Budget 2018: Jaitley Proposes 5% Circle Rate Valuation; Realtors Give A Mixed Review

Budget 2018: Jaitley Proposes 5% Circle Rate Valuation; Realtors Give A Mixed Review

Budget 2018: Jaitley Proposes 5% Circle Rate Valuation; Realtors Give A Mixed Review
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If you thought that the Union Budget 2018 completely missed the real estate sector, you may be wrong. A small but an effective move was made by the Finance Minister Arun Jaitley in his Budget Speech for the real estate sector. He said, “Currently, while taxing income from capital gains, business profits and other sources in respect of transactions in immovable property, the consideration or circle rate value, whichever is higher, is adopted and the difference is counted as income both in the hands of the purchaser and seller. Sometimes, this variation can occur in respect of different properties in the same area because of a variety of factors, including the shape of the plot and the location. In order to minimise hardship in real estate transaction, I propose to provide that no adjustment shall be made in a case where the circle rate value does not exceed five per cent of the consideration.”

What does this mean?

The Finance Minister seems to have understood the vagaries that exist in the real estate sector. Due to the slump in the real estate sector, developers were willing to offer a discount to the homebuyers. However, even this price advantage failed to woo many homebuyers because stamp duty they had to pay was either on the actual selling price or the circle rate in the area as decided by the local body, whichever is higher. 

Why is there a gap?

Over the years, most of the unaccounted money made its way in to the real estate market. There have been multiple instances wherein a lower selling price was quoted so as to forgo a higher stamp duty, which ultimately hit the government's revenues. Therefore, a standardisation in the form of circle rates was brought in. However, it did not attract homebuyers as the difference between the selling price and the circle rate value was seen as unaccounted money and both buyer and the seller were taxed. In simple words, even if the developer gave you for a price advantage, after the tax, you wouldn't have had much in your pocket.

According to Pankaj Bajaj, president, CREDAI NCR, “The Finance Minister has amended section 43 CA and allowed for market transactions to happen up to five per cent below the circle rate without deeming the deficit to be the income in the hands of the seller and the buyer. While we welcome the move, it would have been better to do away with this provision entirely as in many places the market prices are way below the circle rates.”

Way forward

Going forward, if a property is being sold at a price lower than the circle rates, no adjustments would be made if it doesn't exceed five per cent of the consideration. Developers have welcomed the move of government recognising that the price variation within certain zones is possible and that the pricing gap has been an issue for long. However, there are some who are disappointed because they feel that the stamp duty should be levied on the actual selling price and not on the circle rate value. 

However, realtors feel that there could have been other ways in which real estate could have been given an indirect push in the Budget. Surendra Hiranandani, CMD, House of Hiranandani says, “The move to allow a variation of five per cent between transaction value and circle rates for computation of capital gains will not impact transactions significantly in any of the metropolitan cities in India. The massive push for improvement in infrastructure, including significant capital expenditure for roads, railways and development of smaller airports will indirectly benefit the real estate sector in the long run.”

However, it wouldn't be wrong to say that hardships in real estate transactions would now be minimised if not omitted.

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