India's uphill battle against "black money" in real estate

By Aditi Shah and Swati Pandey

MUMBAI | Wed Nov 21, 2012 3:15am IST

(Reuters) - 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, which starts on Thursday.

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.