The difference between guideline value and market price must be reduced, says Rohan Sharma
The guideline value is the minimum value at which the sale or transfer of a plot, built-up house, apartment or a commercial property can take place. The market price is the value of this asset as determined by the market forces of supply and demand and agreed upon between buyer and seller.
The guideline values are usually defined by the local state government’s revenue departments or the local development authorities, in line with what they decree as the prices at which the sale or transfer should be undertaken. As such, it is usually a determinant or reference rate at best. Market rates, on the other hand, are determined by the seller’s expectation of price and the buyer’s inclination to pay.
Across all property markets in India, guideline values are invariably much lower than the actual market rates. This is because they are not reviewed regularly to bring them in line with market prices, nor do represent the actual barometer of ground realities.
The guideline value determines the stamp duty and registration charges to be paid for the transaction. This is called the 'floor price' and the actual transaction price can be higher than this, resulting in higher stamp duties.
Most real estate transactions are registered at the minimum guideline values or slightly above, which may be lower than the actual transaction price. The result is a loss to the exchequer in terms of stamp duties. As market rates are determined by demand and supply, an area with lower supply but higher demand will inevitably command higher prices.
Though guideline values and market rates are connected, they have limited impact on each other. While the market rate can never be below the guideline value, the significantly high difference in value indicates a lag between market performance and the governemnt's tracking of it. This is the primary reason for black money transactions in the real estate space.
In property sales, stamp duties are usually paid by the buyer. It has been argued that an increase in guideline values causes transactions to decline.
Despite that, if the gap between the two rates is reduced, the proportion of genuine buyers with clear, accounted money entering into transactions will increase significantly. It may reduce transaction velocity but it also reduces the incidence of black money being parked in real estate.
The point is significant when seen in the light of the government's recent drive towards curbing black money and money laundering. Also, state government treasuries can generate higher tax collection from real estate transactions if the stamp duty is paid on guideline values that are in sync with market rates.
It will impact property buyers since they will pay higher stamp duties and thus marginally higher transaction costs.
However, the weeding out of black money in real estate causes the market to behave in a more rational manner towards project pricing. Also, it makes little sense to view the added financial outlay as wasted expenditure, as it is actually increases the investment value and, therefore, the potential resale value of the property. Finally, higher revenue for the government means more funds available for support infrastructure development. Thus, bringing guideline values close to or on par with market rates can only be a positive process.