A fine way to check black money in realty

Real estate provides the best refuge to black money in the country, be it self-construction, or through builders, or purchase of used houses.

For the last category, that is, purchase of used or existing houses, the government had an answer — pre-emptive purchase of immovable properties. This was given up in 2001 with an excuse that sounded plausible then, but which, on a deeper reflection, was found to be lame.

The excuse given was the government was chock-a-block with unsold houses in a plummeting market. The scheme, however, was brilliant, the one that hoisted the seller on his own petard.

The SCHEME

Let us say the property price was Rs 2 crore in Chennai, requiring the seller to notify the tax administration in the prescribed form of the intention to sell (Rs 50 lakh was the demarcating price above which notification was mandatory).

If, in fact, Rs 1 crore had already changed hands through underhand deals, the aggregate of Rs 3 crore would be more indicative of the prevailing market price of the property. If the 2001 scheme had been around, the department could have scuttled the deal, with devastating effects for the buyer, by offering the seller a cheque for Rs 2 crore.

The seller would be in no position to refuse, because who offers him the money should not matter to him, as long as the price demanded by him is paid.

Besides, he would have received the black component, leaving the buyer holding the can.

But if wary buyers were to bide their time, instead of parting with the cash in haste, the seller would have paid the penalty for his greed, receiving only two-third of the market price. There would be no loss to the original buyer, apart from the missed opportunity.

The scheme worked well while it lasted, with the apex court giving its thumbs-up, except that it was resented by the real-estate mafia and some other vested interests, who shook in their boots at the prospect of being short-changed, or at having to stew in their own juice.

They all let out a collective sigh of relief on its replacement with a softer regime — one that has made the stamp duty authorities the lynchpin in the government's feeble attempt at fighting black money in real estate deals.

GUIDANCE VALUE APPROACH

To be sure, the successor regime, too, has instinctive appeal. The stamp duty authorities, supposed to be in the know, fix the guideline value, the benchmark value, on the basis of enquiries and genuine transactions.

The government rode piggyback on stamp duty authorities, secure in the knowledge that while by enforcing the benchmark rate they would foil stamp duty evasion by the buyer. The income-tax authorities, by latching on to that figure would foil capital gains tax evasion on the part of the seller.

So far so good, except that the stamp duty authorities are alleged to be ramping up the benchmark price to unrealistically high levels to be in the good books of the government auditors.

This, ultimately, discourages over-the-board transactions, and gives a leg up to benami deals, what with the 1988 Act still in limbo. In the discarded pre-emptive scheme on the other hand, there was nothing normative or subjective. Real cheques for the agreed considerations were handed out, often with a wicked smile! In this Budget season, the government must be considering several proposals, some to please the salaried class, and some to placate the aam aadmi — but it should also think of some anti-evasion measures.

It should drop the guidance value approach and revert to the pre-emptory purchase scheme that has the potential to not only stem the generation of black money from real-estate deals, but also bestow on the income-tax department another source of revenue.

Even if the seller tells the truth, in a rising market, the department can hope to make profits if it bides its time. To be sure, there is also a downside — falling market. But that wasn't reason enough to have discarded the scheme, and it still isn't reason enough why it shouldn't be revived. For good measure, the government can give itself the power to waive stamp duty or reduce it when the seller is the income tax department.

Critics would cavil at this proposal as being discriminatory, but if used sparingly, especially in a depressed market, even they would take it sportingly.

(The author is a New Delhi-based chartered accountant.)

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