News: Demonetisation alone cannot suck out black money from property market-01.02.2017

Demonetisation alone cannot suck out black money from property market

It has been nearly two months since the demonetisation drive hit the real estate sector, hitherto considered a safe haven to park black money. While the move is ambitious, experts say the note ban is merely the beginning and not an end of the war on unaccounted-for income. It is also not a permanent measure to ensure that ill-gotten funds will not find their way back into the system.

A permanent solution involves rationalising the tax structure and stamp duties. “The note ban is a futuristic step rather than a retrospective measure. The government needs to ensure that circle rates reflect the market reality and are revised frequently. Circle rates should evolve as per actual market prices. Long gaps in revision kill the objective of circle rates. Property markets should not follow circle rates. Rather, circle rates should reflect market rates,” says Samantak Das, chief economist and national director - research, Knight Frank (India) Pvt Ltd.

Over the years price volatility has not had much impact on circle rates, which have never shown any drastic changes. Das suggests that state governments set up a machinery to understand the market better, go for frequent revisions of circle rates to ensure that buyers and sellers pay stamp duties and the exchequer gets revenues.

Measures in isolation cannot work. Incentives should be given to people who pay in white and register properties. If the circle rate is Rs 5,000 per sq ft and the market rate is Rs 7,000 per sq ft, most people pay Rs 3,000 per sq ft in black to save on registration costs (calculated on the basis of property price paid). “A more robust, real-time system is the need of the hour. Circle rates or guideline values should be reflected in the real estate values. The government needs to arrive at a robust system. It could engage with the National Housing Bank to capture market data to work out an enabling regulatory framework,” says Anckur Srivasttava of GenReal Advisers.

A report titled Currency Demonetisation: Short Term Pain, Long Term Gain by Assocham, says that demonetisation will wipe out the stock of ill-gotten wealth held in cash, while doing little about the wealth that has been converted to assets such as land and gold.

Further, it does not prevent the future build-up of black money. Demonetisation might be effective, no doubt, but it is a blunt instrument. By invalidating existing high denomination notes, it addresses the stock of black money but does little to address future flows of black money (which may accrue in the new currency notes). Eliminating such flows will require further reforms.

“Lowering stamp taxes on property transactions would incentivise the lower levels of evasion associated with such transactions. Further, electronic registration of real estate transactions (and re-registration of existing ownership claims) to match individual identification numbers will go a good distance in minimising the channelling of corrupt earnings into real estate,” says the report.