Reduction in guidance value unscientific, imprudent

The recent announcement by Karnataka’s Revenue Minister that the government is planning to reduce the ‘guidance values’ of properties across Karnataka and in select parts of Bengaluru is most unscientific, irrational and at best can be termed a populist move.

Guidance values are the minimum selling price of properties fixed by the government. ‘The value’ depends on the nature of property (residential site, agricultural land, commercial, apartments, houses, second sales, etc.), location and type of structure.

The government’s basic assumption that a downward revision in the guidance value will cool down property prices sounds juvenile. Across Karnataka and more so in Bengaluru, there is a gulf between the existing guidance value of residential properties (independent houses/ apartments and vacant sites) vis-a-vis market rates, with a ‘variance band’ of 20% - 150%.

Invariably, registration of properties takes place on the guidance value to save on stamp duty and not on the market value which would have been the real consideration amount paid to the vendor by the purchaser. The huge difference between the registered document based on guidance value and the actual consideration amount (market rates) will be met through the ‘cash component’.

This cash component invariably goes unaccounted, escapes the tax net, can lead to money laundering and also result in revenue loss to the state exchequer.

Credible builders in Karnataka insist on registration of the apartments for the entire purchase price and not on the low guidance values. No builder or a seller of a house/site will reduce the selling price on account of a paltry reduction in the guidance value. The notional ‘consumer surplus’ on account of the proposed reduction in guidance value, drives the customer to buy the property after the completion of the project/flat, as registration of under construction flats are not possible and also attracts GST.

Instead, a progressive state like ours should, in a phased and graded manner, align the ‘property guidance values’ to the market rates and not undertake the misadventure of reducing the guidance values which straightaway eats into revenue of the exchequer.

In a virtuous cycle of guidance value in sync with the market rates, the state will garner 100% more revenue from stamp duties and registration of properties, banks will lend 80% loan on the registration amount which will be in tandem with the market rates/LTV, borrowers will get higher IT rebates on their home loan repayments and huge increase in property equity values.

The impact of the Covid pandemic has already taken its heavy toll on the real estate sector. Our state has lost revenue of around Rs 1,000 crore during the nationwide lockdown and around Rs 400 crore during the two-week lockdown when the government temporarily shut property registrations in all the 243 sub-registrar offices.

In FY21, the revenue from stamp duties and registration was Rs 10,480 crore as against target of Rs 12,655 crore — 19 lakh properties were registered during 2020-21. The revenue target for the present FY 2021-22 is the same at Rs 12,655 crore. Reducing it further will be like axing our own feet.

Interestingly, stamp duty has already been slashed three times during the last two years, the latest reduction being for apartment purchases in the slab of less than Rs 45 lakh, from 5% to 3%. This is to boost affordable housing under the Prime Minister Awaz Yojana — Housing for All by 2022, for first-time buyers, to make them eligible under the Cash-Linked Subsidy Scheme (CLSS). There has already been a revenue sacrifice on this score.

Further decrease in the guidance value on properties will have an adverse impact and cause collateral damage on the lending front of housing loans. Most banks and housing finance companies lend housing loans up to 70-80% on the guidance value of the registered document/sale deed of the purchase transactions and not on the actual purchase price which will be invariably the ruling market price. Any further reduction in the guidance value will further reduce the loan eligibility of the purchasers of properties.

They will also lose out significantly on the IT benefits/rebates towards principal and interest on their housing loan repayments.

Increasing guidance value in certain rural pockets will affect buyers’ affordability.

In sum, the idea of reducing the guidance value of properties is not prudent, works counterproductive and does not help any stakeholders — government will lose significant revenue, purchasers will get reduced housing loans from banks/HFCs, lower IT rebates

and builders who are already plagued with piled-up inventories, will not reduce apartment costs just because guidance values have been reduced.

Let not the New Year gift of the government be like, “Win us in honest trifles and betray in the deepest consequences.”

(The author is a former banker)