- The builders/developers will face huge shortage of capital as they were relying heavily on cash reserves to complete projects.
- Most real estate transactions a mix of ‘cheque’ and ‘cash’, so there will be disputes and delays in possession between home buyers and developers.
- With the ban on transactions on high value currency notes, the transactions in areas with lower circle rates will also reduce significantly.
- With the lack of cash reserves to finish the construction of these projects, the builders will face a steep rise in cumulative project development costs.
- With the removal or reduction of the cash component on these transactions, the stamp duty will be payable on the full consideration value of the transaction.
- Transactions, which have thrived on the exchange of cash, will transpire in the absence of readily available cash currency.
Immediate effect on India’s real estate market based on Modi’s ban of high value currency notes (INR 1000 and INR 500):
1. Real Estate Regulatory Authority (RERA)
With the onset of RERA Rules being notified in a phased manner by various States and UT’s, builders/developers across the country were rushing to complete existing projects in order to avoid prosecution under this stringent law.
Several builders who had misutilised allottees’ money and/or had exhausted their credit facilities with commercial lenders, were relying heavily on their cash reserves to complete these projects. These cash reserves will be rendered redundant by midnight after the Prime Minister’s revolutionary announcement.
RERA mandates that 70 percent of allottees deposits be kept in a separate bank account (which is monitored and regulated) to be effectively utilised for that specific project, which the money was paid for. With the developers having to deposit such large amounts, they were facing a huge shortage of capital and were relying heavily on cash reserves to complete projects.
Real estate are expected to be worst hit after the crackdown on black money.
2. Cash Component in Existing Transactions
Most real estate transactions in India traditionally have a mix of ‘cheque’ and ‘cash’ component. In thousands of cases where honest taxpayers have already executed buyer agreements and paid the cheque component of the consideration value, they will be unable to complete the balance payment in cash, which is demanded by the developers in order to take timely delivery/possession of their properties.
This will lead to an unprecedented increase in disputes and delays in possession between home buyers and developers. Such disputes will result in their hard-earned tax paid money (as well as their cash savings) being locked up proving to be of little or no use.
Developers will not agree to handover the developed units without payment of full consideration as agreed to in the buyer agreement.
3. Circle Rates
With the steep increase in circle rates in cities such as Delhi, it was the lower strata of the real market which was helping builders/developers to stay afloat.
Most of the transactions in areas with lower circle rates had a cash component to them which enabled builders/ developers to complete purchase and sale transactions to retain a steady flow of income even though a certain strata of the market was stagnant.
After the ban on transactions on high value currency notes, the transactions in areas with lower circle rates will also reduce significantly leading to a slump at both ends of the real market spectrum.
4. Issues in Payment of Project Costs
While heavy materials used by developers are bought in bulk and several project costs are made by way of cheque payments, there are several costs involved in project development which are paid for in cash by developers.
Labour, transportation, minor miscellaneous costs etc. are usually paid partly in cash to cushion the costs of taxes, duties etc. and avoid legal compliance.
With the lack of cash reserves to finish the construction of these projects, the builders will face a steep rise in cumulative project development costs leading to a further delay in completion of projects (which may result in developers abandoning projects citing lack of availability of funds for completion).
5. Stamp Duty
Stamp duty is ordinarily payable on the consideration value of transaction or on the circle value of the property being transferred, whichever of the two is higher.
Traditionally, where there was a cash component involved in the transaction, the stamp duty would be purchased only on the minimum circle value of the transaction and the remaining part of the transaction consideration would be paid in cash thereby lowering the overall cost of the transaction.
With the removal or reduction of the cash component on these transactions, the stamp duty will be payable on the full consideration value of the transaction (since the entire amount will be paid in cheque). This may result in payment of higher stamp duty, which is beneficial for state revenue, but a substantial increase in cost on the property buyer.
6. Payment of Land
While developed units and commercial building are ordinarily financed by financial institutions, majority of the land cost in India has traditionally been paid for in cash (especially for agricultural land, where the price of land decided by the revenue department has been relatively lower than urban areas).
In the future, it will be interesting see to how these transactions, which have thrived on the exchange of cash, will transpire in the absence of readily available cash currency.
While the aforementioned key issues highlight certain issues which may be faced in the near future, it will be hard to determine at this point how the reduction of the cash component in real transactions will pan out.
In the long term this move may prove to be a boon for both the government and the end users of real estate. It may also help in removing the corruption and difficulties which have plaguing the real estate market.
(The writer is a real estate lawyer based in New Delhi. This is a personal blog and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)
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