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Mainstream, VOL LIV No 39 New Delhi September 17, 2016

Introducing New Policy in Real Estate—Special Attention to Control Black Money: Facts and Challenges

Sunday 18 September 2016

by Santhoshkumar, R. and Lalithambika, R.

The sheer volume of investment in participatory notes (P-notes, estimated at around $ 43 billion last June) and private equity money flowing into real estate ($ 1.3 billion in January-June, 2015) suggests that illegal money held abroad may actually be substantially invested here. (Jagannathan, 2015) The line separating foreign from domestic assets is arbitrary and thin. In any case, the two cannot be segregated unless we know the full identities of investors in P-notes and private equity funds, especially those getting into real estate. Real estate is where the bulk of the illegal domestic money is parked. Real estate is overvalued and due for a serious correction, and it is only the political control of supply that prevents its healthy rectification. (Jagannathan, 2015)

The open auction-cum-property transaction is clearly discussed in an article titled “A New Approach to control the fake notes, Black money and increase the Revenue of State Governments in India”. (Lalithambika and Santhoshkumar, 2015) The method would be useful for the government, especially as it is a new and clear procedure to collect tax without fail. However, introducing the policy directly may encounter difficulties, because the open auction process does not have a strong base in most of the States in India. In the present scenario, black money and fake currency are widely used in the real estate business and in the share market. The article mentioned above outlines an innovative technique to prevent such illegitimate transactions.

The main attraction of the article is a simple rule. The application for the transaction of any land may be done through the government channel. (Figure 1) Register-cum-open auction sale is the main base of the system. For this base, the government will develop a channel system for the smooth functioning of the process. This is the first step in the open auction-cum-property sale, proposed to start at the Taluka level in the States.

Figure 1. Diagrammatic representation of various steps involved in the property register-cum-auction sale:

Source: Lalithambika, R. and Santhoshkumar, R., 2015, “A New Approach to control the fake notes, Black money and Increase in the Revenue of State Governments in India”,Journal of Indian Development Review 13 (1&2): 121-123.

In the proposed system, if a person is interested in selling his or her property, the details will be registered through the govern-ment channel. The properties include land, house, shopping complexes, buildings, flats or any other thing in the category. The second step is that the land details will be published officially. The third phase is to auction the property openly. At this point, numerous people may attend and participate in the auction. After the auction, the property or land will be handed over to the person who bids the highest amount. During the time of cash transaction, the government attempts to collect the details of the source of income.

The benefit of this system is that the exact market land or property value of an area will be identified and the exact stamp duty collected at the time of transaction. In addition to this, the transfer of black money to white will be discouraged. In addition to the departments that assist the government, a branch of the Revenue Department or an annexure of the Department of Tax may be created, to be utilised for the coordination of the land auction process.

The system suggested above is very effective. But the present situation is not suitable for introducing the policy in an efficient manner. It is more feasible in the case of small States like Goa, Kerala and others in North-East India. However, some practical difficulties may be encountered in the larger States. In such situations, a more convenient method may be adopted.

Suggestions to Improve the Proposed Open Auction-cum-Sale of Land 

The real estate business is now at a turning-point in its history because the maximum man-made value is already achieved. The result has negatively affected the real estate scenario in the country. Diverse problems have come up because many transactions take place not through the registered real estate authorities, but through unauthorised persons. It will affect the original land value and also transfer black money easily.

In Kerala, a number of government-recognised agencies such as Kudumbasree, Janasree, Akshya Computer Centres, etc. are functioning effectively, and these can help the government in the implementation of new policies at the State level. A small percentage of commission may be given to these agencies in return for the work done. It will help to generate a number of job opportunities in the State. A new trend and interest will also be generated in this field. Many people are ready to give complete stamp duty in property transactions. This will help to control unwanted competition in the real estate industry. The ultimate goal of the policy is that people should refuse to purchase land at exorbitant prices and the government would get a chance to collect the full stamp duty without fail, as in the case of duty collected from petroleum products.

Benefits to the Government

The actual benefits for the government through the open auction process are manifold:

[[<> (1) Revenue of the government will increase.

For example, imagine that the present land value of a property is Rs 1,00,000 and the market price is very high. The current property transaction is at Rs 10,00,000 in the area. That means the actual price is hidden. The government will collect stamp duty for only Rs 1,00,000. That of the remaining Rs 9,00,000 will be a huge loss in revenue.

(2) Black money or fake currency will be curbed.

Let us consider that an open auction is in progress, and that a number of persons with interest in the land are participating in it. Suppose one person bids Rs 2,00,000 for the land, and another, Rs 3,00,000. The land will go to the person who gives the higher auction price and the government will collect the stamp duty for Rs 3,00,000. At times the buyer may not be able to give the source of money. In such a situation, the land will be transferred to the next person with the proper documents of income and the government will be forced to rule the amount without the source as black money. This way the authorities will be able to control the transaction of black money in real estate.

3. Job opportunities will be created.

If the government gives a license to qualified agencies to act as control centres, they will function as the base level of the whole process. They can coordinate land transaction in a particular area.

Conclusion 

In the present situation in India, the implemen-tation of the policy is difficult because of the lack of systematic rules in the States. However, the Right to Property—”No person shall be deprived of his property save by authority of law”—is enshrined in Article 300A, inserted by the 44th Amendment to the Constitution. The Constitution of India, as initially adopted, protected the Right to Property in a number of ways. The 44th Amendment of 1978 robbed the right to property of its fundamental right (character of rights), and adorned it with the status of constitutional/legal right. Articles 19(1)(f) and 31 were deleted from Part III Fundamental Rights and only a fraction, in the form of Article 300 A, which corresponds to Article 31(1) alone, has been inserted in Part XII under a separate Chapter V, the ‘Right to Property’. The rule is to be enforced to control black money-related property transaction.

The final effect of the system is to reduce the land value and with it, the actual selling price. On the implementation of this policy, individuals can participate in transactions only with their legitimate wealth. In the third stage, people have no chance to participate in the open auction system if they are unable to produce the documents in proof of the source of their money. Black money thus partially or completely goes away from the land auction system. The land value will then be as determined by the government.

References

Jagannathan, 2015, ‘Why Jaitley’s threats won’t work: All black money is in stock markets and real estate, too risky to touch’, www.firstpost.com,Business News, October 5, 2015.

Lalithambika, R. and Santhoshkumar, R., 2015, ‘A New Approach to control the fake notes, Black money and increase the Revenue of State Governments in India’, Journal of Indian Development Review 13 (1&2): 121-123.

Santhoshkumar, R. is the Head of Department, Post-Graduate Studies and Research Centre of Botany, Mahatma Gandhi College, Thiruvananthapuram. He can be contacted at e-mail: santhoshkumar30576 @gmail.com. Lalithambika, R. is an Assistant Professor, Post-Graduate Department of Economics, Mahatma Gandhi College, Thiruvananthapuram. She can be contacted at e-mail: lalithambika77@gmail.com