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- THE CORRUPTION TRICKLES DOWN
Sure, builders are victims of this anarchic system. But they also exploit this anarchic system while transacting with buyers, who neither know the rules well nor have the wherewithal to immerse themselves in such details. An example is the illegal sale of parking spaces. Another example is underreporting the sale price of a property.
Because of the high tax rates-stamp duty of 5-14 %, longterm capital gains tax of 20%-both buyers and sellers tend to under-report the transaction value of a property and transact the differential in cash. "The increasing spread of home loans and corporatisation of big real estate companies has reduced such transactions in original purchases," says Ananthanarayanan . "But in resale, a cash component of 20% remains the norm," adds Sachithanandan.
Such transactions put cash in the coffers of builders, which the promoters use to buy favours or generate more cash for themselves . "The expense side is a rich source for money laundering," says the regional MD of a consultancy quoted earlier. He says builders purchase many small items from the unorganised sector-for example, steel rods and sand-in cash.
So, for example, a builder will show Rs 100 cash paid towards buying material. But as per an agreement with the supplier, only .
90 worth of material is delivered; the builder siphons off the remaining Rs 10, thus escaping tax. "Many realty firms indulge in 'creative accounting' , which inflates sales and profits," says Jamil Khatri, executive director with KPMG, an audit and advisory firm .
Builders have even violated loan terms. With real estate emerging as an investment, builders exploit bank finance. They buy land, advertise a scheme and collect 20% of the booking amount from buyers. But instead of beginning construction , they use the loan to buy another plot for a new project . Banks are not allowed to fund land acquisition, but money is fungible. A slowdown in loans can snap this chain. The credit crisis of 2008-09 threatened this chain. But PSU banks were coaxed by their political masters to provide loan support to builders on the pretext that defaults could put the economy under stress. Even as the BSE Real Estate Index tumbled 80%, real estate prices fell just 15%.
Thanks to the generosity of bankers, and the interest of politicians , builders have consistently defied a basic principle of economics : prices should fall if supply exceeds demand. In 2010, the number of unsold flats in the Mumbai Metropolitan Region (Mumbai, Thane and Navi Mumbai) stood at 28 times normal monthly sales, according to research outfit Liases Foras. Yet, in the past year, house prices in the region are up 36%. "That's because Indian builders can access alternate finance channels," says Kaushal of BNP Paribas. It's an intricate chain of corruption , controlled by the rich and the powerful. And the losers in this cosy, connected web of relationships are honest, powerless buyers like Mrs XYZ.
- A sad state of affairs. That is why it becomes so difficult to buy a ready made house for a salaried person. The only option is booking a flat in a to be launched project.
There is black money even in the newly launched projects of NOIDA and Gurgoan if you are not the first buyer of the project.CommentQuote0Flag
- Originally Posted by eloish
"Corruption aside, the quality of people evaluating plans designed by professionals is very low," adds Vijay Sohani, president of the Council of Architecture. "It's like asking a fifth standard pass to evaluate a BCom paper."
Even the regulations leave much to interpretation, leading to the strange situation of state agencies contradicting each other . In Bangalore, different local authorities use four definitions of built-up area. "They (local authorities ) know it well. It suits them to have confusion," adds Sachithanandan.
This is the root of all problems...traditionally people have been running behind "sarkari Naukri" coz there is lot of scope to earn "cream" income. Thousands of illiterates have got powerful positions across various government agencies and all they understand is to take bribe. Obviously they dont have any other career choice.CommentQuote0Flag
- all that the above article says is known to everybody, and this has been going on for years. Howcome then, the builders/ govt. bodies get away with that.
what could be the solution to this? May be the end users...who ultimately have to pay a price should start keeping a check on this. One possibility is as follows:
Step 1. Make a group of prospective buyers for a undercontruction/ pre launch project
Step 2. Negotiate the rates hard with the builder and enter into a contract on cost plus basis. This way, his interest is protected since his margin is fixed irrelevant of the cost.
Step 3. When the builder starts developing the project, any road block he faces in getting approvals/ connections etc, the group of buyers should intervene.
Now that the anti corruption movement in India has been launched in a big way, not many babus will dare to ask bribe from a group of home buyers. They may continue to dominate on the developers though.
Step 4. This could lead to a win win situation for all...builders will earn their margin, and consumers can to a cretain extent, control the prices of the house they buy.
what currently happens is that the buyers pay the amount upfron but do get control of the project. In this way, buyers will get control of the project also..and the process will be very transparent.CommentQuote0Flag