CHAPTER 1

PARALLEL ECONOMY IN REAL ESTATE

CHAPTER 1: INTRODUCTION TO PROJECT

1.1 INTRODUCTION

This project focus on the black money in the real estate. And the government initiatives

taken against the black money in the real estate.

The use of unaccounted money in the real estate market of urban India has emerged as a

major problem. The purchase of land is paid for 'under the counter', bungalows and flats are

transferred through ingenious devices such as 'power of attorney'. To escape the tax payment

frequent under-valuation of immovable properties is resorted to. Although it is difficult to assess

its dimension accurately, the growing influence of black money in the real estate sector is well-

known. The use of black money in real estate market, besides significant loss of revenue to the

government due to widespread tax evasion, has its distortionary effects on prices. As a

consequence, the residential land and buildings in urban India in general, and metropolitan cities

in particular, have registered steep increases in prices in the recent years. While the long-

standing shortage of housing in the country could be a reason for the recent spurt in prices, there

is a strong suspicion that black money in the real estate market is influencing the present trend.

1.2 OBJECTIVES OF STUDY

On the above premise the following are the laid down as the objective of the study.

1) To understand the parallel economy in the real estate.

2) To understand the government initiatives.

3) To study the functioning of black money in the real estate.

1.3 RESEARCH METHODOLGY

1) Scope:

The scope of this project is confined to the study of the parallel economy in the real estate

and the impact of black money in the Indian economy . A case study on parallel economy is also

carried out.

S.I.E.S COLLEGE OF COMMERCE AND ECONOMICS, SION 1


2) Sources of Data:

The data has been collected from secondary sources from various websites and also

referred the books.

1.4 LIMITATION

Some of the limitation are faced during the project are :

1) The information collected is limited by the authenticity and accuracy of information. The

data collected from the website are limited.

2) The time predefined for these project is very short for covering such a big project.



CHAPTER 2: PARALLEL ECONOMY

2.1 INTRODUCTION

Parallel economy means functioning of an unsanctioned sector in the economy whose

objectives run parallel and in contradiction with the objectives of official or sanctioned or

legitimate sector in the same economy. This is variously referred to as ‘unaccounted economy’,

‘illegal economy’, ‘subterranean economy’, or ‘unsanctioned economy’. According to the D.K.

Rangnekar, “If the ‘Parallel economy’ poses a serious threat to stability and growth of the

official economy, surely it stems from the fact that the magnitude of ‘black‐money’ is large and

rigged deals are growing in volume and complexity at an alarming rate. Apart from the wide

ramifications of the ‘parallel economy’, one might also be alive to the fact that ‘black incomes’

are accentuating the inequalities in income and wealth and breeding a new class of ‘black’ rich in

a society which is already harshly stratified.”

Illegal economy is tax-evaded economy. It is possible to convert illegal economy or black

money into white money and vice versa. For example, when a person manages to get the receipt

from the shopkeeper by paying the sales‐tax for a commodity but does not purchase it actually,

he generates black money as reimbursement is made to him against the receipt. The money not

actually paid is the black money in such a case. In such case, the shopkeeper sells the same

commodity to another person without giving him any receipt for it. On the other hand, if a person

purchases something and plays Rs. 15,000 for it out of white money but gets a receipt of only

Rs. 10,000, the balance of Rs. 5,000 becomes black money for the seller. In this case, the white

money becomes the black money.

The parallel economy has political, commercial, legal, industrial, social and ethical

aspects. There are wide confrontations between the objectives of the legitimate and illegitimate

sectors under parallel economy. It was argued by D.R.Pendse that there are two possible sources

of black money. Firstly, it may originate from illegitimate source of income arising out of illegal

gratification such as payment of ‘Selami or Pagri’ or income from smuggling, bribery etc.

Secondly, it may originate from legitimate and legal sources of income but concealed from tax

authorities out of tax evasion.

The basic objectives of this paper are to analyze the causes of parallel economy, its

impact on the economy and various initiatives of Indian government for solving this problem.



2.2 CAUSES OF GENERATING BLACK MONEY

There are many reasons for the creation of back money in India. Some of them are as

follows:

Controls and licensing system:-

Black money is increasing in India for the reasons of controls, permits, quotas and

licenses.

Higher Rates of Taxes:-

Higher rates of taxes has resulted a growing tendency of tax evasion among the tax

payers. Tax evasion is common in income tax, corporate tax, corporation tax, union excise

duties, custom duties, sales tax , etc.

Ineffective enforcement of tax laws:-

In India, the enforcement of tax laws in respect of income tax, sales tax, excise duty,

stamp duty etc. is quite weak. This has led to enormous unrestrained evasion of taxes and piling

up of black money.

Funding of political parties:-

There is an upward tendency of supporting of political parties with the help of black

money. Big trade houses are donating an enormous amount of black money to the political

parties, especially the ruling party with the sole objective to tame the political leadership for

deriving undue profit by manipulating policy decisions.

Second World War after influence:-

During the time of Second World War, a lot of the Indian industry found circumstances

favourable for black marketing. Supply industrial goods from the traditional supplies of the West

were cutoff, which resulted severe shortages in many essential fields. This formed the sentiment



of making of marketing money out of shortages and not out of extension of the business

activities.

Inflation:-

The addition in prices of commodities like petrol, etc. in international market, boost in

prices of commodities due to high increase in duties and taxes imposed by the government, the

conspicuous utilization created by people with unaccountable money, diverting resources from

manufacture to speculation‐ all these is the root of inflation which in turn creates black money.

Agricultural Income:-

The reluctance to bring agricultural earnings in the realm of income tax has also

contributed to creation of black money. Big industrial houses, over the past few decades have

entered the agriculture sector in a big way by acquiring big farms. The black money accrued

from other sources is sought to be transformed into white by viewing it on the agricultural

returns account.

Privatization:-

Privatization has opened up a new area to the private sector as well as to ministers and

bureaucrats for making black money. It is expected that many scams come to light for making

black money through privatization.

Transactions in Urban Real Estates:-

Real estate transaction is a significant source of generating black money in India. Since

the sale of property on lease hold is permitted by the government only at a payment of certain

amount of premium to it, the lessee generally completes this transaction through the power of

attorney so that they escape from paying the premium which is fixed on the basis of the

difference between the current market price and the price fixed by the government. In case of

freehold property or the property in which there is complete transfer of ownership at one go, the

black income is generated through the sale of the property at the actual value but registering it at

a lesser value than the sale value of that property. Thus, a vicious circle is established in the sale

and purchase of different kinds of property. In other words, the pugree system is also another



source of black income in the property business. It is both the outlet ad the source of black

income as there is net absorption of black income of the seller.

Other Factors:-

Generation of black income in a country like India also results from other different

activities like smuggling, property deals, bribery, kickbacks, commissions, concealment of

income by professionals, artists etc. In this way an enormous amounts of black income

incessantly results in enhancement of the area and activities of parallel economy.

2.3 IMPACT OF BLACK INCOME ON THE INDIAN ECONOMY

Generation of black income and thereby establishment of parallel economy has been

creating the following serious impacts on the social and economic system of the country.

Black income has been causing underestimation of GDP in India as an enormous volume of

income is diverted to this unaccounted sector resulting in growing continuation of parallel

economy of the country.

The direct effect of black income is the loss of revenue to the state exchequer as a tax

evasion.

Black money has resulted in the diversion of resources for the purchase of real estate and

luxury housing.

Black money has resulted in transfer of funds from India to foreign countries through

clandestine channels.

The availability of black incomes with businessmen and capitalists and the consequent

inequalities of income place a large amount of funds at their disposal.

A part of the black incomes is held in cash and as a result there is an abundance of liquidity

which becomes available through the addition of savings held in the form of cash, bullion,

gold, silver, etc.

Money evaded by illegitimate way is spent in undesirable and vulgar manner. Virtues like

hardwork and honesty are underestimated.



Thus the existence of parallel economy has totally distorted and disrupted the planning of

the economy of the country.

2.4 GOVERNMENT INITIATIVES

Departure from the previous UPA government’s reluctance to set up SIT even after the

Supreme Court had asked to do so.

Modi government constituted the SIT within two-and- a-half days of forming the

government.

The government is well aware that all money stashed in foreign banks is not black and there

is a need to investigate each case properly. Moreover, disclosing names of the account

holders in foreign banks violates the confidentially clause in treaties with other countries.

With a fresh list of account holders making waves, the SIT is considering all old and new

cases and efforts are being made to complete the probe by 31 March.

A delegation led by Shaktikanta Das, Revenue Secretary had visited Switzerland on 15

October last year and held discussions with the Swiss Finance and Tax Authorities on issues

relating to Exchange of Information in tax matters. Switzerland has indicated willingness to

provide information in respect of cases where investigations have been carried out by the IT

Department independently from what Swiss Government considers as stolen data.

The Swiss Federal Tax Administration has agreed that their competent authority would assist

India in obtaining confirmation of genuineness of bank documents on requests by the Indian

side and also swiftly provide information on requests relating to non-banking information.

Switzerland has also assured that they would commence talks with India for concluding an

Automatic Exchange of Information (AEOI) Agreement between India and Switzerland at

the earliest, after completion of their domestic procedures. This is the first time that

Switzerland has agreed to commence discussions on a bilateral agreement on AEOI.

Combating unaccounted money and tax evasion is not an easy task. However, the

government’s initiatives are yielding positive results. Negotiations with Swiss authorities and

other measures would assist the Income Tax Department in its investigations. The government



has also assured that the cases are in the advanced stage of investigation and all names will be

made public.

Taxation experts recommend that the new government should come out with a six-month

amnesty scheme that will facilitate transfer of such funds back home on voluntary basis with

payment of 40 per cent tax. They point out that the 40 per cent tax deduction is ten per cent

above the maximum effective tax on income and would dissuade misuse of the scheme for

turning internal black money into white through a transfer mechanism.

2.5 CONVERT BLACK MONEY TO WHITE MONEY

The following are the ways used in India to convert Black Money to White Money

1. Donation to Charity:-

Simply donating anonymously the black money to some charitable institution and it

would convert into white money. Even though there is some tax exemptions for charitable

donation, the black money holders cannot donate with their name, because they have to show the

account for that amount. It is one of a method of transferring Black Money to White Money. But

very few follow this method, because there is no advantage for the donator.

2. Altering the Source of Income:-

Get to a Jewellery. Give him the amount you want to convert into white as cash. He

would give you a Cheque back for the same amount less some percentage. He would give you

a purchase bill to show that you have sold Jewellery to him. On the amount of the cheque when

you file your returns you will have to pay capital gain tax, the money is white now. Source of

income is sale of jewellery.

3. Using the money for Fraudulent Transactions:-

If you want to get a medical/engineering seat you have to pay something for which

no receipt is given. The something amount you pay cannot be shown officially because the giver

and taker both will face government problem. In this way, you can’t convert the Black money to

white money instead you can use your black money. It is again Black money for the recipient.



4. Investing in Movies:-

Now, the Black money is invested in Bollywood to make the money white. But not

directly.

5. HAWALA:-

It is one of the Famous method used to convert black money to white money.

Money is transferred via a network of hawala brokers, or hawaladars. A customer approaches a

hawala broker in one city and gives a sum of money to be transferred to a recipient in another

city. The hawala broker calls another hawala broker in the recipient's city, gives disposition

instructions of the funds and promises to settle the debt at a later date.

6. Through Real Estate:-

The BM holder buys land worth 20lakhs. But he shows the government that he bought

that land for 1 crore. With a loss of 20 lakhs, remaining 80 is converted into white.



CHAPTER 3: PARALLEL ECONOMY IN REAL ESTATE

3.1 INTRODUCTION

In recent years, the use of unaccounted money in the real estate market of urban India has

emerged as a major problem. The purchase of land is paid for 'under the counter', bungalows and

flats are transferred through ingenious devices such as 'power of attorney'. To escape the tax

payment frequent under-valuation of immovable properties is resorted to. Although it is difficult

to assess its dimension accurately, the growing influence of black money in the real estate sector

is well-known. The use of black money in real estate market, besides significant loss of revenue

to the government due to widespread tax evasion, has its distortionary effects on prices. As a

consequence, the residential land and buildings in urban India in general, and metropolitan cities

in particular, have registered steep increases in prices in the recent years. While the long-

standing shortage of housing in the country could be a reason for the recent spurt in prices, there

is a strong suspicion that black money in the real estate market is influencing the present trend.

There are two apparent reasons for the real estate to have become the nerve centre of

black money. First, the real estate properties such as land and buildings have become

increasingly attractive for transaction through unlawful modes of concealment like the

understatement of actual value. Second, once black money enters into the real estate market it is

finding a safe haven from being caught by the tax enforcement authorities. The 'attractiveness'

factor of the real estate sector as a channel of preferred investment could be explained, at least

partly, by the persistence of inflationary pressures and scarcity of urban land and housing in the

country. Under conditions of inflation the value of savings in the form of bank deposits or bonds

depreciates in real terms. In contrast to these assets, the rate of increase in land prices remains

higher than the rate of inflation resulting in the appreciation of the value of investment. So many

investors have looked to real estate as an avenue of investment in an appreciating asset. Urban

land is thus acquiring the status of an investment good as well as store of value, apart from being

a consumption good for a large number of households.

The reason for the real estate becoming a safe area for the operation of black money, on

the other hand, rests largely on difficulties of deciding the value of real estate properties, and the

scope for undetectable under-valuation in the existing provisions of Central and State tax laws. A

unified method of valuation among the tax administering authorities at Centre, State and local



levels is absent. The price that gets determined in the free market by the forces of demand and

supply is, mostly, absent in the real estate market due to a highly regulated land market and

master planning system, problems of land use conversion, delays in the provision of city

infrastructure, and the cumbersome approval system. The provision for auctioning of land and

buildings by the government does indicate a market price, but the valuation problem remains far

from being resolved in such an approach, as the prices quoted by the bidders reflect the scarcity

premium due to inadequate supply. Taking advantage of weaknesses inherent in the valuation

problems in real estate, buyers and sellers resort to undervaluation in order to avoid the payment

of capital gains tax, higher wealth tax, and the fixation of higher rateable value, besides other

levies resting on the declared property value.

The need for an appropriate policy to tackle the problem of black money in the real estate

cannot be overlooked. The policy has particularly to take care of the important urban centres

which are increasingly bearing the consequences of the operation black money. While there are

no easily available solutions to the black money problem, a good opportunity to start containing

it has been opened up by the policy of economic liberalisation. Some of the avenues of black

money generation, that sprang up as the unintended effect of the preceding policy regime would

decline under a more transparent regime and reduced controls. The policy could, therefore,

concentrate on avenues that still remain open to black money due to artificial scarticity and

control.

A major task before the National Housing Policy (NHP) spell out clearly the areas under

the Enabling Strategy that need government intervention in order to reduce the scope for

speculation and the use of black money. This was in fact referred to in an earlier draft of the

NHP. The major areas where suitable modification of the existing policies may have to be

effected appear to be the legal obstacles posed by Urban Land Ceiling Act, Rent Control Acts ,

Stamp Act and Registration Act, the prevalent valuation procedures, the rigid Master Plan and

approval systems, property titling systems,and fiscal policy in respect of real estate. Since a

number of steps have been initiated under the liberalisation programme, it may be necessary to

point out the additional tasks before the government.



3.2 STRUCTURE OF REAL ESTATE MARKET

The market structure of real estate in the metropolitan cities of India is examined in the

following. Keeping in view the objective of the present analysis, an attempt is made to focus on

the emergence of a small number of operators in real estate that makes collusion easier to

sustain.

1. Government policy as applied to urban areas:-

The Government policy on real estate market is responsible in a major way for the

emergence of the present market structure. Due to Land Acquisition Act, Rent Control Act,

introduction of a land policy in 1963 and Urban Land (Ceiling and Regulation) Act, activities of

real estate have come under the control of a few participants. The Government acquired a

substantial control on urban land market due to some of the above policies. As it could be seen,

the Urban Land (Ceiling and Regulation) Act, 1976, empowered the Government for acquisition

of the excess vacant land above a certain limit with a single property holder. Also it imposed

certain restrictions on the transfer of land in urban agglomerations. Besides land, a substantial

proportion of houses demanded in the important metropolitan cities of India was also supplied

through the construction undertaken by the Government agencies.

However, the supply was not adequate to meet the demand arising from different income

groups. Consequently, housing units went to a selected few who could pay the price in an illegal

transfer. One of the consequences of land and housing policies is the emergence of people with

big money in the construction business of big cities. Describing the situation in Bombay, for

example, Dange points out that 2/5th of the new construction is controlled by 20 builders. Out of

this, a single builder claims 2/3rd of the share. The study also describes a similar pattern

influence of the real estate brokers on the construction activities of Madras and Calcutta.

2. Private operators and market structure:-

As pointed out above, the public sector policy on the urban real estate failed to develop a

regulated market to meet the demand of urban consumers. Consequently, the attention of these

consumers got diverted towards the private sector. The following presents the market structure of

the real estate keeping in view the activities of the private sector. Three groups of people, viz., (i)



big real estate developers and constructors, (ii) real estate agents and (iii) individual consumers

and investors entered it.

A large chunk of potential residential land and building seemed to be controlled by the

first two groups due to their access to organised and unorganised financial markets. The

individual investors from the third group also acquired some properties in the first half of the

1980s. But they are not as active in their participation as the real estate agents and builders are

determining the prices of properties transacted. In terms of behaviour, they could safely be put in

the category of price takers where the price is set by the real estate agents.

3.3 FUNCTIONING OF THE MARKET

1. Operation of the property dealers:-

The entry barriers created by Government regulations described above has helped the

property dealers in limiting the number of operators. In the absence of large scale entry into the

sector, the incumbents seem to be functioning without threat of competition. The real estate

agents concentrate mostly on the acquisition of small plot of vacant land as well as residential

buildings, authorised and unauthorised, in the city and sell these off after waiting for a while to

allow the land value to appreciate. Their success in enticing customers to the unauthorised

colonies is well documented by some studies. The finance for this activity comes from the

unorganised financial market as organised credit market does not provide credit for the purchase

of land. Besides, they act as the middle men in selling, purchasing and renting-of private houses

as well as other categories of flats in metropolitan cities. The entry into the business of property

dealership is also fairly restricted due to restricted supply of credit. While there is the necessity

of borrowing large sums of money at a short notice when the opportunity of acquiring some land

or a building comes up, the unorganised credit market which supplies such finances requires

known customers rather than a stranger to minimise the risk of detection of black income.

2. Operation of big developers and builders:-

The big real estate developers and builders operate on a much larger scale in acquisition

of land compared to the real estate agents. Many of them have enlisted themselves as corporate

bodies and raise their finances from the organised capital market. Their acquisition of land is



based on the programme for short and long term house construction. The availability of land with

unique locational advantage in terms of accessibility, transport cost and developed market has

been the prime target of big developers. As undivided long patches of land are no longer

available in the developed centres of the cities after the introduction of the Land Ceiling Act,

they concentrate in acquiring the undeveloped land in the suburban rural areas, often stretching

their activities to ring towns of the metropolitan areas.

3.4 TAX EVASION IN REAL ESTATE

There are numerous ways of tax evasion taking place in real estate. Taxes - Central, State

and local - are evaded by the processing of unauthorised land development and sale in big cities,

unauthorised construction or use, conversion of properties, their renting or sale arising from

inflexible master plans and building regulations, or ineffective control over urban development

by public authorities. The amount of black money generated in these types of illegal activities get

multiplied in every successive stage of transaction. Some of the other practices commonly

observed while transferring properties are (i) a will, (ii) a simple agreement between seller and

buyer, (iii) a General Power of Attorney and (iv) a cash receipt.

A. Tax evasion through understatement of the value of properties:-

In the instrument of transfer, buyers and sellers do not report the correct value of the

property. Both the parties benefit from such a strategy by way of saving from the payment of

capital gains tax, stamp duty and registration fees. To deal with such cases, the government has

been taking the help of provisions of the Chapter XXC of the Income tax Act, 1961 and the

Appropriate Authority is purchasing all such suspected under-reported properties valued more

than Rs 10 lakh entering the market for transfer. As the validity of the resorting to this provision

is upheld by the Supreme Court of India, the strategy of acquiring suspected properties is likely

continue. Since it started operation in 1986, the Appropriate Authority has passed order to

acquire as many as properties.

B. Other forms of evasion:-

1. Agreement to sell:-



Taxes, in the transfer of real estate properties, are evaded as well as avoided by devising

methods which ensure the possibility of a court of law enforcing the contract in case of any

conflict between the parties. Under the Indian system, an Agreement to Sell with possession has

become convenient for carrying out the transfers. Mention may be made of the following

provisions of Indian Registration Act, 1908, Transfer of Property Act, 1882 and Specific Relief

Act, 1963 that are used to execute the transactions without paying transfer Duty and stamp Duty:

a) An Agreement to sell with transfer of possession is not required to be compulsorily

registered under section 17 of the Indian Registration Act.

b) Section 53-A of the Transfer of Property Act ensures the legal validity of a contract in

case of an agreement to sell with possession given.

c) The Specific Relief Act states that if the buyer is willing to make payment of the balance

amount of an agreement, he cannot be asked to hand over possession back to the seller.

These provisions combined ensure that the Agreement to Sell with possession is a clever

way of executing a transfer without paying stamp duty and registration fees. Its attractiveness

increases under the regime of regulatory policy because the restrictions on sale and purchase of

land and buildings could be circumvented.

2. General power of attorney:-

In recent years, the practice of transferring properties through General Power of Attorney

has been increasingly resorted to. It is used to designate someone as the duly authorised agent of

the executor to do all acts as specified therein on his behalf in respect of the property. Parties

involved in a transfer of immovable property avoid registration through this method. The Power

of Attorney, moreover, is registered often outside the state where the property is located. States

like Maharashtra have tried to plug this loophole by requiring the parties to pay stamp duty at the

rates prescribed for the conveyance, where the GPA seeks to confer authorisation to deal in

property.

3. Will:-

A Will safeguards the buyers' interest after the death of the seller when the property is

transferred through Power of Attorney. In case of immovable property it is covered by optional



registration under section 18(e) of the Indian Registration Act and provides a safe way of shifting

ownership without payment of taxes due.

4. Cash receipts:-

A cash receipt is furnished by a seller of the property to be retained by the buyer. Usually

it gets registered with the registrar stating merely amount paid by one party to other. The

possibility of detection of the transaction and subsequent payment of taxes are avoided by

omitting to mention the fact that the payment has been made in connection with a purchase of

immovable property.

C. Institutional Setting and Registration:-

Under the Indian administrative system, the control of real estate conveyance is in the

hands of multilevel authorities. A major consequence of the operation of multiple authorities is

the hardship, in terms of money and time, caused for the people while dealing with the different

levels of officials. Consequently, many buyers and sellers of land and buildings have tended to

resort to extra-legal means which gives rise to problem like entrance of black money into real

estate. An upshot of the regulatory economic policy followed in India until recently is the

practice of issuing "no-objection' certificate before any land transaction can be registered. There

are offices of the Competent Authority for Urban Land Ceiling Act, the Revenue Department

regarding the land not being under acquisition, the no objection under the Land Reforms Act to

guard agasinst the alienation of agricultural land, and general approval to prevent registration of

documents against public policy as in Karnataka and Maharashtra, NOC of Appropriate

Authority of Income Tax Department for all transactions above Rs. 10 lakh, and Income tax

Clearance Certificate in case of transaction of more than Rs. 2 lakh, whose clearance is necessary

for transferring real estate properties. As documented, the requirement of clearances and

approvals prior to registration of the document causes considerable delay and expense, apart

from the scope for alleged corruption,and deters the parties from going through the registration

process.

Sub-Registrars in the taluka and district levels deal with registration of land and property

transactions and related instruments. Since all land transactions above Rs 100 are required to be

compulsorily registered under Section 17 of the Indian Registration Act, 1908, almost every



property entering the market has to be presented to these officials. In practice, the process of

registration has become complex, and prone to delay. In a number of states, barring Delhi (where

the provision for enquiry for undervaluation does not exist), it is common for the Registering

Officer to refer the document to the Collector for the fixation of the market value for the purpose

of deciding on the stamp duty, and this results in delays upto one year. It is pointed out in studies

that a large number of different types of documents/instruments are to be presented before the

Sub-Registrar approves registration of a transaction. The registration of land transaction in India

does not automatically change the ownership title of land record. The city record office and the

municipal body has to be approached to deal with change of title on land when transfer takes

place between two parties.



CHAPTER 4

LINK BETWEEN REAL ESTATE MARKET AND BLACK MONEY

The attraction of transactions in real estate as a black income generating activity is the

focus of the two commonly observed factors that make the sector attractive are, (i) low

probability in the detection of tax evasion with a low cost penalty rate on being caught and (ii)

high rate of appreciation on investments in real estate market. The two factors pointed are

concerning the attractiveness of the real estate market are closely related.

The high rate of return on investment in some activities of this market is realised mainly

due to non-payment of taxes like capital gains and stamp duty. A common method of evading the

payment of tax is the undervaluation of properties. This strategy works well in the real estate as

both buyers and sellers have an incentive in carrying out it. While the seller of real estate

property gains from the undervaluation by paying lower capital gains tax and the subsequent

wealth tax, the buyer saves in terms of less payment of stamp duty and registration fees.

As both buyers and sellers have an incentive in under-reporting, this link between real

estate and black money can be called incentive-induced. It is well documented in the recent

analyses. There are other instances of black money generation that could be added to this group.

For example, the present study has information on incentive-induced black money cases by

interviewing a cross section of people in the important metropolitan centres. Some of these are

given in the following.

1) Buyers and sellers often take advantage of the existing Rent Control Act to undervalue

property. The seller claims that he was forced to sell his property at a lower price since

his tenant was refusing to vacate. As the seller was not interested in getting into the

legalities of eviction, he claims he sold the property at whatever price it could fetch, and

this argument is advanced before the Appropriate Authority.

2) Undervaluation of the property in projects like construction of farm houses appears to be

quite common. Since it is difficult to ascertain the true market value of such projects,

both the builder and the buyer find it somewhat easy to undervalue the property.



3) By overestimating the cost of production, builders manage to show low profit, and

consequently escape paying taxes on it.

4) Often buyers approach builders with the suggestion that though they can purchase the

property at the listed price, it would not be possible to pay the entire amount in 'white'.

The builder, if convinced that the buyer has funds, gives him a "special discount".

Schemes like a promotional discount or a personal relation discount serve the purpose of

showing that a price lower than the listed one is paid. The unaccounted balance is paid by

the buyer in cash that is not entered in the book of accounts of the builder.

At times, the incentive-induced black money generation is a result of the real estate

policy of the Government. For example, the incentive to evade stamp duty is induced by the

policy of high rate of tax on transfer of immovable properties. So there are policy-induced links

as well. To appreciate this, the widely recognised sources of black money in real estate are given

below.

1) Undeclared capital gains

2) Unpaid stamp duty and registration fees

3) Transfers through power of attorney

4) Payment of 'pugree' for rented accommodation

5) Bribe allegedly paid to Government officials for obtaining clearance to construct houses

and transfer of properties

6) Alleged payment of bribe for manipulating the law related to the use of land.

The above list is by no means exhaustive. Yet, it can be seen that the last four of the

above sources are largely due to policy-induced distortions in the real estate market. It also can

be seen that the policy- and incentive- induced links are not mutually exclusive. The important

legislations like building bye-laws and Master Plan provisions enacted with the intention of

planned development of cities have been pointed out as factors responsible for generating black

money in real estate.

However, the dynamism exhibited by the circulation of black money in activities of real

estate in recent years is difficult to understand in terms of incentive- and policy-induced links



alone. Self-perpetuating growth of black money and participation of real estate agents, who help

use of black money and help expansion of its quantum, have to be considered to understand the

present dimension acquired by the problem. It is indeed difficult to disaggregate the quantum of

black money in terms of its continuation and withdrawal from circulation in real estate. There is

a possibility of at least one-third of the black income getting reinvested. The evidence on the

proportionate reinvestment in the real estate market is not available. Hence, it is difficult to draw

any precise conclusion on the quantum of black money used for generating more black money.

For having some idea on the nature of accumulation, the following discussion will attempt to

identify the category of people who could often be investing their capital in real estate and

simultaneously keeping themselves away from the system of formal financial market.

The major emphasis of the present discussion will be on the operation of informal

financial market that serves as the entry point of black money. Many real estate agents depend on

informal credit to finance their activities and it is seen that black money may not be generated

only by big builders and developers and individual home owners through the financial market.



CHAPTER 5: CASE STUDY

1. REAL ESTATE BUSINESS ACCOUNTS FOR MAJOR CHUNK OF

BLACK MONEY

When it comes to flow of black money, real estate business accounts for a major chunk of

of such illicit funds, accounting regulator ICAI has told the government while seeking urgent

steps to check this menace.

In a representation made to Finance Minister Arun Jaitley, the Institute of Chartered

Accountants of India (ICAI) has suggested steps to improve business practices in the real estate

sector to check flow of black money, an ICAI council member said today.

"Today, black money is largely parked in the real estate sector. The real estate can't be

governed only by rules and regulations, but demand and supply mismatch vis-a-vis final

consumers has to be addressed.

"Once there is sufficient competition and supply exceeds demand, prices will come down

and better practices will be followed by players," ICAI central council member Tarun Ghia told

PTI.

He was speaking on the sidelines of the 29th regional conference of the Western India

Regional Council of the Institute of Chartered Accountants of India.

He welcomed the government's move in the direction of real estate investment trusts

(REIT) and foreign direct investment in the real estate sector.

"Things like REIT and FDI relaxation are in the right direction, though they are merely

small steps which have several limitations," he said.

A REIT, or Real Estate Investment Trust, is a company that owns or finances income-

producing real estate. REIT would infuse funds into the market and once it happens, competition

would increase, paving the way to keep tabs on black money entering the sector. Today, the real

estate market is in the hands of suppliers, Ghia said.

The government must involve the ICAI to frame a policy to curb the black money

menace, he said, adding that the ICAI has a big role to play in unearthing black money.

However, this should not end up as some kind of a voluntary disclosure scheme. The

entire system of tracking black money would have to be examined so that creation of black

money is plugged at the threshold, he said.



"The ICAI council recently made a representation before Union Finance Minister Arun

Jaitley. Being a partner in nation building, ICAI is concerned with the menace of black money

and would join all efforts made by the government to address the menace," ICAI president K

Raghu said.

The ICAI has been batting for a robust taxation and accounting system to curb the

menace for quite some time, he said.

"The ICAI has always been working to ensure that black money levels in the economy is

brought down through a transparent, robust taxation and accounting system," ICAI Vice

President Manoj Fadnis said.

Earlier, it was the ICAI which had recommended deduction of tax through tax deduction

at source (TDS), whenever there is a transaction or sale of immovable property, which has

already been implemented by the government, he said.

2. INDIA'S BATTLE AGAINST "BLACK MONEY" IN REAL ESTATE

Ulwe, a village of dusty, uneven streets on the outskirts of Mumbai, lacks basic amenities

like water supply and electricity, but a two-bedroom, 1,000 sq ft house costs about 5 million

rupees, beyond the reach of many middle-class Indians. According to prospective buyers, many

developers will demand up to 30 percent of that price in cash, a small slice of the ubiquitous,

unaccounted "black money" that costs India's straitened exchequer billions of dollars in lost

taxable income. Legislation that would bring more transparency to the industry will be

considered during the winter session of India's parliament. However, investors, tax officials and

bankers Reuters spoke with were sceptical the law would stamp out illegal practices they say are

closely entwined with politics."Four out of 10 developers were ready to do it in full white and six

were asking for a black component," said 35-year-old Umesh Kolhapure, who was looking for a

three-bedroom house around Ulwe, near the proposed site of a new international airport serving

the country's financial capital. Recent high-profile scandals in the coal and telecoms sectors

involving large corporate houses and politicians have rattled investors in Asia's third-largest

economy, where undeclared wealth has long been rampant.

Real estate accounts for a large share of illicit transactions, thanks to lax regulation and

the numerous approvals needed for projects, making many ordinary people party to corruption



and pricing some of the emerging middle class out of the market. That has prompted the newly-

appointed housing minister, Ajay Maken, to push a real estate regulation bill. Designed to bring

greater accountability, transparency and prevent fraud and delay, the bill proposes appointing the

sector's first national regulator. However, it will not have control over land deals, which is where

illicit activity is widely believed to be rampant. "The bill is not going to help solve the issue of

black money," said Anurag Mathur, chief executive officer of project and development services

at Jones Lang LaSalle. "Black money is tied in or shifted through land transactions and the

regulator will have no jurisdiction over that."

TAX AVOIDANCE

In the year to June 2012, about $6 billion, or 30 percent of total transactions in the

property sector, were executed using black money, according to Liases Foras, a consultancy.

Real estate accounts for more than a 10th of India's $1.85 trillion economy. The government says

black money, a term widely used in India to describe undeclared funds, often meant to avoid

taxes, can be present in every stage of a project from land acquisition to home sales. For the

purchaser of a 5 million rupee home like those in Ulwe, a developer might typically ask for 1.5

million rupees in cash while making out a sales agreement for 3.5 million. With banks willing to

lend up to 75-85 percent of the "official" sale price, the buyer will then need to fund anything

from 45 to 60 percent of the total cost from savings, which is difficult for many salaried, middle-

income househunters.

"It is unfair on the buyers," said Kolhapure, who has put his search on hold in the hope of

a price correction that will help him afford a home for his family of five. If the bill comes into

force it might go some way in solving Kolhapure's problem. The draft says developers will have

to get accreditation for projects from the regulator, make public disclosure of details including

the price of units, and maintain a separate bank account for each project to collect payments from

buyers. However, there is widespread cynicism about whether it can stamp out the practice given

the belief that a large share of illicit money sloshing around the sector is tied to politicians.

"There can't be a legal measure to put an end to black money ... because ultimately it ends up in

the political cycle. That is where the requirement is," said a Mumbai-based income tax official

who did not wish to be named.



Improper dealings between the son-in-law of ruling Congress party chief Sonia Gandhi

and DLF, India's biggest property developer, underline the perception of a nexus between

developers and politicians. Activist group India Against Corruption accused DLF of arranging

favourable loans and real estate transactions for Robert Vadra, a businessman married to

Gandhi's daughter, who had previously announced a possible move into politics. The company

and Vadra both deny wrongdoing.

CORRUPT OFFICIALS

Central bank rules prohibit bank loans to fund purchases of land, a regulation designed to

curb speculation and reduce balance sheet risk for banks. To fill that void, wealthy individuals,

including politicians, are widely believed to invest "black money" in real estate. Some of that

money can later be poured into election campaign donations from developers, say private equity

investors, real estate consultants and sector analysts. Those same developers might be awarded

with plots of land at attractive prices or assisted in getting project approvals. Black money comes

in handy for bribing corrupt officials. "There is a cost of pushing the file. But what is the

alternative?" said Lalit Kumar Jain, chairman of the Confederation of Real Estate Developers in

India (CREDAI).

For a typical residential project in Mumbai, developers need about 55 approvals from

more than a dozen departments. Delays in consents add 40 percent to a project's cost, said Jain.

At least 10 developers Reuters tried to reach including DLF Ltd, Oberoi Realty, DB Realty

Sobha Developers, and Hiranandani did not respond to emails, declined to comment or did not

make officials available. CREDAI backs the pending legislation that would create a single-

window clearance for approvals, which it says will reduce the temptation to pay bribes. Getting

consents in time would make homes cheaper by 25 percent, Jain said. "Our biggest problem is

the approval process," said Jain, who is also the managing director of Mumbai-based property

company Kumar Urban Development. "That is the only corruption we know of and where we are

victimised and exploited. Otherwise developers are clean."



CONCLUSION

Parallel economy is a new threat for the Indian economy. In India parallel economy is

expanding very rapidly. Government of India introduced commissions under Kaldor, Wanchoo,

Rangnekar, Chopra, and Gupta for estimating black economy. There are many factors like

Controls and Licensing System, Higher Rates of Taxes, Ineffective Enforcement of Tax Laws,

Inflation, Funding of political parties etc. that influence its growth.

In India amount of black money are increasing continuously which badly impacts the

economic growth of the nation. Such money is a new challenge for Indian economy. Indian

economy is badly affected by black money as it is underestimating GDP, increasing inequality of

income, increasing illegal activities etc. Over the past 50 years, the government has at various

times announced several schemes offering opportunities to bring black money overboard but the

result are not so effective. Some of these schemes are: introducing the scheme of Special Bearer

Bonds, demonetizing high denomination currency notes, stringent raids and scheme of voluntary

disclosures. These instruments are expected to reduce the volume of the black economy.

In my opinion, there are three reasons why consumer protection is so poor in real estate:

Real Estate is a big money business. While 'cleaning up' the industry would be of enormous

benefit to consumers, it would not be in the best interests of many agents and other

businesses tied to the real estate industry.

The Real Estate Industry is 'controlled' by real estate agents. When governments want to

know how to improve the real estate industry they ask people who

represent real estate agents. They rarely ask people who represent consumers. The real estate

industry not only deceives consumers, it also deceives governments.

Consumers lack knowledge. For many people, buying or selling a home is a once or twice in

a lifetime experience. Consumers must rely upon agents to give them advice. This costs them

thousands of dollars and much heartache. Also, many consumers never realize how much

they are losing. They do not know what goes on behind the scenes.



BIBLIOGRAPHY

BOOKS:-

Financial Markets And Services

- E. Gordon

- K. Natarajan

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big-it-is/articleshow/8771206.cms

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Documents

CHAPTER 1