The Black Money Bill – the Game Changer for Revival of Real Estate in India

Black Money and Real Estate in India - ‘Choli Daman Ka Saath’

• The debate on Black money keeps coming back to the centre stage for different reasons, probably because it’s like the ‘brahmastra’ of the Mahabharat, to be used anytime for political gains. However, the government has moved fast and done well to table the Black Money Bill in the parliament in the present session.

• Though there are no official estimates as to how much of black money is staked in foreign tax havens, but a fair estimate given by CBI in 2012 was $ 500 billion. As per Schneider, black money contributes from 23 to 26% towards the gross domestic products in India. The average of the World in 96 countries is 38.7%. Real Estate in India contributes 10% towards the Indian economy, as per Liases Foras, a Real Estate Consultancy, about 30% of all Property transactions in India are in black. The biggest beneficiaries of black money (if one may call it that way) are Gold and Real Estate in India. As per a sting conducted by Cobra-post a few months back, 35 Real Estate developers in India were ready to accept black money and convert it to white.

Why Real Estate in India acts like a magnet for Black Money?

There are a number of reasons for the Real Estate sector in India to attract black money investments. From an investment perspective, if black money is kept as cash it is unsafe and obviously does not earn any interest, however, ones it is pumped into real estate not only it provides social security but ends up maturing with handsome returns and probably, in some cases gets converted to white, therefore it becomes an attractive investment portfolio. In order to overcome the heavy taxation and stamp duties, black money becomes the easy way out to save on these, especially in high valued transactions of land etc., like reverse osmosis this sometimes leads to white money getting converted to black. Another puller of the black money into Real Estate in India is corruption, a lot of palm greasing takes place for release of land, CLU (change of land use) and clearances for construction, all these transactions obviously are through black money. The boom Real Estate in India went through from 2004 to 2012 created a huge gap between the market rate and the circle rate (government prescribed rates) and to save on tax both the property buyer and seller preferred black money transactions. Some, municipal bodies tried to correct this (like Gurgaon, Bhopal, Indore) by a steep increase in the circle rates, however it became counterproductive with the slump in the Real Estate costs in India, in some locations the circle rate became higher than the market rate. It’s a myth that the Real Estate secondary market attracts more black money than the primary market, as explained earlier it gets utilised towards palm greasing and land acquisitions in the primary market, it also leverages flexibility to a developer as he is able to keep his white investment low and therefore can play around with the price tag being offered to an investor.

Black Money Bill – the Game Changer for Real Estate in India

The Black Money Bill has two specific clauses which will affect its flow into the Real Estate in India. (a) Any transaction of more than INR one lakh will attract mandatory reference of PAN number, (b) It is proposed to ban advance payment of more than INR 20,000 for real estate deals. Though, both the clauses are being opposed by the industry lobby as well as certain sections of the opposition parties, as it is feared that this would initiate a further slump in the real estate sector in India, as of now the government has refused to budge. However, these two clauses may actually be instrumental in reviving the real estate in India, if handled with due diligence by the industry. The investors as well as developers have been shying away from investing in real estate for the past few years due to the slump and piled up inventories, however if the Black Money Bill is to become a law in the next few months, both the parties would be more than keen to invest the stalked up black money at the earliest and the obvious sector is real estate. This is likely to lead to the following, (a) frantic buying of land and initiation of new projects by the developers, in order to exploit the available time before the law becomes affected, (b) Increase in purchase, as well as sale of property in India, leading to reduction of piled up inventory in the primary market.

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