Black Realty

By Rahul Trivedi
In Issue 4
January 13, 2015
0 Comments
957 Views

Just before the cold waves made the country shiver, the realty sector was already shivering. The Operation Black Ninja of Cobrapost exposed the involvement of black money in the realty sector. Though this is not new but the involvement of some big and reputed players has once again raised the questions on the transparency in the sector.

black-moneyThe sector which is the second largest employer after agriculture and ranks fourth in terms of the multiplier effect on the economy, has exposed its dark underbelly yet again. With most big players shown to be involved in the sting operation of the investigative website cobrapost.com, one can clearly understand that the builders are not only ready to do bulk property transactions ranging from 10 to 90 percent but they are also not bothered about the violation of Income Tax laws, Foreign Exchange Management Act and Prevention of Money Laundering Act, among others.

Though the black money is not new to the sector but this time it was from horse’s mouth that  came in front of everyone. Senior officials said that accepting payments in black was nothing new for them and that it was an accepted norm of the real estate industry. Some of these real estate officials were caught on camera ready to accept black money abroad via hawala. As many as 35 companies were  caught on camera admitting helping their clients convert black money into white by letting them pay in cash a substantial part of the sale price of the
properties.

How the black money is pumped in
Black money has been one of the most sensitive issues in last few months. But even though Arvind Kejriwal had several times raised the question on black money and BJP fought the elections saying that it will bring back the black money, the use of black money in the domestic realty market is an open secret but on no one’s radar.

The inflow of the black money starts right at the time land is purchased. With so many projects being launched, it is difficult to get virgin land. Developers therefore buy land in outskirts where the circle rates are low. Often, the people who own the land ask for a significant part of the payment in black, sometimes as much as 25-30 per cent, so they could avoid tax. The next step is getting approvals from local civic bodies which are controlled by politicians and bureaucrats. No approval comes without greasing many palms, developers say.

All these under the table payments mean that a developer has to have a significant kitty of black money. So, the developer starts putting price tags on things he isn’t legally allowed to sell, parking spaces for instance. It is this chain of black money transactions that has raised the launch prices of apartments, resulting in the fact that most
genuine buyers can’t afford a home.

The only ones who can afford a home are, unfortunately, not the salaried class but traders and other dubious buyers who have a steady flow of black money. Given that Indian tax norms favor people who are buying a second or third house more than a first-time buyer, most people who can indulge in inflated real estate transactions are investors who have black money. This forms a vicious cycle of illicit money and higher realty prices.

How to curb?
Weeding out black money from real estate is a herculean task. India has a shortfall of 18.7 million homes — over 95% of this is in the economically weaker section. Only 1.4% of that demand is being met. If India’s real estate sector has to grow, the menace of black money needs to be weeded out. Pankaj Kapoor, Managing Director of Liases Foras, a real estate research company said that it needs slew of reforms to reduce the inflow of black money. Some are being attempted but are not enough.

Some state governments have reduced ready reckoner rates to almost the same level as market value but that alone hasn’t been enough. More steps are required. First of all, incentivization of firsttime buyers is needed. Two, the process of getting approvals needs to be made transparent, perhaps by Making the process automated.

Cutting off all political discretions in granting approvals or buying land would be a great booster. The Real Estate Regulation Bill is a first step towards that. But in its current form, there are some loosely defined terms in the draft and oversights which can be misused. For instance, approval authorities are not brought under the purview of the Bill. Most delays of housing projects happen because of delayed approvals.

According to Kapoor, the escalation of prices itself has happened because of the large inflows of black money into realty. Even though no official figures are available, it is safe to assume that anywhere between 30 to 40 per cent  of real estate transactions, be it the purchase of land or an apartment in a metro, involves black money. Higher the price tag of an apartment, bigger is the black money component. For instance, there is hardly any black  money involved in an apartment priced between Rs 15 lakh and Rs 20 lakh but in a luxury apartment priced above Rs. 3 crore, the black money component could go up to 60%.

Impact
Between 2001 and 2005, real estate in India boomed. Interest rates were low, housing was affordable and  first-time buyers were entering the market. One could understand a bump-up in prices then. But between 2009 and 2013, something strange happened. Even though first time buyers were absent, prices went upwards sharply. Most of this was fuelled by investors who invested in the premium and luxury segments and most of them involved black money transactions.

The real estate market which was already sluggish has become almost stagnant because most genuine buyers can’t afford to buy their dream home as the market is overpriced. The investors who were pumping in black money have also paused as prices have stagnated. There is no space for the real buyers, people are not able to buy the property due to price escalation. This price has been escalated by the investors who have infused the black money in the market.

Bridging the trust deficit
The real estate sector has always been a trust deficit  sector. There are self-claimedapex associations of developers and builders such as CREDAI, NARDECO etc., who claim to provide transparency in the sector. But now, with such a big sting operation, the credibility of such organizations is also questionable. It is hard to imagine that these organizations  were not in know of massiveprevalence of black money in realty sector. Why  did they chose to remain mum and would theyme cancelling the memberships of such tainted members? Or would they impose penalty for  which they don’t have legal sanctions?

Real estate regulatory bill is pending since long time. It is totally agreeable that the government is to be  questioned on this but is the government only entity to be questioned? Developers opine that the real estate bill should be passed but there has been no single serious effort taken from the developer’s side to get this bill passed  and enforced. These organizations only raise the issues such as reduce the interest rates, but they never take up the issues such as single window clearances, seriously.

The CBDT has already ordered an Income Tax department investigation against a number of real estate developers tainted by the sting operation. The apex authority of the I-T department has asked its investigation units across the country to furnish reports of any action or probe conducted against the groups named by the portal in the past. The progress would be closely watched.

The scourge of black money is essentially cheating commoners out of realty market. Government needs to create organizations such as TRAI and SEBI to regulate the sector. But ridding realty sector of black money would require deeper cleansing of political system which is easier said than done. But somewhere a start is sorely needed.