Citizen letter one: Real estate and the black economy

Dear Finance Minister,

Actually, I would like to address this letter to you and the Chief Ministers of the various states of India. But since the policy pronouncement in the Budget speech has come from you, it is probably more apt to send this letter to you, with the fervent hope that Chief Ministers (and their Ministers dealing with the subject of Land Registration and Stamp Duty) also take note of what I have to say.

Your budget speech detailed measures to tackle the malaise of black money and spoke of efforts to unearth such funds stashed in offshore accounts. I am at this point, however, more concerned with the generation of black money and its circulation within the country. One such measure in the budget which is likely to give a fillip to the generation of black money is the decision to levy TDS of 1% on the sales value of urban properties above Rs. 50 lakhs and rural properties above Rs. 20 lakhs.

It is a corollary of Gresham’s Law that any attempt to extract advance tax from a revenue source will drive that source underground. In any case, the evader of today is unlikely to be deterred by this measure; it is only the honest tax-payer who will pay in advance and then chase the tax refund that will take its own time to reach him. So the measure will only impose more burdens on the honest tax-payer while having no impact on the conscious evader. What is likely is that the net of evaders will broaden: it would not be surprising if a large percentage of property valuations from the next financial year are just a little below Rs. 50 lakhs (say, a Bata price of Rs. 49.99 lakhs). Potential buyers will then seek to ensure that “white” payments through the banking system are below the threshold limit of Rs. 50 (or 20) lakhs, with the rest of the payment fuelling the black economy.

The problems with “under the table” property sales have as much or more to do with the evasion of stamp duty and registration charges as with the evasion of income and wealth tax. An examination of the “ready reckoner” rates for land and property valuation fixed by state governments show these to be at least 40% lower than the actual market value. Consequently, buyers have an incentive to declare only the “ready reckoner” value as the property value and pay stamp duty only on that amount. To evade stamp duty payment, buyers are ready to offer anywhere from 50% to 70% of the market value in cash. Apart from the loss to the state government exchequer through the undervaluation of property values, those with undeclared incomes also find an easy investment conduit, which is less cumbersome than hoarding, say, gold or currency notes.

What is to be done then? For one, state governments should base “ready reckoner” rates closer to market values through a more scientific, market-based analysis of property values. This would reduce the incentive to under-declare property values and ensure that a fair share of the value accrues to the government. Secondly, it should be mandatory for all such transactions to be undertaken through the banking system. Thirdly, the integration of the land registry data bases with the income tax data base and the use of up to date market intelligence would enable the income tax department to conduct random assessments of transactions that are significantly below market value. Strict penal provisions for evasion combining recovery of multiples of stamp duty and income tax evaded with prosecution for offences under the Indian Penal Code would have a significant deterrent effect on a large body of those undertaking such transactions.

Mr. Finance Minister, your desire to curb the menace of black money is definitely laudable. But trying to enforce compliance through advance payment of tax is likely to create more problems than it solves. Technology and information-based measures that reduce the scope for discretion of the assessing authorities and the incentive for the tax-payer to cheat the exchequer are far better long-term solutions to the problem.

Yours sincerely,

A concerned citizen

2 responses to this post.

  1. Very logical solution, Sir. But who will bell the cat?


  2. Organisations like yours should take a lead in proposing feasible solutions. I will also be bringing my views to the notice of policy framers.


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