Circle rate is the minimum
value at which the sale or transfer of a plot, built-up house, apartment or a
commercial property can take place. Market price is the value of such an asset
for a transaction between a seller and buyer which is done at an arm length’s
principle with the price determined by the market forces of supply and demand.
Circle rates are usually
defined by the local state government’s revenue departments or the local
development authorities, in line with what they perceive the prices at which
property sale or transfer should be undertaken. As such, circle rate is usually
a determinant or a reference rate at best market rates, are determined by the
seller’s expectation of price and the buyer’s inclination to pay.
Not in Sync
Across all property markets in
India, the circle rates are invariably much lower than the actual market rates.
This is because:
·
Circle rates are not reviewed regularly to bring
them in line with the market prices.
·
They do not represent the actual barometer of
ground realities.
Floor Price
Circle rates are the minimum
authority - defined price at which a property sale or transfer can be done
between two parties and also determine the associated stamp duty and
registration charges to be paid for such a transaction. This is the ‘floor
price’, and the actual transaction price can be higher than this, resulting in
higher stamp duty to be paid out.
Registration Impact
Most real estate transactions
are registered at the minimum circle rates or slightly above, which may be
lower than the actual transaction price. The result is a loss to the exchequer
in terms of the applicable stamp duty.
Demand Driven
Market rate is a price range
arrived at by looking at actual transaction prices in a location, and is a
better indicator of what sellers demand and what buyers are willing to pay. As
these prices are determined by demand and supply, an area with lower supply but
higher demand will inevitably command higher prices when compared to another.
Black Money
Though circle rates and market
rates are connected, they have a limited impact on each other. While, the
market rate can never be below the circle rate, a significantly higher
difference between them indicates a lag between market performance and the
authority’s view of it. This is the primary reason for black money transactions
in Indian real estate.
Genuine Buyers
In property sale or transfer
transactions, stamp duties are usually paid by the buyer. It has been argued
that the increase in circle rates causes the rate of transactions to drop. Be
that as it may, the gap between the circle rate and the market rate reduces and
the proportion of genuine buyers with clear accounted money entering into
transactions increases. Though this may reduce transaction velocity, it also
reduces the incidence of black money being parked in real estate assets.
Tax Collections
This process is significant
when seen in the light of the Indian government’s drive towards curbing the
incidence of black money and money laundering in real estate. Simultaneously,
state government’s treasuries generate higher tax collection from real estate
transactions, as stamp duty is paid on a circle rate which is in sync with the
market rates or close to them. In terms of impact, there is an additional
burden on property buyers in terms of higher stamp duties, resulting in
marginally higher transaction costs and over-all cost of ownership.
Investment Value
However, the weeding out of
black money in real estate causes the market to behave in a more rational
manner towards pricing of projects. Also, it makes little sense to view the
added financial outlay as a wasted expenditure, as it is actually increases the
investment value, and therefore potential resale value of the property. Finally,
higher revenue of the government means more funds available for support
infrastructure development. Seen in this light, bringing region’s circle rates
closer to or on par with its prevailing market rates is a positive process.
