Solution for black money


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A white paper on eradicating black money and world poverty. It presents a integrated view on black money in real estate, unemployment, poverty, government deficit, corruption, inflation and financial markets and a possible solution through a very simple policy change on how real estate is transacted.

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Solution for black money

  1. 1.  Solution  to  black  money  and  perhaps  world  poverty  Automatic  price  discovery  in  Real  Estate  market  is  a  simple  fix  to  a  big  problem  of  black  money  and  persistent  high  inflation.    Revised  -­‐  December  2011      
  2. 2.     2   Solution  to  Black  Money      Executive  summary    It  is  a  well  established  fact  that  India’s  parallel  economy  is  more  than  50%  and  the  money  earned  from  such  tax  evasion  is  parked  in  Real  estate.  Also  the  Real-­‐state  sector  is  about  88%  of  India’s  wealth  and  acts  as  the  most  legitimate  way  of  parking  black  money  or  money  earned  from  corruption  or  illegal  activities.    The  ease  and  lucrativeness  of  being  able  to  park  such  money  influences  the  investments  in  favor  of  real  estate  and  away  from  legitimate  businesses  that  create  jobs  and  products  in  the  economy.  This  not  only  leads  to  slower  expansion  of  businesses  but  also  resulting  in  India’s  unusualy  persistent  high  inflation.  It  sets  a  chain  reaction  of  tighter  monitory  policy  and  high  interest  rates  and  further  reducing  the  incentive  to  invest  in  businesses  (due  to  high  payback  periods)  and  making  real-­‐estate  the  most  favored  option.    The  effort  so  far  from  government  like  reducing  stamp  duty,  and  capital  gain’s  tax  has  resulted  in  no  results.  Even  the  best  deterrent  in  form  of  37i  (chapter  20c)  was  further  removed  in  2002  to  let  the  situation  completely  loose.    It  is  proposed  that  all  the  properties  that  get  registered  are  opened  for  next  14  days  with  10%  increments  by  anybody.  It  would  make  black  money  transactions  in  real  estate  impossible.  It  is  by  far  the  most  comprehensive  and  yet  a  simple  policy  change  with  far  reaching  immediate  benefits  by  putting  a  stop  on  black  money.    To  restore  our  falling  economy  it  is  imperative  to  divert  investments  to  businesses,  job  creation  and  stop  our  persistent  inflation.  It  will  also  increase  tax  collections  of  both  stamp  duty,  income  tax  and  all  other  taxes.  It  will  reduce  budget  deficits  and  strengthen  the  rupee  and  help  reduce  the  interest  rates.  A  double-­‐digit  growth  is  easily  achievable  before  we  loose  the  shining  India  completely.    It  is  now  further  proposed  to  file  a  PIL  for  the  discrimination  suffered  by  a  pure  ‘white  man’  and  ‘white  companies’  in  real-­‐estate  transactions  in  India.              Price  discovery  in  real  estate     September  2011  
  3. 3.     3   Solution  to  Black  Money          Table  of  Contents  EXECUTIVE  SUMMARY   2  WHY  BLACK  MONEY  NEEDS  TO  BE  ERADICATED?   4  WHY  REAL  ESTATE  IS  IMPORTANT?   5  IT  IS  THE  CAUSE  FOR  LOWER  GDP  AND  POVERTY   5  CAUSE  FOR  HIGH  INFLATION   7  HOW  DOES  IT  CAUSE  MORE  CORRUPTION?   8  HOW  DOES  IT  CREATE  POVERTY?   9  WHAT  HAS  GOVERNMENT  TRIED  SO  FAR?   12  A  SIMPLE  FIX  FOR  REAL  ESTATE  TRANSPARENCY   13  CONCLUSION   16  ANNEXURE  I   17  50C   17          Price  discovery  in  real  estate     September  2011  
  4. 4.     4   Solution  to  Black  Money        Why  black  money  needs  to  be  eradicated?    At  a  five-­‐day  anti-­‐corruption  convention  in  2009  at  Doha,  United  Nations  said  the  cost  of  political  corruption  to  governments  around  the  world  is  about  1.6  trillion  dollars1  each  year.  This  does  not  include  the  black  money  generated  by  the  businesses  and  the  tax  losses  there  off.  The  loss  due  to  this  has  a  spiraling  impact  on  public  welfare  and  public  policy.        The  black  money  in  India  alone  is  stated  to  be  50%2  of  the  GDP  of  India  i.e.  another  750  billion  dollars  a  year.  It  means  $250  billion  in  taxes.  It  is  roughly  equal  to  the  Indian  budget  of  $278  billion3.                                                                                                                          1  2  Global  Financial  Integrity,  Centre  for  International  Policy,  Washington  DC  3  Indian  Budget  Reins  in  Spending  Increases  –  The  Wall  Street  Journal,  Feb  26th    2010      Price  discovery  in  real  estate     September  2011  
  5. 5.     5   Solution  to  Black  Money      Why  real  estate  is  important?    India  has  88%4  assets  as  non-­‐financial  and  the  debt  being  as  low  as  3%.  The  financial  assets  only  account  for  13%  of  the  total  wealth  of  the  nation.  It  shows  that  out  of  the  3.5+  trillion  dollar  wealth  of  the  country,  most  of  it  is  in  the  real  estate  market.    It  is  non-­‐worthwhile  to  prove  how  rampant  the  black  money  is  in  the  real-­‐estate  sector.  Indian  Prime  Minister  Mr.  Manmohan  Singh  at  the  Today  Conclave  admitted  "I think as far as black money in real estate is concerned,unfortunately that is a reality and one way out of this would be to lower thestamp duties," 5      Tata Housing Development Company Managing Director and CEO BrotinBanerjee in the same meeting remarked - “There has been rampant use ofblack money in the real estate sector.”  The  problem  is  reaching  epidemic  proportions  can  be  judged  from  the  recent  news  coverage  it  has  been  receiving:    The Economic Times reported - “Property market: Biggest sink of blackmoney” – 7th November 2010The Times of India in Goa reported - “Goa real estate boom fuelled byblack money” – 20th July 2011  The  Business  Today  Mumbai  reported  real  estate  as  -­‐  “The black moneyvault” – 20th March 2011    The Business Standard reported: “Black money trail: Dubious real estatedeals under I-T scanner” –19th April 2011It is a well-documented fact that the secondary market real estate deals today aregenerally done in more than 50%6 hard cash.  It  is  the  cause  for  lower  GDP  and  poverty  The  development  of  the  economy  is  directly  linked  with  the  development  of  the  financial  markets  as  evidenced  by  the  below  mentioned  comments  in  the  Global  Wealth  Data  Book  2010  by  Credit  Susie.                                                                                                                  4  Credit  Suisse,  Global  Wealth  Data  Book  2010,  page  76.  5­‐stamp-­‐duties-­‐can-­‐check.html  6  More  than  50  percent  of  the  value  transacted  in  the  secondary  market  for  real  estate  in  Mumbai  is  made  in  black  money  (Jha,  1999)    Price  discovery  in  real  estate     September  2011  
  6. 6.     6   Solution  to  Black  Money          “Other  features  of  the  survey  evidence  from  developing  countries  capture  important  real  differences.  Very  high  shares  of  non-­‐financial  wealth  are  found  for  the  two  low-­‐income  countries  in  our  sample,  India  and  Indonesia,  reflecting  both  the  importance  of  land  and  agricultural  assets  and  the  lack  of  financial  development.  On  the  other  hand,  the  share  of  non-­‐financial  assets  in  China  is  relatively  modest,  possibly  because  the  value  of  housing  is  reported  net  of  mortgage  debt,  and  because  urban  land  is  not  privately  owned.  In  addition,  there  has  been  rapid  accumulation  of  financial  assets  by  Chinese  households  in  recent  years.  Debts  are  very  low  in  India  and  Indonesia,  again  reflecting  poorly  developed  financial  markets.”    Also  the  complex  mechanism  for  investment  preferences  is  well  presented  in  a  paper  in  2008  “Financial  Repression,  Bank  Deposits,  Real  Assets  and  Black  Money”  in  which  Mr.  Gurcharan  Das  elaborates  why  the  black  money  influences  the  investment  choices  of  individuals.  It  may  appeal  to  common  sense  that  how  people  would  get  stuck  to  an  asset  class  due  to  inability  to  park  the  black  money.  This  puts  an  artificial  ceiling  on  the  investments  available  to  the  Primary  and  secondary  financial  markets  which  are  the  growth  factory  for  jobs  and  production  (GDP)  in  the  economy.    The  profit  generated  through  government  or  consumer  spending  is  converted  into  black  money  by  tax  evasion  and  ends  up  getting  parked  in  the  real–estate  market.  Thus  starving  the  financial  instruments  or  the  financial  market,  which  creates  sustained  jobs  and  forms  the  supply  curve  of  an  economy.  Such  inelastic  supply  of  an  economy  results  in  inflation  and  is  usually  met  with  increase  in  interest  rates  from  RBI.  Eventually  further  starving  the  mass-­‐market,  thin-­‐margin  businesses,  with  higher  capital  costs,  more  risk  and  less  capital  for  growth.  People  would  rather  save  a  30%  direct  tax  and  another  10-­‐20%  indirect  tax  by  not  making  invoices  and  straight  away  park  the  money  in  real  estate  for  immediate  gains  without  getting  noticed  while  corrupting  and  derailing  the  entire  system  of  sustained  business  expansion.  Longer  pay  back  periods  due  to  high  interest  rates  compared  to  better  returns  on  deposits  and  real-­‐estate  deter  large  investments  into  businesses.      A  promoter  ends  up  spending  substantial  time  in  managing  the  transaction  personally  without  delegating  to  maintain  secrecy.  Lower  profits  and  turnover  in  books  further  restricts  objective  view  of  business,  opportunities  for  Debt  and  equity  participation.            Price  discovery  in  real  estate     September  2011  
  7. 7.     7   Solution  to  Black  Money      Inelastic  Supply  due  to  parking  of  black  money   Prohit   Fear  of  getting  Caught   Black  money   Fudged  books   Park  in  Real   Less  delegation   estate   Less  expansion   Fear  to  scale  up   No  investments   Immediate   Corruption   No  debt   Less  Jobs   saving  of  50%     No  listing   Inhlation   Increase  in   interest  Rates   Higher  Risk    Cause  for  high  Inflation    Every  year,  there  is  a  developmental  effort  from  the  government  like  building  roads  or  schemes  like  rural  employment,  which  may  be  very  well  conceived.  It  ends  up  playing  havoc  with  the  economy.  The  10,000s  of  crore  ends  up  pushing  the  demand  which  then  in  turn  temporarily  increases  prices  and  the  profit  from  the  inflation  ends  up  getting  parked  in  the  real  estate  as  apposed  to  the  financial  market,  thus  starving  the  supply  of  capital  and  making  it  very  inelastic  in  long  term.  These  developmental  efforts  are  normally  met  by  increase  in  real  estate  prices  that  can  very  easily  be  seen  from  the  history  of  our  economy.    The  government  ends  up  controlling  the  inflation  with  increase  in  interest  rates  and  further  reducing  the  access  to  capital  and  negatively  impacting  supply.  The  increase  in  interest  rates  directly  decreases  the  profitability  of  businesses  and  increases  the  risk  of  expansion.  They  especially  make  the  mass-­‐market,  low-­‐price,  non-­‐branded  businesses  vulnerably  due  to  already  being  on  thinner  margins.  The  ineffective  strategy  can  be  very  well  be  correlated  with  the  fact  that  India  is  a  global  anomaly  in  terms  of  having  persistent  high  inflation.  The  Economist  in  its  article  “Bringing  tears  to  Indian  eyes”  remarks  –  “In richcountries (with the possible exception of Britain), deflation remainsthe bigger worry, but India’s inflation is also substantially higherthan in other emerging economies.”It continues to say -{Indian policymakers tend to underestimate this trend. In April2009, the governor of the country’s central bank was quoted assaying that he expected WPI inflation to be at 4% in March 2010. Infact, it was 10.2% that month, and stayed at or above 10% inevery month till July. And while the RBI does not formally target  Price  discovery  in  real  estate     September  2011  
  8. 8.     8   Solution  to  Black  Money      inflation, there are plenty who think that it has been too slow totighten monetary policy. It has in fact been raising rates regularlysince March last year, but only very gradually. Some reckon itshould have tightened faster. The RBI is, of course, wary of chokingoff India’s rapid recovery from the slowdown in growth during theglobal economic crisis. Its governor, D Subbarao, said on January17th that "For the Reserve Bank the challenge is to calibratemonetary policy taking into account the demands of inflationmanagement and the demand of supportive recovery”.}  "The shift of the Indian household sector from deposits to inflationhedges such as property and gold is creating a liquidity crunch inthe banking sector that’s unlikely to be solved in the near future,”Kristine Li, senior director of Asia-Pacific credit strategy at RoyalBank of Scotland Group Plc, told Bloomberg. “If banks’ loan growthdecelerates, asset quality concerns are likely to return.”    How  does  it  cause  more  corruption?    The  situation  may  be  better  understood  by  an  analogy  of  honeybees.  There  are  several  types  of  opportunities  for  corruption  spread  across  the  country  like  how  different  types  of  flowers  exist  in  an  area.  There  may  be  multiple  colonies  of  honeybees  that  prefer  different  types  of  flowers.  It  may  include  businessmen,  legislative,  executive,  judiciary,  NGOs  and  people  from  all  walks  of  life.  The  bees  are  uncountable  and  difficult  to  catch.  The  nature  of  bees  is  to  collect  honey  or  create  wealth.  There  are  always  honeycombs  where  all  the  honey  gets  parked.      Examples  from  Current  Scenarios   • Honeycomb  -­‐  People  buy  large  areas  of  agricultural  land  by  parking  black   money  just  before  a  government  acquisition  and  end  up  converting  in   white.   • Flower  -­‐  In  listed  companies  promoters  sell  company  properties  and   pocket  black  money,  evade  tax  and  dupe  shareholders.    We  have  already  established  that  Real-­‐estate  is  the  biggest  honey-­‐comb  of  the  economy  and  especially  India  with  87.6%  of  India’s  wealth  stored  in  it.  It  also  is  the  biggest  sink  for  black  or  corruption  money.    How  much  honey  can  be  parked  in  gold  or  cash?  A  25,000  crore  scam  is  equal  to  10  tones  of  gold.  It’s  very  difficult  to  store  such  huge  quantities  of  gold  without  the  fear  of  getting  caught  or  killed.    How  much  honey  has  been  parked  in  Swiss  banks  ?  A  very  well  made  out  empirical  study  was  published  recently  by  Dev  Kar  from  the  Global  Financial  Integrity,  Centre  for  International  Policy,  Washington  DC.  He  dispelled  many  myths  about  the  illicit  money  flows  to  Swiss  banks.      Price  discovery  in  real  estate     September  2011  
  9. 9.     9   Solution  to  Black  Money        “It  is  estimated  that  a  total  of  $213.2  billion  was  shifted  out  of  India  between  1948  and  2008,  or  about  17.7%  of  India’s  GDP  at  end-­‐2008.  Applying  rates  of  return  on  these  assets  based  on  the  short-­‐term  US  Treasury  Bill  rate,  the  total  gross  transfers  of  illicit  assets  by  Indian  residents  amount  to  $462  billion  at  the  end  of  2008.”7    The  outflow  compared  to  real  estate  parking  is  quite  small  if  we  see  it  on  per  year  basis.  So  it  can  easily  be  inferred  that  most  of  the  black  money  is  being  parked  within  India  and  that  too  in  the  Real  Estate.    Easy  access  and  ability  to  park  black  money  makes  honeybees  multiply.  It  attracts  honeybees  to  the  top  positions.    Since  one  cannot  control  the  spread  of  flowers  or  catch  the  honeybees,  it  is  only  wise  to  remove  the  honeycombs  in  the  area  and  the  honeybees  will  have  no  choice  but  to  go.    How  does  it  create  poverty?    An  economy  is  measured  by  the  GDP  of  the  country.  GDP  is  broadly  the  demand  and  supply  of  the  country.  Lets  take  a  new  perspective  on  how  economy  can  grow.    Lets  assume  that  majority  of  the  people  if  given  the  ability  to  buy  and  consume  a  product/service  (non  luxury)  that  they  can  afford  would  normally  choose  to  consume  if  given  enough  wealth.  It  is  also  then  fir  to  assume  that  the  majority  of  demand  is  a  function  of  income  or  wealth  the  people  have.  Some  as  such  the  demand  or  need  to  products  is  either  latent  or  active  at  any  given  time  depending  on  their  income.    So  basically,  if  the  economy  can  provide  enough  jobs  then  there  is  enough  demand  to  consume  any  products  and  services.  So  the  bottleneck  is  really  the  jobs  or  the  wealth  spread.    Now  if  the  government  starts  creating  jobs  and  the  demand  starts  rising  then  the  prices  should  start  increasing  and  also  the  profit  opportunities.  There  should  then  be  a  matching  response  by  increase  supply  and  book  profit.  The  increase  in  supply  should  also  lead  to  job  creation  and  thus  create  a  powerful  self-­‐sustained  reaction  of  growth  of  economy.    However  in  reality,  an  increase  in  supply  would  always  need  access  to  cheap  capital.  India  only  has  $3.5  trillion8  dollars  of  capital  over  a  population  of  1.2                                                                                                                  7  An  Empirical  Study  on  the  Transfer  of  Black  Money  from  India:  1948-­‐2008  by  Dev  Kar  from  Global  Financial  Integrity,  Centre  for  International  Policy,  Washington  DC  8  Credit  Suisse,  Global  Wealth  Data  book  2010,  pg  72  Price  discovery  in  real  estate     September  2011  
  10. 10.     10   Solution  to  Black  Money      billion  as  compared  to  $54.6  trillion9  in  America  for  300  million  populations.  There  is  a  difference  of  astonishing  223  times  when  we  also  take  into  account  the  financial  component  only.  The  disparity  in  wealth  is  only  23.48  times  if  we  only  take  non-­‐financial  wealth  as  comparison.    This  stark  disparity  in  our  asset  classes  throws  the  economy  off  balance  when  it  comes  to  job  creation  through  further  investments.      Further  to  make  it  worse  the  debt  taken  by  the  public  in  India  is  mere  4%  of  the  total  wealth.  So  majority  of  the  capital  remains  locked  away  in  the  real-­‐estate  sector  and  does  not  even  get  deployed  as  collaterals  or  loans.  With  high  interest  rates  the  risk  of  doing  business  goes  up  and  profitability  in  the  stock  market  goes  down.  Real-­‐estate  becomes  an  even  more  attractive  option  as  a  safe  heaven  and  especially  for  tax  evasion.  This  disrupts  the  chain  reaction  for  job  creation.  It  leads  to  less  spread  of  income,  less  taxes,  less  public  welfare  projects  and  only  concentration  of  wealth  into  properties  in  established  cities  and  no  jobs  for  the  homeless.    GDP  of  a  nation  should  normally  be  25%  to  32%  of  the  country’s  financial  wealth.  What  has  perhaps  remained  unnoticed  is  that  India  it  is  already  running  at  127%,  which  is  several  magnitudes  higher.  It  only  shows  the  lack  of  capital  in  the  economy.      It  has  some  of  the  following  implications:    Stock  Market  or  financial  assets  are  under  performing  as  compared  to  GDP.   • Businesses  not  getting  listed.   • Investment  in  stock  market  comparatively  low.   • Valuations  of  businesses  listed  are  very  low.   • Lower  valuations  or  margins  are  either  because  of     o Black  money  being  squeezed  out.   o Interest  rates  are  too  high.   o Low  pricing  mentality  due  to  price  sensitive  demand.    It  is  to  be  noted  that  the  GDP  does  not  include  the  50%  transactions  done  in  black  money.  So,  the  ratio  is  actually  over  200%  and  almost  10  times  normal.    Developing  the  financial  wealth    To  create  more  businesses  or  employment  we  need  to  either  increase  the  profitability  to  increase  corresponding  valuations  by  plugging  leakages  of  black  money  or  redirect  investments  into  financial  assets.  The  wealth  or  the  capital  of  the  country  seems  too  small  compared  to  GDP  in  India.  It’s  therefore  needed  that  the  black  money  portion  of  the  real  estate  be  recognized  and  made  available  for  loans  and  capital.                                                                                                                        9  Credit  Suisse,  Global  Wealth  Databook  2010,  pg  75    Price  discovery  in  real  estate     September  2011  
  11. 11.     11   Solution  to  Black  Money      Developing  the  non-­‐financial  wealth  The  capital  or  the  fuel  of  the  supply  curve  is  embedded  in  the  real  estate  as  already  seen.  So,  it  is  apt  for  government  to  allow  development  of  this  asset  class  through  FDI.  However,  with  the  rampant  corruption  and  involvement  of  black  money  in  this  ever  so  important  sector,  it  is  natural  for  the  foreign  investors  to  find  other  destinations,  which  they  can  deal  with  easily  and  remotely.    So,  it  is  most  important  to  clean  up  this  sector  to  unclog  the  hidden  potential  and  develop  it  further  at  all  costs  for  a  smoother  expansion  of  the  economy  and  creating  jobs.    Poverty  a  closer  look    The  figures  for  India  are  disturbing.  At  number  16th  on  the  rankings  of  poverty  gaps,  and  housing  almost  41%  of  the  world  poor  (World  Development  Indicators  database),  there  is  a  lot  to  be  concerned  about.  There  are  1,26,700  Indians  who  are  classified  as  millionaires  (Capgemini,  Merrill  Lynch  Wealth  Management),  yet  a  sickening  80%  who  lives  on  less  than  two  US  dollars  a  day.  The  stark  contrast  between  the  rich  and  the  poor  is  probably  our  biggest  challenge  in  terms  of  designing  effective  social  and  economic  policies.  India’s  priority  must  become  its  poor  because  it  is  poverty  that  affects  the  majority  of  the  population.          Price  discovery  in  real  estate     September  2011  
  12. 12.     12   Solution  to  Black  Money      What  has  government  tried  so  far?    The  government  has  done  a  brilliant  job  in  the  stock  market  by  way  of  demat  accounts,  policies,  procedures  and  electronic  exchanges.  It  has  also  tried  many  ways  to  control  the  black  money  in  the  real-­‐estate  sector.      20C.  There  was  a  form  37i  required  under  Chapter  XXC.  It  used  to  act  like  a  crude  check  on  self-­‐reporting  on  real  estate  transactions  by  inducing  fear  of  government  take  over  in  case  of  under  reported  prices.  It  was  introduced  in  1986.  It  gave  powers  to  the  government  to  acquire  the  land  if  it  thought  it  was  being  sold  below  the  market  price.  It  was  removed  in  2002  in  the  budget  as  a  tax  friendly  measure  by  the  BJP  government  under  269UP.      Once  gone,  the  real  estate  has  become  the  major  parking  method  for  all  money  collected  in  black  by  either  corruption  or  tax  evasion  with  no  way  of  tracing  it.  The  percentage  of  black/white  being  quoted  in  the  property  deals  has  substantially  risen  in  the  last  decade  and  so  has  properties  linked  with  corruption  cases  (10  times)10.    Why  it  was  really  removed  is  attached  under  Annexure  I  –  a  circular  from  CBDT  on  the  reasoning  behind  the  change  in  policy.    50C. (1) Where the consideration received or accruing as a result of the transfer by anassessee of a capital asset, being land or building or both, is less than the valueadopted or assessed 91 [or assessable] by any authority of a State Government(hereafter in this section referred to as the “stamp valuation authority”) for thepurpose of payment of stamp duty in respect of such transfer, the value so adopted orassessed 91[or assessable] shall, for the purposes of section 48, be deemed to be thefull value of the consideration received or accruing as a result of such transfer.This section however only applies capital gains tax at the circle rates and still does notprevent the black money being part of the transaction.                                                                                                                    10    Price  discovery  in  real  estate     September  2011  
  13. 13.     13   Solution  to  Black  Money      A  simple  fix  for  real  estate  transparency    Short  comings  of  XXc   • Requires  government  funds   • Requires  monitoring  and  not  automatic.   • Does  not  use  market  forces  and  is  subjective.   • Open  to  corruption  and  misuse    How  to  over  come  shortcomings   • Allow  public  to  bid  on  transactions  once  published  on  net  for  14  days  in   10%  increments.  It  will  act  as  price  check.      It  is  proposed  that  we  reenact  the  chapter  XXc  and  also  involve  the  public  in  bidding  to  make  the  process  completely  automatic.  The  mechanism  will  completely  erase  the  black  money  being  quoted  in  the  real  estate  transactions.    Today’s  technology  is  fully  capable  to  make  the  whole  process  online  with  all  documents  scanned  and  made  available  to  public  for  intervention  to  make  sure  that  the  deal  is  not  priced  too  low.      Some  of  the  Benefits:   • It  will  be  a  deathblow  to  big  corruption.   – It  will  make  it  difficult  to  store  the  dirty  money.   – It  is  too  risky  to  store  1000s  of  crores  in  cash  of  kind  at  home.     • Properties  will  stop  trading  in  black.   • Will  reduce  wealth  divide  by  having  high-­‐income  people  to  pay  more   taxes.   • Banking  will  be  healthier  in  long  term.   • Tax  collections  from  capital  gains  and  declared  income  will  both  go  up   substantially.   • Land  revenue  will  go  up.   • Cleans  up  the  majority  of  the  game  and  encourages  fair  play  across  both   business  and  government  sections  of  the  society.   • The  businesses  will  find  it  hard  to  park  dirty  money.   • Cash  in  the  system  will  reduce  and  so  will  counterfeit  notes  and  shift   towards  digital  economy.   • All  transactions  and  ownership  of  land  going  forward  will  become   traceable.   • Will  result  in  less  property  disputes  and  thus  access  to  more  capital  in  the   economy.   • It  benefits  the  overall  economy  by  making  access  to  capital  easier.            Price  discovery  in  real  estate     September  2011  
  14. 14.     14   Solution  to  Black  Money      Ensuring  Price  Stability    It  is  recommended  that  the  property  transaction  be  listed  on  the  website  as  a  price  check  once  an  approval  request  is  received  from  the  seller  and  buyer  of  an  agreed  transaction  like  the  way  it  was  done  in  XXc.  It  is  necessary  to  maintain  price  stability  by  making  the  public  bidding  mechanism  as  a  price  check  and  not  an  upfront  public  auction.      Ensuring  Reliability  of  deals    The  paper  trail  for  land  ownership  and  proofs  should  be  made  available  to  public  for  inspection  before  the  bidding/price-­‐check  process.  A  standard  needs  to  be  laid  on  the  documents  needed  to  proceed  for  sale  of  a  real  estate.    The  government  may  also  choose  to  mediate  the  payment  process  of  the  winning  bidder.  There  may  be  a  requirement  for  security  deposit  before  a  person  or  a  licensed  property  dealer  can  bid.    In  future  the  land  recorder  should  be  dematerialized  or  at  least  maintained  electronically  to  reduce  fraud  and  disputes  and  increase  transparency  like  the  stock  market.    Ensuring  privacy  The  buyer  and  bidder  details  should  be  kept  confidential  till  the  deal  gets  finally  approved.        Comparison   20c   50c   Proposed  Description   Government  can   Properties  can  not   Public  bidding  will   acquire  properties   be  registered   ensure  there  is  no   valued  lower   below  circle  rates   black  money  in  a   transaction.    Status   Discontinued  in   Active   New   2002    Price   Through  self-­‐ Region  wise  Circle   Allow  public  Discovery/check   reporting   Rates   bidding  on  all   private   transactions.    Method   Fear  of  loosing   Controlled  rate   Market  forces  to   property   cards.   discover  real  price.    Government   Valuation   Circle  rates  have   Very  little  –Effort   required   to  be  revised   Automatic      Price  discovery  in  real  estate     September  2011  
  15. 15.     15   Solution  to  Black  Money      Short  comings   Valuations  are   Circle  rates  do  not   Rates  may   cumbersome   get  revised  timely.   temporarily   process.     reduce.     Rates  are  always   Government  funds   lower  than  market   can  be  misused  by   rates   collusion.       Does  not  account   Subjective.   for  value     construction  or   Title’s  might  be   design.   disputed  and     impact  the  value.   Does  not  include   special  features  of   plot  like  corner,   park  facing  etc.     Title  might  be   disputed    Government   Required   Not  required   Not  required  funds  Control  on  black   70-­‐80%   30-­‐60%   90-­‐100%  money.  Tax  collections   High   Low   Very  high    Possibility  of   High  -­‐   Low  –  A  state   Not  possible.  corruption/   government  may   government  may  inaccuracy   choose  not  to   choose  an  area   acquire  or  wrong   not  to  be  revised   valuation   in  collusion  with   builders  like   greater  noida.    Tax  declarations   Medium   Low   Very  high  (because   properties  will  be   going  cheap)      It  is  not  important  that  we  adopt  the  proposed  prognosis  (solution)  but  what  is  important  is  to  have  the  right  diagnosis  of  the  problem.  Only  then  an  appropriate  prognosis  can  be  created.  A  policy  change  to  the  effect  below  needs  to  be  passed  in  the  parliament,  so  that  the  executive  body  is  free  to  do  its  role  in  the  matter:    “The  chapter  XXC  will  be  applicable  again  from  1st  April  2012.  The  government  must  make  all  property  documents  available  to  the  general  public  on  internet  for  public  bidding  at  10%  increments  to  effect  automatic  price  discovery  and  transparency  for  a  period  of  14  days”    Price  discovery  in  real  estate     September  2011  
  16. 16.     16   Solution  to  Black  Money      Conclusion    Indian  economy  currently  is  like  a  very  highly  powered  agricultural  truck  with  its  plow  stuck  too  deep  in  real  estate  black  money.    Automatic  price  discovery  in  real  estate  transactions  has  potential  to  eradicate  black  money  and  corruption  to  a  large  degree.  It  will  not  only,  increase  tax  collections  but  also  strengthen  the  capital  markets,  reduce  inflation  and  fuel  the  growth  of  India.    Once  the  black  market  gets  fixed,  it  would  be  possible  to  sustain  a  high  double-­‐digit  growth  for  the  next  few  decades  due  to  availability  of  capital  and  higher  valuations.  There  will  be  more  inclination  to  invest  in  financial  markets  and  will  help  new  IPOs.    The  question  we  should  ask  ourselves  is  that  how  long  can  India  live  without  a  super  strong  stock  market?  Why  should  FDIs  and  FIIs  trust  Indian  businesses  if  we  ourselves  choose  not  to  invest  in  it?    It  is  foreseeable  that  once  the  framework  and  policy  implications  are  adopted  and  the  benefits  realized  then  all  other  developing  nations  would  adopt  the  same.  This  does  have  the  potential  to  uplift  billions  from  poverty.  All  we  need  is  more  powerful  economies  that  spread  prosperity  and  development  for  a  better  future  of  humanity.       “Few small atoms can tilt the balance of power And few simple thoughts can transform a nation.”          Price  discovery  in  real  estate     September  2011  
  17. 17.     17   Solution  to  Black  Money      Annexure  I  Extracts of Circular No.8/2002 dated 27.08.2002 issued by CBDTThe scheme of pre-emptive purchase of immovable properties under ChapterXX C abolished.75.1 Under the existing provision contained in Chapter XX C of the Income tax Act,any person intending to transfer immovable property in specified areas at valuesexceeding specified amounts is required to file a statement in form 37 I before theAppropriate Authority within the prescribed time before the intended date of transfer.The transfer can be registered only if the Appropriate Authority does not pass anorder of pre emptive purchase of the property, and issues a no-objection certificate.75.2 Since these provisions were causing procedural delays in registration oftransfers, and with a view to remove source of hardship for the tax payers, the FinanceAct, 2002 has, by inserting a new section 269UP in the Income tax Act, made theprovisions of the Chapter XX-C inapplicable in respect of any transfer of immovableproperty effected on or after 1st July, 2002.75.3 This amendment will take effect from 1st July, 2002  50C  37.1 The Finance Act, 2002, has inserted a new section 50C in the Income tax Act tomake a special provision for determining the full value of consideration in cases oftransfer of immovable property.37.2 It provides that where the consideration declared to be received or accruing as aresult of the transfer of land or building or both, is less than the value adopted orassessed by any authority of a State Government for the purpose of payment of stampduty in respect of such transfer, the value so adopted or assessed shall be deemed tobe the full value of the consideration, and capital gains shall be computed accordinglyunder section 48 of the Income tax Act.37.3 It is further provided that where the assessee claims that the value adopted orassessed for stamp duty purposes exceeds the fair market value of the property as onthe date of transfer, and he has not disputed the value so adopted or assessed in anyappeal or revision or reference before any authority or Court, the Assessing Officermay refer the valuation of the relevant asset to a Valuation Officer in accordance withsection 55A of the Income tax Act. If the fair market value determined by theValuation Officer is less than the value adopted for stamp duty purposes, theAssessing Officer may take such fair market value to be the full value ofconsideration. However, if the fair market value determined by the Valuation Officeris more than the value adopted or assessed for stamp duty purposes, the Assessing  Price  discovery  in  real  estate     September  2011  
  18. 18.     18   Solution  to  Black  Money      Officer shall not adopt such fair market value and shall take the full value ofconsideration to be the value adopted or assessed for stamp duty purposes.37.4 This amendment will take effect from 1st April, 2003 and will, accordingly,apply in relation to the assessment year 2003 04 and subsequent years.  Price  discovery  in  real  estate     September  2011