The Madhya Pradesh government has decided to overhaul its benchmark rates for land in order to boost transactions and unlock the real estate market in the state. Though the state has followed examples set by the Tamil Nadu and Haryana governments among others, real estate experts do not see the move helping the sector that has been hit by a slowdown for some time now, unless the market rates for home buyers come down, too.
The decision is a first move by the Kamal Nath-led Congress government to simplify land rates. It is expected that in order to avoid any impact on the compensation, that is given based on these rates when land is acquired for industrial and other purposes, the state is likely to increase the compensation amount to 2.5 times from the current two times of the guideline rates.
The state Cabinet on Wednesday decided to reduce the guideline rate, uniformly across state, by a factor of 20 per cent. But, the maximum registration rate in urban areas has been increased from 10.3 to 12.5 per cent and in rural areas from 7.3 to 9.5 per cent so that there is no net revenue loss to the state, The “market value guidelines” (guideline rates or circle rates) are used for charging stamp duties, cess, registration fees. "The move is expected to be revenue neutral for the state government while at the same time help in revival of construction and real estate sector," Manu Srivastava, principal secretary, commercial tax, in the Madhya Pradesh government, told Business Standard.
Anuj Puri, chairman ANAROCK Property Consultants, welcomed the move, but said that by simultaneously increasing the registration cost the government had more or less nullified any positive impact on homebuyers, particularly those who register their property at the actual price (or market value) they paid to the builder/seller. “The softening of circle rates would impact positively only if the property prices soften. On the flipside, this move could lead to increased cash transactions, especially in areas where the circle rates are much below the market rates,” said Puri adding that the move could negatively impact the exchequer more than the actual buyer.
For instance, in most cities, the circle rate/guideline rate is lower than the actual market rate at which the buyer buys his property. Moreover, to save on the registration costs, most homebuyers often register their property on the basis of circle rates instead of the actual market value of the property that they pay. “Thus, by lowering these rates by 20%, the gap between the market value and the circle rate will further increase, giving way to more cash transactions,” said Puri.
Rates are decided by district valuation committees after approval from central valuation board in the state, are called
Madhya Pradesh CM Kamal Nath. Photo: @ANI
) rates. For transactions done below these rates, incomes tax is calculated on the guideline rate which increases the outgo for the seller.The state has also made changes in applicable fee where women are co-owners. Presently, if wife and/or daughter is included as co-owner in a property, the instrument is chargeable at an ad-valorem rate of 1 per cent stamp duty and 0.8 per cent of registration fee. It has been decided to cap such stamp duty at Rs 1,000 and registration fee at Rs 100 to promote inclusion of wife and/or daughter.
Similarly, stamp duty on instrument of gift of immovable property to family members is charged at an ad-valorem stamp duty of 2.5 per cent and registration fee of 0.8 per cent. The state decided to reduce stamp duty to 1 per cent and subject to maximum of Rs 500, and registration fee subject to maximum of Rs 100.
Srivastava said agricultural land, land in and around urban areas were defragmented and sold out to small investors over a period of time. Smaller land size have higher market value guideline rate per unit area as compared to larger land parcels, since they are used for residential or commercial purpose.
This, however, led to anomalies in the value of land, if they are to be reconsolidated or defragmented again for a project, or larger size agricultural operation. "Same land when in a multiple parts purchased from multiple users to consolidate into one would cost anywhere from twice to ten times, depending on the size of individual pieces, than the same land when if it were a single parcel of the land. This anomaly has been removed and from April 2019 onwards any defragmentation or reconsolidation in a single instrument will be evaluated as it were a single consolidated larger piece," said Srivastava.
Tamil Nadu had in 2017 also reduced these rates. “Even though the move was aimed to curtail the soaring market value of property, it barely succeeded. It paved the way for more black money transactions in the realty business because property prices (market value) maintained status quo with no reduction. Thus, In fact, the widening of the difference in market value and guidance value is most likely to have ended up as becoming a cash transaction in a property deal,” said Puri.
He cites the example of Haryana which reduced or revised circle rates twice a year in 2017 so that property sales in the city like Gurgaon could see an uptick. In fact, Gurgaon is one city where in few micro markets the gap between the circle rate and the market value is almost at par or has very minimal difference, said Puri.