Now, seller returning cash to realty buyer

Topics Real Estate  | Sebi | Sebi norms

My friend Suresh called to report that he had finally managed to sell off his flat in Mumbai. He then described a strange phenomenon — the transaction value was reported at Rs 292 lakh in the sale agreement whereas the deal was actually struck at Rs 250 lakh. Suresh got paid the entire consideration of Rs 292 lakh but was required to pay back Rs 42 lakh to the buyer’s architect for work to be done in the flat by the buyer. The net consideration in his hands was Rs 250 lakh only. Effectively, Suresh had tur­ned the “black money” concept in real estate on its head. Here, the seller was effectively paying “ca­sh” to the bu­yer, and not the other way around. 

Suresh explained that the ready reckoner value (minimum market value for a property laid down by the state government for stamp duty purposes) was Rs 292 lakh for that property. It would have caused income tax problems both for him and the buyer if they had recorded the transaction at the actual value of Rs 250 lakh instead of the stamp duty value of Rs 292 lakh. An incidental purpose served by the overstatement of sales con­sideration was that the buyer got higher loan eligibility and his down payment requirement came down. 

Why has the state government kept the valuation at such a high rate if the actual value in a locality is much lower? The reason is simple. All state governments are perennially strapped for revenue. Stamp duty on real estate is a significant source of revenue for them. While an increase in the percentage rate of stamp duty would be difficult to justify, all state governments raise stamp duty by the simple expedient of arbitrarily increasing the ready-reckoner rates or keeping rates the same despite a fall in real estate prices. 

Alternative remedies have been provided to get the property valued at the correct market price. But those processes are so riddled with delay and corruption that the average person would not think of availing them. I think everybody understands that going the valuation route either in the stamp duty office or the income-tax office is operationally tricky and riddled with delay and corruption.  

What allows state governme­nts to fiddle with the ready-reckoner rates is the semi-opaque way in which they are fixed. The rate is supposed to be ba­sed on the tra­n­sa­ction values recorded in every locality. But exactly how the data from multiple transactions in an area gets converted into the ready reckoner rate is a big mystery. Why it can’t be completely data-driven is beyond me. When all the rates are available online, the state should fix the ready-reckoner rates at the 20th or 30th percentile of transaction values for all properties in an area. The state government can even provide a live price counter for every locality, giving data for past years and the year-to-date data. That will provide valuable real-time inputs on real estate market trends.
The writer is a Sebi-registered investment advisor

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