If we look at the prices of immovable properties in India say 12-14 years ago, there used to be a huge gap between Market Values and Circle Rates. It was quite normal for Market Value to be two to four times of Circle Rate (even six to eight times for some areas/cases). But for the past six years, this gap has started coming down steeply and it’s narrowing even at faster rate in the last 4 years.
But, before discussing anything more in detail and probing ourselves into the complexities involved, let’s get done with the required basics to get the gist: –
Market value
– (also known as OMV or “open market valuation”) is the price an asset would fetch in the marketplace or the value that the investment community gives to it. The greatest difficulty in determining market value lies in estimating the value of illiquid assets like real estate and businesses, which may necessitate the use of real estate appraisers and business valuation experts respectively.
Circle rate
is also known as Stamp Valuation Authority Value/ Ready Reckoner (RR) Value“. The revenue collected on real estate transactions by the State Government levies stamp duty on the transaction value based on the circle rate. The circle rate is the minimum value at which sale or transfer of plots, built-up houses, apartments, or commercial property can take place. It can also be defined as the amount that the buyer has to pay as stamp duty to the government while registering for a property. These are the minimum values set by a state government below which a property cannot be registered.
Key Point: –
If the Market Value for a land property is lower than its Circle Rate value, the difference is taxed as ‘other income’ for the buyer. This comes under Section 56 (2)(x) of the Income Tax Act. The seller, also, will have to pay capital gains tax on the Circle Rate.
Now talking about the reduction of this gap, we will find two big reasons behind this-
- In the last 4-5 years, most state authorities regularly increased the RR/Circle rates in cities to align them with market values.
- Market Values are stagnant (or say Depleting).
Dwarka Expressway in Gurgaon, for instance, saw circle rates rise by 43% in the last four years i.e. from INR 2,900 per sq. ft. in 2016 to nearly INR 4,133 per sq. ft. in 2020. However, Market Values in this period have only increased by 10%. The gap between the two is to continue to narrow down significantly.
One point of view advocates the fact that it discourages ‘black money’ transactions. The primary sales market in tier-1 cities today offers limited scope for quoted by developers in such regions.
The primary sales market in tier-1 cities provides little scope for unaccounted cash infusions because of the negligeable gap between the Market Value and the State-Notified Circle Rates.
The above scenario perceives to be an ideal one until you look at the bigger picture. On a personal note, I believe, it can create a problem for the banks whose finances are based on Market Value. For instance, a bank keeps the house as security and maintains a certain level of exposure to the value of the property, (80-90%). If the borrower defaults on the loan, the bank can recover the money by selling the house. For this to happen, the market value of the property should be greater than or equal to the outstanding home loan.
So, a continuous fall in Market Value should be a concern for a growing economy like ours.
-CA Bhagwant Singh Bhatia
Partner at GRANDMARK & ASSOCIATES
+91-8285899434, www.grandmarkca.com
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