Why does the government keep revising circle rates?

People with any interest in real estate in Delhi, must be wondering what they have done for the government to yet again increase circle rates by 20%.

For ignorant souls, circle rate is the MINIMUM rate at which the government mandates a real estate transaction has to happen. For example, if you buy a house in say Defence Colony, the government says that the transaction must happen at Rs. 500 (its an example, its more like Rs. 50 cr!), then no matter what the actual transaction is at, (i.e. Rs. 50 or Rs. 5000),  the stamp duty and registration should happen at either Rs. 500 OR Rs. 5000 whichever is higher. That means the government completely disregards the lower value in comparison to the circle rate.

Now that the circle rate explanation is out of the way, lets have a moment of silence for the poor souls living in New Friends Colony in Delhi. The colony falls in Category A, which means that the government mandates that the transaction should happen at Rs. 7,75,000 per square yard (its actually square meters, but for purposes of this example, I am not getting into the details). What is the actual market rate there? – about Rs. 5,00,000 per square meter.

Lets run through a live example now.

The government mandated price for a 500 square yard plot is Rs. 38.75 cr. The market price is Rs. 25 cr. Thats a difference of Rs. 13.75 cr!! Lets say you go for the transaction at Rs. 25 cr. – Here are the ramifications of that:

a) Stamp Duty – Stamp duty will be paid at the government mandated rate. Assuming 6%, it works out to Rs. 2.3 cr. vs Rs. 1.5 cr on Rs. 25 cr. Therefore, you are paying the government Rs. 80 lakhs on top.

b) Tax authorities – You pay stamp duty on Rs. 38.75 cr, but as a seller, you only receive Rs. 25 cr in your bank account (lets forget about black money for now!). Ideal scenario for the babu’s at the tax authorities to start sending you notices and harassing you. Where did the other Rs. 13.75 cr go? You tell one department of the government that the price is Rs. 38.75 cr and the other that its 25 cr.? Of course you’re lying!!

Spot the odd one out – Sundar Nagar, Golf Links, Jor Bagh, Amrita Shergill Marg, New Friends Colony.

Did you guess New Friends Colony – CORRECT !

Lets try and understand why the government raised the circle rates? Simply because they are not earning enough money from property registrations! This is what must have gone through their heads – Currently we are getting 6% of x, its not enough, lets increase the x by 20% and we make 20% more money! Genius! NOT!!

No one in the government understood the concept that if you lower x, and increase the 6%, there might be a higher windfall for the government. Of course for this they would have to know that the market is in a slump, but with the Modi wave, anything is possible.

What could the government have done? – They have the records of transactions registered in an area, and at what rate. Analyse that data! Does an area have a high number of transactions? Increase the circle rate there! Does an area have transactions at a rate much higher than the circle rate, Increase the circle rate there!

If anyone can forward this blogging rant to someone in the government, the residents of New Friends Colony will be eternally grateful!

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