Thursday, November 24, 2016

Cash and Real Estate

"Heroes need monsters to establish their heroic credentials. You need something scary to overcome."
—Margaret Atwood (Canadian, 1939)
Word for the day
Duende (n)
Charm; magnetism.
A goblin; demon; spirit.
Malice towards none
Who has created this illusion that the government has demonetize 86% of Indian currency?
The current effort is just an exercise to replace the old high denomination notes (HDNs) with the new HDNs.
The assumption that some of the existing HDNs may not be presented for replacement is just that - an ASSUMPTION.
First random thought this morning
Till May 2014 many termed PM Modi as divine intervention that will cure India of all its ills. The detractors termed him as Taliban, who will destroy the core fabric of the Indian society by communalizing it.
Both the extreme views have proven to be mostly wrong.
The history is repeating itself with Donald Trump.
Will history repeat again with Donald Trump?

Cash and Real Estate

Continuing from tomorrow (see here), I would like to share my understanding of the real estate market dynamics in India with the readers. Admittedly, my views do suffer from limited knowledge of the real estate markets, as I know about the practices only in 10 states. I assume the practices are similar in most states.
To estimate the impact of the abolition of old high denomination notes on real estate market in the country, it is important to understand the role of cash in the market dynamics.
·         A large part of the land parcels for development of real estate projects, originate from the farmers or sick industrial units that have closed operations. In recent times, the government has also announced release of land parcels owned by CPSEs etc. for redevelopment.
In case of farmers, there is no capital gains tax on sale of agriculture land, hence no tax motivation to receive payment in cash. The farmers receive cash in consideration of land sale either out of habit of dealing in cash, or buyer willing to pay little extra so that he could save on stamp duty and registration fee etc. In some cases buyers are willing to pay little extra as they do not have sufficient white (accounted and legal) money to pay as consideration.
However, in case of sick industrial units, great motivation to receive cash is present due to (a) first right of lenders on any sale consideration received; (b) huge tax liability on capital gains; (c) unwillingness of promoters to share the sales consideration with minority shareholders; (d) corruption of the nominees of financial institutions on the board of such companies.
In case of redevelopment of government/CPSE properties, the role of cash is mostly limited to the corruption in the award of contracts.
·         It is not necessary that the involvement of cash always leads to inflated value of the underlying deal. In many cases cash involvement leads to both parties agreeing to lower sales consideration as they save on taxes and duties.
·         In many cases, the buyer has to convert his white money into black, as the buyer insist that a part of the sales consideration be paid in black money. In a large number of cases, buyers are black & white agnostic.
·         The stock of black money perpetuates the role of cash in real estate deals as the seller insists on cash because he has to pay cash in the subsequent deal he is negotiating.
·         The smaller developers accept cash from buyers, as they sell cheaper and try to save cost by saving on VAT, Service Tax, etc. payable on the construction material and construction related services
·         The sources of cash that is used in the real estate deals are primarily (a) bribes received by public officials; (b) money earned through illegal means like smuggling, drugs, ransom, extortion; (c) tax evasion by not accounting the full revenue or accounting fake expenses...to continue

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