Real Estate Laundering – Where does it Start?
Black money is unaccounted money. The money for which taxes are not paid. According to certain estimates, India generates close to Rs. 1555 thousand crores of black money. However, this is just an estimate and that too was made in 2011.
But honestly, nobody knows, even the government does not know. Can we say in percentage? Is it 10 percent of India’s economy, is it 20 percent, or anything else? No one knows. We can only speculate. Real Estate Laundering is an interesting facet of the global economy.
Then how do we know that there is black money in India? That we know because of our understanding of certain Real estate transactions.
Imagine a small piece of land with a house in it, in your locality. The owner decided to sell it and the local people came to know that it was sold for Rs. 10 Million. If you ask the seller, how much value is mentioned in the sale agreement, then you may hear it was only Rs.4 Million.
Tax evaded money is a real curse for India. It is more so in the real estate business where it has almost become a norm all over India to pay cash in real estate transactions.
The introduction of corrupt money in the real estate sector affects the corrupt and the honest people in different ways.
Honest Buyer is the loser and….
If you are an honest person and you wish to buy a real estate property, you want the bank to finance your purchase. Banks give loans up to 80-90% of the declared value of the property. Suppose the value of the property is Rs. 10 Million and are paying 50% amount in cash, then it means that you can get a loan up to only Rs. 4 million at the best.
In this case, the buyer needs to arrange Rs. 5.5 million from other sources. Considering the economic situation of Indian citizens, honest people can’t have so much cash and hence they don’t buy such property.
A corrupt seller is a winner
This arrangement, however, benefits the corrupt. He is the person who is already sitting on the pile of cash and can spend 5 million in cash. This is the beauty of the real estate laundering process.
Government is a loser and….
By recording just half the value of the property transaction, in the above case Rs. 5 million
- The Income tax department loses revenues arising from the capital gain tax from the seller.
- The Government loses a stamp duty on the undervalued portion of the property during the registration.
Builder is the Winner
Let us assume that a builder makes a residential complex and constructs 100 flats to be sold for Rs 10 million each. Let’s assume that he accepts only 25% in cash and the rest by cheque. He generates black money to the tune of Rs 250 million.
Needless to say that this money goes back to either the corrupt politicians or the bureaucrats to get all sorts of protection and permissions. The builder uses this black money to buy assets for himself and save a lot of taxes. The state and center government lose huge taxes due to the transaction of this black money.
Politicians and Bureaucrats are the Ultimate Winners
First, under the pretext of permission and protection, politicians ask for bribes. The bribes take different forms. Sometimes in cash or sometimes in offshore account deposits. Politicians and Bureaucrats often lend money to builders to construct real estate. Sometimes they act as investors and buy the properties in good real estate projects. This is the same money that they have raised from the builders.
The black money generated in the real estate sector is so high that the builders think they can buy almost everyone in the system. They can then do illegal constructions, construct extra floors and make unsafe houses. However, they take the risk of constructing the real estate. Politicians on the other hand are the biggest beneficiaries. They take no risk but by virtue of their position, their investment returns a huge sum. They use the same cash in elections to corrupt the whole society by buying the votes.
One of the effects of the prevalence of black money in the real estate sector is that honest builders can’t survive in this business as everyone in the system expects them to pay a huge amount of bribes, kickbacks, and incentives.
Real Estate Reforms
There were three important reforms in the Indian economy that were expected to curtail the flow of cash.
- Demonetization absorbed all the currency notes that created a shortage of cash in the market. This euphoria was, however, temporary. As the new notes were introduced in the market, the real estate started booming again.
- Introduction of Real Estate Regulatory Authority. This mandated the real estate builders to introduce the capital before starting the construction and to accept the money in the escrow accounts. However, there are a number of workaround for these provisions, which facilitates the builders to accept the cash.
- After the demonetization, within a short time, the government implemented GST and also introduced the Benami Act. The government has also started new procedures, like, KYC in the Banks. Buyer and seller of property are requested to submit copies of Aadhaar numbers, PAN cards, passport-type photos, etc.
Immediately after the November 2016 demonetization, the Real estate industry came to a standstill. For the next three and a half years real estate prices never increased. It has become stagnant or even going down. This is because, earlier, the prices were high due to the presence of black money. The real estate industry was the best and the easiest destination for black money.
However, the corrupt seem to have just changed their route. They are still engaging in real estate laundering. After the demonetization, the currency notes were extinguished for some time. Overnight, the cash they were holding/hoarding, became useless.