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Executive
summary
It
is
a
well
established
fact
that
Indias
parallel
economy
is
more
than
50%
and
the
money
earned
from
such
tax
evasion
is
parked
in
Real
estate.
Also
the
Real- state
sector
is
about
88%
of
Indias
wealth
and
acts
as
the
most
legitimate
way
of
parking
black
money
or
money
earned
from
corruption
or
illegal
activities.
The
ease
and
lucrativeness
of
being
able
to
park
such
money
influences
the
investments
in
favor
of
real
estate
and
away
from
legitimate
businesses
that
create
jobs
and
products
in
the
economy.
This
not
only
leads
to
slower
expansion
of
businesses
but
also
resulting
in
Indias
unusualy
persistent
high
inflation.
It
sets
a
chain
reaction
of
tighter
monitory
policy
and
high
interest
rates
and
further
reducing
the
incentive
to
invest
in
businesses
(due
to
high
payback
periods)
and
making
real-estate
the
most
favored
option.
The
effort
so
far
from
government
like
reducing
stamp
duty,
and
capital
gains
tax
has
resulted
in
no
results.
Even
the
best
deterrent
in
form
of
37i
(chapter
20c)
was
further
removed
in
2002
to
let
the
situation
completely
loose.
It
is
proposed
that
all
the
properties
that
get
registered
are
opened
for
next
14
days
with
10%
increments
by
anybody.
It
would
make
black
money
transactions
in
real
estate
impossible.
It
is
by
far
the
most
comprehensive
and
yet
a
simple
policy
change
with
far
reaching
immediate
benefits
by
putting
a
stop
on
black
money.
To
restore
our
falling
economy
it
is
imperative
to
divert
investments
to
businesses,
job
creation
and
stop
our
persistent
inflation.
It
will
also
increase
tax
collections
of
both
stamp
duty,
income
tax
and
all
other
taxes.
It
will
reduce
budget
deficits
and
strengthen
the
rupee
and
help
reduce
the
interest
rates.
A
double-digit
growth
is
easily
achievable
before
we
loose
the
shining
India
completely.
It
is
now
further
proposed
to
file
a
PIL
for
the
discrimination
suffered
by
a
pure
white
man
and
white
companies
in
real-estate
transactions
in
India.
September 2011
Table
of
Contents
EXECUTIVE
SUMMARY
WHY
BLACK
MONEY
NEEDS
TO
BE
ERADICATED?
WHY
REAL
ESTATE
IS
IMPORTANT?
IT
IS
THE
CAUSE
FOR
LOWER
GDP
AND
POVERTY
CAUSE
FOR
HIGH
INFLATION
HOW
DOES
IT
CAUSE
MORE
CORRUPTION?
HOW
DOES
IT
CREATE
POVERTY?
WHAT
HAS
GOVERNMENT
TRIED
SO
FAR?
A
SIMPLE
FIX
FOR
REAL
ESTATE
TRANSPARENCY
CONCLUSION
ANNEXURE
I
50C
2
4
5
5
7
8
9
12
13
16
17
17
September 2011
At a five-day anti-corruption convention in 2009 at Doha, United Nations said the cost of political corruption to governments around the world is about 1.6 trillion dollars1 each year. This does not include the black money generated by the businesses and the tax losses there off. The loss due to this has a spiraling impact on public welfare and public policy. The black money in India alone is stated to be 50%2 of the GDP of India i.e. another 750 billion dollars a year. It means $250 billion in taxes. It is roughly equal to the Indian budget of $278 billion3.
1 2
http://digitaljournal.com/article/281907
Global
Financial
Integrity,
Centre
for
International
Policy,
Washington
DC
3
Indian
Budget
Reins
in
Spending
Increases
The
Wall
Street
Journal,
Feb
26th
2010
September 2011
Other features of the survey evidence from developing countries capture important real differences. Very high shares of non-financial wealth are found for the two low-income countries in our sample, India and Indonesia, reflecting both the importance of land and agricultural assets and the lack of financial development. On the other hand, the share of non-financial assets in China is relatively modest, possibly because the value of housing is reported net of mortgage debt, and because urban land is not privately owned. In addition, there has been rapid accumulation of financial assets by Chinese households in recent years. Debts are very low in India and Indonesia, again reflecting poorly developed financial markets. Also the complex mechanism for investment preferences is well presented in a paper in 2008 Financial Repression, Bank Deposits, Real Assets and Black Money in which Mr. Gurcharan Das elaborates why the black money influences the investment choices of individuals. It may appeal to common sense that how people would get stuck to an asset class due to inability to park the black money. This puts an artificial ceiling on the investments available to the Primary and secondary financial markets which are the growth factory for jobs and production (GDP) in the economy. The profit generated through government or consumer spending is converted into black money by tax evasion and ends up getting parked in the realestate market. Thus starving the financial instruments or the financial market, which creates sustained jobs and forms the supply curve of an economy. Such inelastic supply of an economy results in inflation and is usually met with increase in interest rates from RBI. Eventually further starving the mass-market, thin- margin businesses, with higher capital costs, more risk and less capital for growth. People would rather save a 30% direct tax and another 10-20% indirect tax by not making invoices and straight away park the money in real estate for immediate gains without getting noticed while corrupting and derailing the entire system of sustained business expansion. Longer pay back periods due to high interest rates compared to better returns on deposits and real-estate deter large investments into businesses. A promoter ends up spending substantial time in managing the transaction personally without delegating to maintain secrecy. Lower profits and turnover in books further restricts objective view of business, opportunities for Debt and equity participation.
September 2011
Prohit
Black
money
Park
in
Real
estate
Fear
of
getting
Caught
Fudged
books
Less
delegation
Less
expansion
Fear
to
scale
up
No
investments
Immediate
Corruption
No
debt
Less
Jobs
saving
of
50%
No
listing
Inhlation
Increase
in
interest
Rates
Higher
Risk
September 2011
inflation, there are plenty who think that it has been too slow to tighten monetary policy. It has in fact been raising rates regularly since March last year, but only very gradually. Some reckon it should have tightened faster. The RBI is, of course, wary of choking off Indias rapid recovery from the slowdown in growth during the global economic crisis. Its governor, D Subbarao, said on January 17th that "For the Reserve Bank the challenge is to calibrate monetary policy taking into account the demands of inflation management and the demand of supportive recovery.} "The shift of the Indian household sector from deposits to inflation hedges such as property and gold is creating a liquidity crunch in the banking sector thats unlikely to be solved in the near future, Kristine Li, senior director of Asia-Pacific credit strategy at Royal Bank of Scotland Group Plc, told Bloomberg. If banks loan growth decelerates, asset quality concerns are likely to return.
September 2011
It is estimated that a total of $213.2 billion was shifted out of India between 1948 and 2008, or about 17.7% of Indias GDP at end-2008. Applying rates of return on these assets based on the short-term US Treasury Bill rate, the total gross transfers of illicit assets by Indian residents amount to $462 billion at the end of 2008.7 The outflow compared to real estate parking is quite small if we see it on per year basis. So it can easily be inferred that most of the black money is being parked within India and that too in the Real Estate. Easy access and ability to park black money makes honeybees multiply. It attracts honeybees to the top positions. Since one cannot control the spread of flowers or catch the honeybees, it is only wise to remove the honeycombs in the area and the honeybees will have no choice but to go.
10
billion as compared to $54.6 trillion9 in America for 300 million populations. There is a difference of astonishing 223 times when we also take into account the financial component only. The disparity in wealth is only 23.48 times if we only take non-financial wealth as comparison. This stark disparity in our asset classes throws the economy off balance when it comes to job creation through further investments. Further to make it worse the debt taken by the public in India is mere 4% of the total wealth. So majority of the capital remains locked away in the real-estate sector and does not even get deployed as collaterals or loans. With high interest rates the risk of doing business goes up and profitability in the stock market goes down. Real-estate becomes an even more attractive option as a safe heaven and especially for tax evasion. This disrupts the chain reaction for job creation. It leads to less spread of income, less taxes, less public welfare projects and only concentration of wealth into properties in established cities and no jobs for the homeless. GDP of a nation should normally be 25% to 32% of the countrys financial wealth. What has perhaps remained unnoticed is that India it is already running at 127%, which is several magnitudes higher. It only shows the lack of capital in the economy. It has some of the following implications: Stock Market or financial assets are under performing as compared to GDP. Businesses not getting listed. Investment in stock market comparatively low. Valuations of businesses listed are very low. Lower valuations or margins are either because of o Black money being squeezed out. o Interest rates are too high. o Low pricing mentality due to price sensitive demand. It is to be noted that the GDP does not include the 50% transactions done in black money. So, the ratio is actually over 200% and almost 10 times normal. Developing the financial wealth To create more businesses or employment we need to either increase the profitability to increase corresponding valuations by plugging leakages of black money or redirect investments into financial assets. The wealth or the capital of the country seems too small compared to GDP in India. Its therefore needed that the black money portion of the real estate be recognized and made available for loans and capital. 9 Credit Suisse, Global Wealth Databook 2010, pg 75 Price discovery in real estate September 2011
11
Developing
the
non-financial
wealth
The
capital
or
the
fuel
of
the
supply
curve
is
embedded
in
the
real
estate
as
already
seen.
So,
it
is
apt
for
government
to
allow
development
of
this
asset
class
through
FDI.
However,
with
the
rampant
corruption
and
involvement
of
black
money
in
this
ever
so
important
sector,
it
is
natural
for
the
foreign
investors
to
find
other
destinations,
which
they
can
deal
with
easily
and
remotely.
So,
it
is
most
important
to
clean
up
this
sector
to
unclog
the
hidden
potential
and
develop
it
further
at
all
costs
for
a
smoother
expansion
of
the
economy
and
creating
jobs.
Poverty
a
closer
look
The
figures
for
India
are
disturbing.
At
number
16th
on
the
rankings
of
poverty
gaps,
and
housing
almost
41%
of
the
world
poor
(World
Development
Indicators
database),
there
is
a
lot
to
be
concerned
about.
There
are
1,26,700
Indians
who
are
classified
as
millionaires
(Capgemini,
Merrill
Lynch
Wealth
Management),
yet
a
sickening
80%
who
lives
on
less
than
two
US
dollars
a
day.
The
stark
contrast
between
the
rich
and
the
poor
is
probably
our
biggest
challenge
in
terms
of
designing
effective
social
and
economic
policies.
Indias
priority
must
become
its
poor
because
it
is
poverty
that
affects
the
majority
of
the
population.
September 2011
12
13
September 2011
14
Ensuring Price Stability It is recommended that the property transaction be listed on the website as a price check once an approval request is received from the seller and buyer of an agreed transaction like the way it was done in XXc. It is necessary to maintain price stability by making the public bidding mechanism as a price check and not an upfront public auction. Ensuring Reliability of deals The paper trail for land ownership and proofs should be made available to public for inspection before the bidding/price-check process. A standard needs to be laid on the documents needed to proceed for sale of a real estate. The government may also choose to mediate the payment process of the winning bidder. There may be a requirement for security deposit before a person or a licensed property dealer can bid. In future the land recorder should be dematerialized or at least maintained electronically to reduce fraud and disputes and increase transparency like the stock market. Ensuring privacy The buyer and bidder details should be kept confidential till the deal gets finally approved. Comparison 20c 50c Proposed Description Government can Properties can not Public bidding will acquire properties be registered ensure there is no valued lower below circle rates black money in a transaction. Status Discontinued in Active New 2002 Price Through self- Region wise Circle Allow public Discovery/check reporting Rates bidding on all private transactions. Method Fear of loosing Controlled rate Market forces to property cards. discover real price. Government Valuation Circle rates have Very little Effort required to be revised Automatic Price discovery in real estate
September 2011
Short comings
15
Valuations are cumbersome process. Government funds can be misused by collusion. Subjective. Titles might be disputed and impact the value.
Government funds Control on black money. Tax collections Possibility of corruption/ inaccuracy
Required 70-80% High High - government may choose not to acquire or wrong valuation
Circle rates do not get revised timely. Rates are always lower than market rates Does not account for value construction or design. Does not include special features of plot like corner, park facing etc. Title might be disputed Not required 30-60% Low Low A state government may choose an area not to be revised in collusion with builders like greater noida. Low
It is not important that we adopt the proposed prognosis (solution) but what is important is to have the right diagnosis of the problem. Only then an appropriate prognosis can be created. A policy change to the effect below needs to be passed in the parliament, so that the executive body is free to do its role in the matter: The chapter XXC will be applicable again from 1st April 2012. The government must make all property documents available to the general public on internet for public bidding at 10% increments to effect automatic price discovery and transparency for a period of 14 days Price discovery in real estate
September 2011
16
Conclusion
Indian
economy
currently
is
like
a
very
highly
powered
agricultural
truck
with
its
plow
stuck
too
deep
in
real
estate
black
money.
Automatic
price
discovery
in
real
estate
transactions
has
potential
to
eradicate
black
money
and
corruption
to
a
large
degree.
It
will
not
only,
increase
tax
collections
but
also
strengthen
the
capital
markets,
reduce
inflation
and
fuel
the
growth
of
India.
Once
the
black
market
gets
fixed,
it
would
be
possible
to
sustain
a
high
double- digit
growth
for
the
next
few
decades
due
to
availability
of
capital
and
higher
valuations.
There
will
be
more
inclination
to
invest
in
financial
markets
and
will
help
new
IPOs.
The
question
we
should
ask
ourselves
is
that
how
long
can
India
live
without
a
super
strong
stock
market?
Why
should
FDIs
and
FIIs
trust
Indian
businesses
if
we
ourselves
choose
not
to
invest
in
it?
It
is
foreseeable
that
once
the
framework
and
policy
implications
are
adopted
and
the
benefits
realized
then
all
other
developing
nations
would
adopt
the
same.
This
does
have
the
potential
to
uplift
billions
from
poverty.
All
we
need
is
more
powerful
economies
that
spread
prosperity
and
development
for
a
better
future
of
humanity.
Few small atoms can tilt the balance of power And few simple thoughts can transform a nation.
September 2011
17
Annexure
I
Extracts of Circular No.8/2002 dated 27.08.2002 issued by CBDT The scheme of pre-emptive purchase of immovable properties under Chapter XX C abolished. 75.1 Under the existing provision contained in Chapter XX C of the Income tax Act, any person intending to transfer immovable property in specified areas at values exceeding specified amounts is required to file a statement in form 37 I before the Appropriate Authority within the prescribed time before the intended date of transfer. The transfer can be registered only if the Appropriate Authority does not pass an order of pre emptive purchase of the property, and issues a no-objection certificate. 75.2 Since these provisions were causing procedural delays in registration of transfers, and with a view to remove source of hardship for the tax payers, the Finance Act, 2002 has, by inserting a new section 269UP in the Income tax Act, made the provisions of the Chapter XX-C inapplicable in respect of any transfer of immovable property effected on or after 1st July, 2002. 75.3 This amendment will take effect from 1st July, 2002
50C
37.1 The Finance Act, 2002, has inserted a new section 50C in the Income tax Act to make a special provision for determining the full value of consideration in cases of transfer of immovable property. 37.2 It provides that where the consideration declared to be received or accruing as a result of the transfer of land or building or both, is less than the value adopted or assessed by any authority of a State Government for the purpose of payment of stamp duty in respect of such transfer, the value so adopted or assessed shall be deemed to be the full value of the consideration, and capital gains shall be computed accordingly under section 48 of the Income tax Act. 37.3 It is further provided that where the assessee claims that the value adopted or assessed for stamp duty purposes exceeds the fair market value of the property as on the date of transfer, and he has not disputed the value so adopted or assessed in any appeal or revision or reference before any authority or Court, the Assessing Officer may refer the valuation of the relevant asset to a Valuation Officer in accordance with section 55A of the Income tax Act. If the fair market value determined by the Valuation Officer is less than the value adopted for stamp duty purposes, the Assessing Officer may take such fair market value to be the full value of consideration. However, if the fair market value determined by the Valuation Officer is more than the value adopted or assessed for stamp duty purposes, the Assessing
Price
discovery
in
real
estate
September
2011
18
Officer shall not adopt such fair market value and shall take the full value of consideration to be the value adopted or assessed for stamp duty purposes. 37.4 This amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003 04 and subsequent years.
September 2011