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Why hike in circle rates will not do much to curb black money

With the increase in circle rates (the minimum notified price below which one cannot sell any property) in New Delhi, the state government expects black money transactions to come down significantly, thereby ensuring sizeable revenue generation for itself.

While it is imperative to increase circle rates from time to time to ensure that the government does not lose out on the amount of stamp duty and registration fee because of undervalued properties, the actual property prices are governed by market forces, hence upward revision in circle rates will not have an immediate impact, especially in the secondary market which is "already completely out of line of existing circle rates and much higher even than the revised rates", says Santhosh Kumar, CEO-Operations, Jones Lang LaSalle India.

Normally, paying a huge amount in black helps consumers save on stamp duty. Reuters

Normally, paying a huge amount in black helps consumers save on stamp duty. The Delhi government's move ensures some amount of parity between the actual and the market price.It will force consumers to pay more white money.

However, it remains to be seen whether it will check price speculation and the massive property investment market that has been pushing prices upward in NCR.

The devil in the detail here is that the much hyped 200 percent increase is only in New Delhi's most affluent colonies, where new supply is next to zero. In the lower rung, the rates have been increased by merely 22 percent against the proposed 30 percent which will barely have any impact on reducing the black portion in property transactions.

As per the rates approved by the Delhi Cabinet, Rs 6.45 lakh per square metre has been fixed as new circle rate for category A colonies like Greater Kailash, Defence Colony, Gulmohar Park, Panchsheel Enclave, Anandlok, Green Park, Golf Links and Hauz Khas.

But there will only be a marginal impact on speculation as the market prices of these properties are already much higher than the circle rates even after the hike, says Aniruddh Wahal, Director at property consultancy firm DTZ.

"In all other localities the impact due to revision of circle rates is moderate in capital terms and will be within the financial appetite of majority of investors," says JLL's Kumar.

The government's half-hearted measure will not make any dent in the black market because of a marginal 22 percent hike in colonies which are inhabited by the middle and lower classes.

"In New Delhi, prime areas like Panscheel and Jor Bagh where circle rates have seen the maximum hike only have 100-200 odd houses, and any new supply is next to impossible. Hence churning at the top-end is not possible at all. The real scam lies in Noida and Gurgaon, where Ms Dixit has no jurisdiction," a Delhi-based builder, who did not want to be named, told Firstpost.

There are 1,000 bungalows in Lutyens Delhi and only 65 of them are privately owned. Usually, there are not more than one or two properties up for sale in Lutyens zone in a year. The government will achieve nothing in maximising circle rates in these areas as no property trading takes place in this segment.

Moreover, most of the speculative trading that happens is not registered, since no broker or investor will want to pay stamp duty on a property which he is going to be sold later, says Wahal.

This means that the speculative market will continue to remain untouched as investor demand will keep prices intact.

While the move is a positive for listed companies, smaller players, unlisted companies and investors with huge surplus cash will not find it pleasing as their capacity to involve in realty transaction on basis of strength of the unaccounted money significantly will be hit, explains Santosh.

But Naushad Panjwani, Senior Executive Director at Knight Frank India, thinks that investors and builders in the long term will find a way to adjust to this hike in circle rates, but the interim period may lead to a dip in speculation because of the rise in the cheque component for investment transactions.

Hence, for the common man, the rise in circle rates will not provide any relief in terms of more transparency but will help the salaried class to raise loans from banks to buy property since banks and other financial institutions disburse loans on the basis of the sales deed, which is calculated on the basis of the cirlce rate and not the market rate.

Though an increased circle rate means higher price for a residential property, the buyer will be saved from paying more as black component or in cash on a transaction.

For example, if price of a property in Greater Kailash as per the earlier circle rate was Rs 5 crore, with 200% increase it will now be Rs 15 crore. In an earlier scenario, a seller could sell the property for Rs 20 crore, out of which Rs 5 crore could be shown as the property price while registering and the remaining Rs 15 cror could be transacted as black money (cash). In the current scenario, the same property will now be registered at no lesser than Rs 15 crore and only Rs 5 crore could be transacted as black money, explains Anshul Jain, CEO, DTZ -India.

"So in essence this step will reduce the flow of black money in realty deals but not wipe out the use of black money in real estate transactions," said JLL's Santosh Kumar.

However, the hike in circle rate is bad news for those who are being gifted or inheriting properties. Says Manish Karnani, whose father gifted him a property in GK three years back, " In 2009, I paid a stamp duty of only Rs 10 lakh on the gifted property, but now I have to shell out at least Rs 30 lakh."

He added that this rise is expected to lower black money in the economy, but in reality the government merely misuses it to finance budget deficits.

Another drawback is the land cost. Whenever circle rates are revised upward , land cost goes up. Black money is tied to land transactions which too are mostly off the record and neither circle rates or a regulatory bill can address this problem.

Also, the hike won't check the politician-builder nexus as these kind of arrangements are never at the forefront, says DTZ's Wahal.

An industry expert points out since the entire black money in the real estate industry goes into the hands of the builders and the politicians. The government will never introduce a policy without loop holes where it is net gain for the buyer but a loss to the exchequer and the builders.

As Paramita Datta Dey Senior Research Officer, National Institute of Urban Affairs, rightly said in a column in the Economic Times, "The role of black money is influenced more by the source of funds rather than the higher rate of stamp duty."