Posted by: Shiv Muttoo | March 7, 2015

Driving Black Money out of Real Estate


Two long standing objectives of every government at the center are affordable housing for all and increasing tax collections. Both are seemingly unrelated with the only key commonality being in the relative failure of each successive government to deliver on well-intended goals. It is widely understood that the real estate sector is a major source of/destination for unaccounted/black money in India. This leads to widespread under-reporting of value in a large number of real estate transactions resulting in revenue losses to the exchequer. This practice also inflates real estate prices by not allowing value to be discovered efficiently.

The government is now aggressively driving policy initiatives that will curb the use of unaccounted/black money in the country. Measures announced in the recent Union Budget speech include prohibiting payment/acceptance of cash of Rs. 20,000 or more for any transaction in immovable property. Tougher measures are expected to be in place to limit cash dealings in the real estate sector including e-filing and tracking down of transactions.

In this regard, implementing the following submission may allow us to address this issue of unaccounted/black money usage. The suggested method would be as follows:

  • Mandatory public disclosure of every real estate transaction recorded/registered in the country on a suitable online platform before it is allowed to culminate.
  • Key disclosures pertaining to the transacted property – location, size and transaction value – to be made available in public domain on an online portal and the property physically kept open to inspection for a period of one month.
  • In this period of one month, additional bids to be allowed on the said property keeping the original transaction value as the reserve price.
  • If no further bids are received, the transaction to close at the original transaction value.
  • If higher bids are received in the designated period, then the transaction could be closed with the highest bidder at the end of one month.

Evidently, following such a methodology would be beneficial to both the seller and the tax collector. Also, importantly, real estate would no longer be available as a ready store for parking unaccounted/black money created from parallel economy transactions. Prima facie, all stakeholders benefit from this solution and there is no perceptible reason for resistance from any constituency. In addition, its implementation may bring India closer to its objective of affordable housing for all.

There is a similar mechanism already in place for the auction of properties foreclosed or otherwise repossessed by banks (please refer: https://www.bankeauctions.com). A similar portal could be developed for the suggested purpose as well.

This is a simple solution to an issue of significant proportions that has remained on the nation’s agenda for many decades. Implementation is easy and inexpensive, and results will be evident almost immediately. All that it requires is good intent from the ruling government.

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Responses

  1. I know that there is a part of the ruling government listening to such suggestions (PMO directly?). I would suggest you email this piece to them.

    • I hope they are, going past aggressive rhetoric to do some real work.

  2. A more appropriate title would have been “eradicating black money from real estate”. The first blush reaction that I had when I saw the title was how to make black money from real estate 😀

    It will be useful to talk about the non-online part of the country and how that will be handled? Or is the premise that the bigger problem (80:20 rule) is in the cities, and handling this in those main district towns and cities solves this problem for the most part?

    Also – a transaction can often be more than just a “bid” (price). Time to close the transaction, and other subtleties can allow someone to take a lower bid. And I believe that flexibility should stay with the seller — but even in the worst case, it will bring down the amount of black money margins significantly.

    • In my locality the municipal rate was increased by 20% in 2015 and there was a big hue and cry all around but it’s still just 70% of the going value of apartments. At least the municipalities are setting a minimum value to RE transactions, but I feel making the whole process transparent through universal online access will bring stated values much closer to real values.

  3. Reblogged this on bnnmurali.


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