment and maximum in land.
Black money in the secondary market is almost impossible to track. In cities, there
is a circle rate that is used as a ready reckoner by the authorities. If there is a big
gap between the market price and the circle rate, it acts as an incentive for the
seller to under-declare the payment: he accepts a large chunk of the payment in
cash in order to save on income tax. So it makes sense to fix the circle rate as close
to the market price as possible. But there is a flip side to it: a high circle rate
reduces the scope for price correction when the market enters a downturn - like

now. In Rajarhat in Kolkata, for instance, the market price has fallen below the circle
rate, and that has ensured that no transactions will happen because in such a
scenario, the difference is treated as residual income in the hands of the buyer and
is liable for taxation.
To curb black money in the primary market, the government has made it mandatory
for all buyers to quote their permanent account number in all transactions. But
buyers have got round it by using multiple such numbers. In an interview
to Mint last month, Finance Minister Arun Jaitley said that the government is looking
at linking all real estate transactions with Aadhaar, the unique identity number.
Such a move could indeed bring some sanity into the real estate market.
Mistaking black money in real estate as genuine demand from home buyers, many
developers overbuilt in the last few years. As a result, most real estate markets are
sitting on massive inventories. According to data provided by Liases Foras, Delhi
and its suburbs were sitting on inventory of 83 months at the end of September
2014. In Mumbai as well as Chennai, the inventory would take 50 months to clear. In
Bengaluru, it would take 41 months; and in Hyderabad, 38 months. The prevalence
of black money has ensured that real estate prices stay totally out of whack in the
country. According to one study, it will take an Indian with the average per capita
income 580 years to buy a top-end property in Mumbai, compared to 65 years in
Hong Kong, 62 years in Paris and 47 years in New York.

Real estate business accounts for major chunk of black


money: Institute of Chartered Accountants of India
MUMBAI: When it comes to flow of black money, real estate business accounts for a major chunk of of such
illicit funds, accounting regulator ICAI has told the government while seeking urgent steps to check this
menace.
In a representation made to Finance Minister Arun Jaitley, the Institute of Chartered Accountants of India (ICAI)
has suggested steps to improve business practices in the real estate sector to check flow of black money, an
ICAI council member said today.
"Today, black money is largely parked in the real estate sector. The real estate can't be governed only by rules
and regulations, but demand and supply mismatch vis-a-vis final consumers has to be addressed.
"Once there is sufficient competition and supply exceeds demand, prices will come down and better practices
will be followed by players," ICAI central council member Tarun Ghia told PTI.
He was speaking on the sidelines of the 29th regional conference of the Western India Regional Council of the
Institute of Chartered Accountants of India.
He welcomed the government's move in the direction of real estate investment trusts (REIT) and foreign direct
investment in the real estate sector.

"Things like REIT and FDI relaxation are in the right direction, though they are merely small steps which have
several limitations," he said.
A REIT, or Real Estate Investment Trust, is a company that owns or finances income-producing real estate.
REIT would infuse funds into the market and once it happens, competition would increase, paving the way to
keep tabs on black money entering the sector. Today, the real estate market is in the hands of suppliers, Ghia
said.
The government must involve the ICAI to frame a policy to curb the black money menace, he said, adding that
the ICAI has a big role to play in unearthing black money.
However, this should not end up as some kind of a voluntary disclosure scheme. The entire system of tracking
black money would have to be examined so that creation of black money is plugged at the threshold, he said.
"The ICAI council recently made a representation before Union Finance Minister Arun Jaitley. Being a partner in
nation building, ICAI is concerned with the menace of black money and would join all efforts made by the
government to address the menace," ICAI president K Raghu said.
The ICAI has been batting for a robust taxation and accounting system to curb the menace for quite some time,
he said.
"The ICAI has always been working to ensure that black money levels in the economy is brought down through
a transparent, robust taxation and accounting system," ICAI Vice President Manoj Fadnis said.
Earlier, it was the ICAI which had recommended deduction of tax through tax deduction at source (TDS),
whenever there is a transaction or sale of immovable property, which has already been implemented by the
government, he said.

India's uphill battle against "black


money" in real estate
(Reuters) - Ulwe, a village of dusty, uneven streets on the outskirts of Mumbai, lacks
basic amenities like water supply and electricity, but a two-bedroom, 1,000 sq ft house
costs about 5 million rupees, beyond the reach of many middle-class Indians.
According to prospective buyers, many developers will demand up to 30 percent of that
price in cash, a small slice of the ubiquitous, unaccounted "black money" that costs
India's straitened exchequer billions of dollars in lost taxable income.
Legislation that would bring more transparency to the industry will be considered
during the winter session of India's parliament, which starts on Thursday.
However, investors, tax officials and bankers Reuters spoke with were sceptical the law
would stamp out illegal practices they say are closely entwined with politics.

"Four out of 10 developers were ready to do it in full white and six were asking for a
black component," said 35-year-old Umesh Kolhapure, who was looking for a threebedroom house around Ulwe, near the proposed site of a new international airport
serving the country's financial capital.
Recent high-profile scandals in the coal and telecoms sectors involving large corporate
houses and politicians have rattled investors in Asia's third-largest economy, where
undeclared wealth has long been rampant.
Real estate accounts for a large share of illicit transactions, thanks to lax regulation and
the numerous approvals needed for projects, making many ordinary people party to
corruption and pricing some of the emerging middle class out of the market.
That has prompted the newly-appointed housing minister, Ajay Maken, to push a real
estate regulation bill.
Designed to bring greater accountability, transparency and prevent fraud and delay, the
bill proposes appointing the sector's first national regulator. However, it will not have
control over land deals, which is where illicit activity is widely believed to be rampant.
"The bill is not going to help solve the issue of black money," said Anurag Mathur, chief
executive officer of project and development services at Jones Lang LaSalle.
"Black money is tied in or shifted through land transactions and the regulator will have
no jurisdiction over that."
TAX AVOIDANCE
In the year to June 2012, about $6 billion, or 30 percent of total transactions in the
property sector, were executed using black money, according to Liases Foras, a
consultancy.
Real estate accounts for more than a 10th of India's $1.85 trillion economy.
The government says black money, a term widely used in India to describe undeclared
funds, often meant to avoid taxes, can be present in every stage of a project from land
acquisition to home sales.

For the purchaser of a 5 million rupee home like those in Ulwe, a developer might
typically ask for 1.5 million rupees in cash while making out a sales agreement for 3.5
million.
With banks willing to lend up to 75-85 percent of the "official" sale price, the buyer will
then need to fund anything from 45 to 60 percent of the total cost from savings, which is
difficult for many salaried, middle-income househunters.
"It is unfair on the buyers," said Kolhapure, who has put his search on hold in the hope
of a price correction that will help him afford a home for his family of five.
If the bill comes into force it might go some way in solving Kolhapure's problem.
The draft says developers will have to get accreditation for projects from the regulator,
make public disclosure of details including the price of units, and maintain a separate
bank account for each project to collect payments from buyers.
However, there is widespread cynicism about whether it can stamp out the practice
given the belief that a large share of illicit money sloshing around the sector is tied to
politicians.
"There can't be a legal measure to put an end to black money ... because ultimately it
ends up in the political cycle. That is where the requirement is," said a Mumbai-based
income tax official who did not wish to be named.
Allegations last month of improper dealings between the son-in-law of ruling Congress
party chief Sonia Gandhi and DLF (DLF.NS), India's biggest property developer,
underline the perception of a nexus between developers and politicians.
Activist group India Against Corruption accused DLF of arranging favourable loans and
real estate transactions for Robert Vadra, a businessman married to Gandhi's daughter,
who had previously announced a possible move into politics. The company and Vadra
both deny wrongdoing.
CORRUPT OFFICIALS
Central bank rules prohibit bank loans to fund purchases of land, a regulation designed
to curb speculation and reduce balance sheet risk for banks. To fill that void, wealthy

individuals, including politicians, are widely believed to invest "black money" in real
estate.
Some of that money can later be poured into election campaign donations from
developers, say private equity investors, real estate consultants and sector analysts.
Those same developers might be awarded with plots of land at attractive prices or
assisted in getting project approvals.
Black money comes in handy for bribing corrupt officials.
"There is a cost of pushing the file. But what is the alternative?" said Lalit Kumar Jain,
chairman of the Confederation of Real Estate Developers in India (CREDAI).
For a typical residential project in Mumbai, developers need about 55 approvals from
more than a dozen departments. Delays in consents add 40 percent to a project's cost,
said Jain.
At least 10 developers Reuters tried to reach including DLF Ltd (DLF.NS), Oberoi Realty
(OEBO.NS), DB Realty (DBRL.NS) Sobha Developers (SOBH.NS), and Hiranandani did
not respond to emails, declined to comment or did not make officials available.
CREDAI backs the pending legislation that would create a single-window clearance for
approvals, which it says will reduce the temptation to pay bribes. Getting consents in
time would make homes cheaper by 25 percent, Jain said.
"Our biggest problem is the approval process," said Jain, who is also the managing
director of Mumbai-based property company Kumar Urban Development.
"That is the only corruption we know of and where we are victimised and exploited.
Otherwise developers are clean."