Indian Financial Markets

Real Estate 135

Hyderabad, Pune, and scores of other locations. Indian newspapers and mag-

azines have been filled with stories of spectacular price increases in many of

these cities.

8.2 ACCURACY OF PRICES

Prices of land and real property reported to the government are often signifi-

cantly understated because both buyers and sellers have an incentive to report

a price lower than the one actually paid and received for the property. Let’s

take a typical transaction. Buyer and seller agree to transfer a flat at Rs.40 lakh

(about $100,000).

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Furthermore, they agree to do 10 lakh by check (called

white money) and 30 lakh in cash (called black money, because its tough to

trace and tax). It appears to the government that the property sold for 10 lakh

(the visible white money) which becomes the relevant number for both the

stamp tax paid by the buyer and capital gains taxes paid by the seller.

Stamp taxes, which are essentially title transfer taxes, are set at the state

level, or by the central government for Union Territories

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such as Delhi, India’s

capital. The stamp tax in Delhi, for example, is 8% for men and 6% for women

(a little piece of social engineering intended to get property into women’s names

to empower and protect them). Right next door to the Union Territory of

Delhi is Uttar Pradesh (Pradesh is Hindi for State). And while Delhi has one

of the lowest stamp taxes, UP has one of the highest at 10%. Capital gains

taxes are assessed at the federal level and range from 10 to 30%, depending

upon income. So reporting a lower-than-actual sales price benefits both parties.

The thing that prevents the reported price from getting too ridiculously low,

aside from pure credibility, is that banks finance a percentage of the reported

price. So, in the above example where the actual sales price is Rs.40 lakh, but

the reported price is Rs.10 lakh, a bank willing to loan 75% of the reported

purchase price would be lending only 18.75% of the actual purchase price.

Those who need bank financing would be likely to report something closer to

the real price. While there are no official statistics on this, it is felt that on

average transaction prices are reported at 40% of their true levels, meaning that

40% of the purchase price is given by check and 60% is given in cash.

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There

2

Remember that one lakh is 100,000 and one crore is 100 lakh or 10,000,000, and throughout this

chapter we will use the exchange rate of 40 rupees per US dollar. See Appendix C.

3

India is composed of 28 states and seven Union Territories, even though these numbers change

from time to time and Delhi is on its way to shifting from being a National Capital Territory to a

State. Union Territories are administered by the central government.

4

Income Tax Department Mulls Capital Tax on Property Deals by Prashant K. Sabu and

Siddharth Zarabi, November 28, 2007, Delhiscoop.com.