On the eve of presentation of the State Budget by Chief Minister B.S. Yediyurappa (on March 5), stakeholders and experts met him and gave suggestions related to the real estate sector in Karnataka.
Presently there is a uniform stamp duty of 5% on immovable property sales/transfers in the State. It is recommended to rationalise the stamp duty, based on the cost of property, with a view to increase the revenue from stamp duty and providing significant relief to EWS, LIG and lower strata of MIG who are desirous of buying their dream homes. The stamp duty recommended for property worth less than ₹50 lakh is 4%; ₹50 lakh-₹100 lakh, 5%; above ₹100 lakh, 6%
Economics of revenue collection in Bengaluru
At present rate of 5% stamp duty, for 100 properties of average cost of ₹50 lakh, the revenue collection is ₹250 lakh at recommended stamp duty rates.
Assumptions: average cost of 60% properties is ₹30 lakh; cost of 30% properties, ₹75 lakh; average cost of 10% properties, ₹150 lakh.
For property cost of ₹30 lakh at stamp duty rate of 4% and number of properties being 60, the revenue collection is ₹72 lakh; for property worth ₹75 lakh, stamp duty of 5% and number being 30, the revenue is ₹112.5 lakh; and for those costing ₹150 lakh and stamp duty of 6% and number of units being 10, the revenue is ₹90 lakh. The total is ₹274.5 lakh. This is slightly higher than the stamp duty collection, as per present system. Once stamp duty is rationalised as suggested, it is most likely that the number of registrations will increase, leading to higher revenue collections.
On a socialistic approach, it is necessary to subsidise the poor and levy a slightly higher stamp duty on the rich. Increasing stamp duty on all commercial properties to 6% will certainly increase the revenue collection.
If implemented, this measure will give the required fillip to the national objective of ‘Housing for all by 2022’ and encourage the ‘affordable housing’ sector.
Increasing FSI in CBD areas
At present, depending on the width of approach road and other parameters, FSI (Floor Space Index) or FAR (Floor Area Ratio) is fixed between 1.75 and 3.25. In most of the areas, the applicable FSI is 1.75 or 2.25.
Due to astronomical increase in land costs, especially in CBD areas, violating the approved plan and constructing more built-up area has become the order of the day, which has led to congestion, putting heavy pressure on civic agencies in providing basic amenities to the residents and it has also encouraged rampant corruption in the system.
In CBD areas with the present FSI norms, a builder cannot make a viable project at all. For example, the market price of an apartment in Basavanagudi is around 10,000 per sft., where land price is around Rs. 20,000 per sft. Say on a plot of 10,000 sft, FSI allowed is 1.75% and hence as per approved plan, builder can construct 17,500 sft. The input costs are as follows:
At a land cost of ₹2,000 lakh, construction cost of built-up area at 2,000 per sft being ₹350.0 lakh, and administrative cost at ₹500 per sft being ₹87.5 lakh, the total is ₹2,437.5 lakh.
At the market sale price of ₹10,000 per sft., the realisation from sale of 17,500 sft is ₹ 1,750 lakh. Thus, if the builder constructs as per approved plan, he stands to lose ₹687.5 lakh.
To make the project viable, builders are constrained to violate the approved plan and increase the area of construction from 17,500 sft to 30,000 to 40,000 sft, thus achieving FSI of 3 to 4. On an average, majority of small builders go for 35,000 sft. Then the input costs and realisation of sales workout as follows:
At land cost of ₹2,000 lakh; construction cost at ₹2,000 per sft working out to ₹700 lakh; and administrative costs at ₹500 per sft coming to ₹175 lakh, the total is ₹2,875 lakh.
Revised realisation
By selling at the same price of ₹10,000 per sft, sales realisation on 35,000 sft is ₹3,500 lakh and gross profit is ₹625 lakh. It is estimated that to manage the violations, a whopping ₹100 lakh is spent! When this kind of development has become almost order of the day and almost all apartments are built using FSI of 3.5 to 4 in CBD areas, it is suggested to increase the FSI officially to 3 and allow proper development and wipe out corruption from the system.
The worst worry is for projects coming up on less than 500 sq. mt plot and have up less than 8 units, which are out of the ambit of Real Estate (Regulation and Development) Act, 2016. While medium-size and large projects coming under RERA will have to construct as per approved plans, the violations in smaller projects will certainly make the CBD areas unliveable.
(The author is founder Director of Institute of Home Finance, Bengaluru,and can be contacted at deshpanderp2007@gmail.com)
