The recent regulations passed by the parliament and some steps by the government are expected to make the Kolkata property market more transparent and bring in long-term confidence in the market. These measures are the Real Estate Regulation Act (RERA), the Benami Transactions (Prohibition) Act, 2016, the Goods and Services Tax (GST) and the demonetisation of Rs 500 and Rs 1,000 currency notes.
Real Estate Regulation Act (RERA) will have Huge Impact on Kolkata Property Market
For long, real estate transactions were perceived to be lopsided and heavily favouring the developers. With the RERA and the government’s model code, the transaction between the seller and the buyer of real estate will be more equitable and fair, especially in the primary market.
The RERA will be applicable on any project measuring more than 500 square metres or more than eight apartments and all such projects, even ongoing projects, will have to be registered with the RERA.
The developers of all incomplete projects (for which the completion certificate is yet to be issued) shall make an application to the Regulatory Authority for registration of its project (residential or commercial) within a period of three months from the date of commencement of this Act. If any developer of a project does not comply with the aforementioned registration formalities then he shall be liable to a penalty which may extend up to 10% of the estimated cost of the real estate project as determined by the Regulatory Authority.
Similarly, the Act also requires all the real estate agents to register themselves with the Regulatory Authority, failing which the Regulatory Authority is empowered to impose a fine on the unregistered agent.
It mandates that the developer must park 70% of the project funds in a dedicated bank account. This law makes it mandatory for developers to submit all information on issues such as project plan, layout, government approvals, land title status, sub-contractors to the project, schedule of completion with the State Real Estate Regulatory Authority (RERA) and then pass this information on to the buyers. The current practice of selling on the basis of the super built-up area will come to a stop as this law makes it illegal. Carpet area has been clearly defined in the law.
Any delay in project completion will make the developer liable to pay the same interest as the EMI being paid by the consumer to the bank. The buyer can also contact the developer in writing within one year of taking possession to demand after sales service in case of any deficiency in construction.
The developer cannot make any changes to the plan that had been sold without the written consent of the buyer. The maximum jail term for a developer who violates the order of the appellate tribunal of the RERA is three years with or without a fine.
If implemented properly, the RERA will bring about transparency; ensure consumer-friendly environment and root out some of the malpractices by questionable developers.
Benami Transactions (Prohibition) Amendment Act 2016
The Benami Transactions Act, is intended to crack down on property ownerships, where the source of income is not known. The Benami Transactions (Prohibition) Amendment Act, 2016, is an effort by the government to strengthen the earlier Benami Transactions (Prohibition) Act, 1988.
The benami (without a name) property refers to property purchased by a person in the name of some other person.
The person in whose name the property has been purchased is called the benamdar and the property so purchased is called the benami property. The person who finances the property purchase is the real owner.
The PBPT Act prohibits recovery of the property held benami from benamdar by the real owner.
As per the Act, properties held benami are liable for confiscation by the government, without payment of compensation. The act also allows for heavy penalties including imprisonment up to 7 years for indulging in benami transactions and imprisonment up to 5 years for furnishing false information.
The Act also applies to unaccounted cash parking in benami bank accounts.
The advantages can be huge, especially for the affordable housing sector. Sometimes the developer runs the risk of selling mainly to speculative investors, some of which may be benami transactions.
This Act will benefit the end users as the Act, in effect, intends to drive out speculative interest from the market. Small developers who depend on a handful of large investors for funds during construction phase may suffer as the investors may lose interest.
As Kolkata property market is not heavily investor driven, but rather depends largely on end users, there will be very little relevance of this Act in Kolkata.
The Act stipulates rigorous imprisonment of one year up to seven years, and a fine which may extend to 25% of the fair market value of the benami property.
Goods and Services Tax Regime will Benefit Consumers
The important factor would be the GST rate applicable on purchase of residential property. It is expected by the real estate fraternity that the GST rate on property transactions will be covered under the lower rate slabs (12 or 18 per cent slabs). In such a scenario, the consumers stand to gain as explained below.
For instance, construction activity / works contracts and also the sale of units before completion have been deemed to be ‘supply of services’. Therefore the tax would now be charged on the actual contractual base and there should not be any overlap of VAT and Service Tax on different portions of such contracts as done currently. This should lead to a reduction in tax costs. Also, given the effect of the free flow of credits, excise duty, CST, entry tax, octroi paid on items like steel, cement and other building materials which presently end up being a cost in the system will no longer exist. GST paid at the procurement stage will be available as input credit right from contractor to the developer. Hence, the contract prices should come down, which, in turn, should benefit the developers and finally the customers.
The developers will also gain as this will reduce paperwork and complying with various tax administering authorities will be replaced with a uniform structure of tax compliance.
Demonetisation of Rs 500 and Rs 1,000 Currency Notes
The real estate fraternity has unanimously welcomed the government’s move, to demonetise 500 and 1,000 rupee notes.
The move will impact the real estate sector in a major way. Land transactions, secondary sales of homes and the commercial segment, are likely to witness a significant negative impact. Transactions involving cash component will be unlikely to take place.
Kolkata property market is primarily an end-user driven market and therefore, barring some small developers who rely heavily on cash transactions, the effect will not be major.
However, over the medium and long run, demonetization along with all the other three measures will positively impact the real estate sector, eliminating black money. The affordable housing segment, where the value of homes is largely in the range of Rs 30 lakhs to Rs 50 lakhs, is not expected to be impacted much.
In fact, the expected reduction in interest rate will make it far easier to buy apartments in Kolkata, as the EMI amount will come down significantly.
In the long run, all the four measures will bring about a high standard of corporate governance to real estate industry. Greater transparency will help to weed out unscrupulous market participants. There will be opportunities for project financing by organized financial services industry and a greater role for the developers with a good track record.