Since the Modi government took office the messaging has been that to build India as a progressive welfare state the central administration will evolve and present to the various facets of the Indian ecosystem a robust policy framework to stimulate the economic engines. For instance the introduction of schemes like Make in India, Skill India, Start Up India, Smart Cities etc. and recently the introduction of the RERA act. This act in my opinion will bring a certain level of uniformity to the real estate development sector across the country while retaining the diversity and intricacies of the different states. Unquestionably the implementation will build trust and transparency in the real estate sector and in turn help lift the mood and activity in the market. This may take time and for many markets with high inventory overhang this may be too late.
Undoubtedly the centre is doing what it can to push the tottering sector and so are some state governments which are tinkering with the development laws and cost of transacting, a tactic not popular with the state treasurer. Recently the Haryana government proposed a 15% reduction in the circle rate across all property segments for the financial year 2016-17. In my opinion it?s a sound decision to provide an additional incentive to homebuyers to transact in Gurgaon as they will now pay less stamp duty and registration cost.
So what is Circle Rate and how does reducing the rates increase sales: When a state government fixes the minimum rate/ price for any property transaction in a circle/area, it is called circle rate. Based on the circle rate, the district administration of various state governments collects stamp duty which varies from approximately 2% to 7% of the circle rate. Any rise in circle rate or stamp duty directly impacts the property transaction as it makes homebuyers shell out more as revenue to the government and the opposite when the rates are reduced.
There are rare instances that state governments bring down circle rate or stamp duty. Why is it that when the market is below par that the circle rates are not reduced? The simple explanation is; land revenue is amongst the highest sources of income for the state governments. While everyone is blaming developers for keeping the prices high, circle rate and stamp duty have steadily gone up irrespective of the market sentiments.
Every financial year, state governments review the market prices of the property and accordingly revise the circle rates. Often, the formula that is applied to fix a circle rate is the average of highest and lowest market value of properties in an area. For instance, if the highest price of an apartment is Rs 50,000 per sq.mt. and lowest price is Rs 30,000 per sq mt, the circle rate of that area would be Rs 40,000 per sq.mt. This formula, while it benefits a section of buyers, it does just the opposite for others. It turns more problematic when property market instead of going up goes down.
In my opinion a welfare state should act in a realistic manner as it concerns the basic need of the people: housing. Also it?s advisable to keep the circle rate close to the market rate to curb the circulation of black money. An unjustified increase in circle rate hurts not only the homebuyer but also the state governments in the long run. There is definite merit in the Gurgaon precedent and other states should follow. While only time will size up the Gurgaon results, an instant tactical shot in the arm by optimizing the circle rates will not hurt.