Will this reduce speculation in real estate?

Tue, 5 Mar Pre-Open

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Property prices have witnessed an unprecedented rise over the last few years. Speculation was one of the primary reasons for it. But it seems that the speculation game might well come to an end soon. The Union Budget of 2013 has taken a number of steps to curb the unnecessary speculation in property prices. This is likely to bring some sanity into the real estate market.

Let us have a look at few measures that are being proposed by the government to reduce speculation. We know that most of the real estate transactions have a black money component attached to it. This not only reduces the tax revenue of the government but also fuels further speculation in the market. That's because the black money generated from that transaction is further re-invested into the real estate market itself. It is not possible to invest in other investment avenues as that would attract tax men's attention. Thus, the money is churned into real estate again which fuels speculation and rising prices.

However, the government's measure to impose a TDS of 1% on property transactions above Rs 5 m is likely to dissuade speculative high end real estate transactions. It will also bring in more transparency and improve the reporting standards.

Secondly, the government has also proposed another measure to tax gains made on undervalued properties. There are innumerous cases of property purchases where the agreement value is way below the ready reckoner rates. It may be noted that stamp duty is paid on ready reckoner rates. Thus, structuring a transaction below the reckoner rates helps in evading taxes. However, henceforth if the agreement value is below the reckoner rates the difference will be taxable in the hands of the buyers. This will reduce the cases of the undervalued property transactions.

Lastly, the government has also reduced abatement on service tax for apartments that are valued at Rs 10 m or more. Earlier the abatement figure was 75% and now it is 70%. Thus, rich will have to pay more service tax now. But considering that the luxury class will be indifferent to this increase we do not expect this measure to produce the desired impact on curbing speculation. It is more of a measure to fill government coffers. However, the first two measures are likely to reduce the speculation in the real estate market. And this is likely to benefit the sector in the long term.