Not All Black And White

In a general environment of clean-up anti-corruption campaigns by activists, arrests of tainted politicians and businessmen, and attempts (however meek) by the government to nail Indians who have money stashed in Swiss Banks — the Income Tax department recently announced its intention of doing its bit.

The department has decided it would scrutinise all recent property deals in Delhi and the National Capital Region to check for the use of cash and to unearth black money, though it has not specified the period or criteria of scrutiny.

It is well known that nearly all real estate transactions in India have a cash and a cheque component. In most cases, the cheque component is a few hundred rupees above the circle rate of the region, while the rest of the money is accepted in cash. Both components are equally important to the buyer and the seller, since when one uses the proceeds of a sale to buy a new property, the new seller, too, will want cash. If the cash component is very high, it can also be converted into a cheque at a small premium.

Income tax officials, however, feel that little can come of such announcements for various reasons. One is that such transactions are already being scrutinised by the department although not very successfully.

Millions of deals take place every day and the department simply does not have the "wherewithal" to track all of them. Moreover, even if it gets a tip-off, unless it swoops down, conducts a search and catches either party with the cash red-handed, in most cases, it is very tough to gather enough evidence to try the case in court. Even if it lays its hands on agreements (which, in many cases, actually mention the cash component), these cannot be used as evidence since they are not finalised contracts but just agreements to sell.

In most cases, the department finds it cannot pin down the parties in a court of law for lack of evidence. Proof for these under-the-table deals is hard to come by, and bringing them to book is near impossible.

Ironically, when a comparable deal is done legitimately, that is, all white, officials may raise eyebrows, summon the parties concerned and generally harass them. Often, to be let off the hook, the parties are forced to pay a bribe to the officers in charge.

What the real estate sector needs is professionalism, lower stamp duties across the board and a regulator that is stronger than a Securities Exchange Board of India (Sebi) or a Telecom Regulatory Authority of India (Trai), is backed by law and has teeth to prosecute. These steps may be more effective than announcements that everyone takes with a large pinch of salt.

Another way to tackle the problem of cash in real estate deals is to reduce the incentive to evade. As things stand, from the buyer's point of view, the higher the declared price of the house, the more he has to pay to register it. For the seller, the higher the white money component, the higher is his capital gains tax liability. Hence, both sides have a reason to avoid cheque transactions beyond a certain value.

In the absence of actual changes of the kind mentioned above, if alternative attempts are to be taken seriously, they should be limited to a certain period, to deals above a certain floor (say, Rs 10 crore and above) with active use of technology by honest, incorruptible officials. This may be a tall order.

(This story was published in Businessworld Issue Dated 09-05-2011)