Circle of unreason

Why black money is here to stay in Delhi's housing market despite the hike in circle rates

ashishs

Ashish Sharma | June 15, 2010



Ask not what your government can do for you; ask what you can do for your government. If you live in Delhi, in fact, this year you don’t even need to ask. Your government has not only pre-empted your query but also has been answering it repeatedly, even long after satiating your inquisitiveness. In the process, it has forced you to pay more for just about every public service and to bear the burden of hosting the Commonwealth Games at least twice over, due to delays and cost overruns that it has caused due to its own inefficiency and worse. Now, get ready to pay more for property transactions and, before long, for owning properties as well.

While the hike in tax on property transactions is a good idea, even as it leaves much to be desired, the impending hike in taxes on residential properties is not quite so.

First, consider the hike in circle rates, the minimum rates at which properties can be bought and sold, by up to nearly 200% in case of residential properties and 300% in case of commercial properties. Delhi government expects to collect at least 40% more in revenues from stamp duty following this hike. Look a bit closer, though, and you will find that despite the hike the government will still end up collecting stamp duty on amounts much lower than the actual transaction rates. While the government has fixed the minimum rate at Rs 1.25 lakh per square metre in south Delhi’s Anand Lok, the minimum asking price on www.99acres.com, a real estate portal, works out to Rs 2.89 lakh per square metre, which is 131% more than the rate determined by the government even after a 190% hike over the previous circle rate.

In Jor Bagh, which has been equated with Anand Lok for circle rates, the minimum market rate works out to Rs 4.34 lakh per square metre, which is 247% more than the new rate fixed by the government. Mind you, these are the cheapest rates quoted for residential properties in these areas.  Even the average rates would be several times higher than the new circle rates. However, from the relatively modest East of Kailash to the prime Sunder Nagar, the government proposes to charge a uniform Rs 1.25 lakh per square metre for areas in its highest category.

And yet, the government claims that the new circle rates would go a long way in curbing  black money in property transactions!

Why doesn’t the government go the whole hog and eliminate black money in property transactions? Measures like the latest hike in circle rate only strengthen the suspicion that it is for the same reason as the government does not reform the bus transport: far too many politicians are profiting from real estate just as they are from the city’s dangerous private blueline buses.

Since the vested interests have thrived for so long, and black money has become so entrenched in property deals, first-time salaried buyers have been systematically pushed out of Delhi’s housing market. Ask anybody who has tried to buy a house in Greater Kailash or Rajendra Nagar or wherever else in the city for that matter. The first thing the property agents tell you is that you won’t be able to avail a loan on more than 25% to 40% of the actual transaction cost. The reason is simply that only a small percentage is declared for tax purposes.

The new rates, being much lower than the prevailing market rates, will therefore not do much to change that fundamental reality.

Next, consider the impending hike in the cost of owning a home in Delhi. Now that the circle rates have been hiked, it is only to be expected that the municipal corporation will seek to align its property tax with the new rates. Imagine a couple of retired pensioners living in one of the areas classified as the most expensive as per the new circle rates. Just because the government has suddenly woken up to the market rates and tried to bridge the gap, how will our couple (leave alone those who do not have even a source of marginally increasing income by way of pension or otherwise) suddenly add to their income to be able to afford a higher property tax on their home which they have probably occupied for decades?

The higher tax on transactions, as per the new circle rates, is justified only because this couple will be paying a portion of their receipts if they choose to sell their house. Therefore, aligning taxes on property transaction to actual market rates is a smarter and more socially acceptable way of increasing revenues than increasing the property tax.

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