Singapore: Siddharth Sharma, a salaried aviation consultant, was looking to buy an apartment near New Delhi. Of the eight projects he viewed, developers of three expected part-payment in cash, an illegal but common demand in India.

“With my salary, I don’t generate much cash," said Sharma, 43. “For me, to cough up so much was impossible. I had to cross those builders off my list."

In a nation where the practice of investing in real estate with untaxed income or unaccounted wealth is widely prevalent, that may be about to change if Prime Minister Narendra Modi has his way. His government is planning a new bill to curb “black money" that has inflated property prices, narrowed options for buyers like Sharma and kept homes beyond reach for many Indians.

Finance minister Arun Jaitley told Parliament on 28 February that he plans to introduce a revamped version of a lapsed Benami Transactions (Prohibition) Bill in the current session of parliament. Benami means anonymous, and such deals often involve concealing the identity of the true buyer or the seller.

First pillar

“The first and foremost pillar of my tax proposals is to effectively deal with the problem of black money which eats into the vitals of our economy and society," Jaitley said. “This law will enable confiscation of benami property and provide for prosecution, thus blocking a major avenue for generation and holding of black money in the form of benami property, especially in real estate."

Data provided by Mumbai-based Liases Foras Real Estate Rating and Research Pvt. Ltd show the real estate industry accounts for a large share of illicit deals in the South Asian country, with an estimated 30% of transactions done with black money.

That’s high for a sector making up 6% of India’s $1.88 trillion economy and for an industry forecast to grow fivefold to $676 billion by 2025 and 13% of GDP by 2028, according to KPMG.

If enacted, the law could mean a “healthy" correction to property prices, said Samir Arora, founder of Helios Capital Management Pte Ltd, a Singapore-based hedge fund.

Tough rules

“The biggest beneficiary of black money in India is real estate," Arora said. “The government looks all serious on this bill. Once you make the rules tough, somebody will get caught. When a few get caught, then others will freeze."

For land deals, the cash component could range between 30% and 50% of the deal value, said Pankaj Kapoor, founder of Liases Foras. Politicians and businessmen hold a lot of land as they expect asset appreciation, Kapoor said.

“If black money goes away, property prices could see a sharp correction," Kapoor said.

The S&P BSE Realty Index comprising 13 property stocks, has already dropped 87% from a high reached in January 2008 as developers grappled with debt, high interest rates and declining sales after the global financial crisis.

Unitech Ltd led the slump during this period, tumbling 96% while DLF Ltd, the country’s largest, slid 86%.

The proposed bill will seek to prohibit accepting cash of ₹ 20,000 and above for the purchase of immovable property while buyers will have to provide their income tax identification numbers for property transactions exceeding ₹ 1 lakh.

Easy play

“In principle, the more checks and balances they bring, the better for the industry," said Rohit Gera, managing director of Pune-based Gera Developments Pvt. Ltd. “Everytime one talks of black money, it’s always linked to real estate. We are an easy play because of the perception we are a dirty industry."

Gera, differentiating “reputed" builders from others, said his company accepts only checks and never any cash.

“The prevalence of unaccounted wealth being pumped into real estate is more acute in land deals rather than in developed housing," said C. Shekar Reddy, president of the Confederation of Real Estate Developers’ Associations of India.

“Where developers are concerned, I can say black money in residential transactions is almost nil," Reddy said.

The passage of the bill hinges on Modi’s ability to push it through the upper house of parliament, where his Bharatiya Janata Party (BJP) lacks majority. In his first legislative victory since becoming prime minister in May, lawmakers this month approved a proposal pending since 2008 to raise the cap on foreign investment in local insurers.

Long wait

After the government failed to notify an original law in 1988, another version of the bill was introduced in 2011, which lapsed a few years later. That draft recommended jail terms ranging from six months to two years and a fine of 25% of the fair value of the property held in “benami".

The government’s efforts to tackle unaccounted wealth aren’t just confined to domestic black money. The cabinet this week approved the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill, which will target citizens with secret overseas bank accounts.

India ranked third in the world for money illegally moved overseas in 2011, behind China and Russia, according to a 2013 report by Global Financial Integrity, a Washington-based group researching cross-border money transfers.

Mumbai, Manhattan

Modi’s avowed intent to unearth black money was a key campaign pledge that helped him win the largest electoral mandate in three decades.

Undisclosed income is among the reasons for a surge in property prices in India despite the lack of a matching improvement in infrastructure.

Weighted average apartment prices in Mumbai, the nation’s most expensive real estate market, have more than doubled since 2009 to ₹ 13,120 a square foot in the December quarter, according to Liases Foras.

A three-bedroom apartment in Mumbai’s upscale Malabar Hill neighborhood costs between ₹ 12 crore ($1.9 million) and ₹ 25 crore. The median price of apartments that changed hands in Manhattan last quarter was $980,000, up 15% from a year earlier, according to a report by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate.

As for Sharma’s search for a suitable property near New Delhi, he says he hasn’t seen a happy ending yet.

“Property prices have become unaffordable in India, and with some developers asking for cash, its pricing people like me out of the market," he said.

Bloomberg

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