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Tuesday, July 17, 2018

Circle rate and market rate: What you need to know

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 overall cost of ownership.

Published: April 12, 2014 1:19:33 am

By: Rohan Sharma

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’s length 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, 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, the circle rates are invariably much lower than the actual market rates. This is because: a) Circle rates are not reviewed regularly to bring them in line with the market prices and b) They do not represent the actual barometer of ground realities.

As already mentioned, circle rates are the minimum authority-defined prices 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.

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.

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.

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 the Indian real estate domain.

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 into real estate assets.

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 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 overall cost of ownership.

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 for the government means more funds available for support infrastructure development. Seen in this light, bringing a region’s circle rates closer to or on par with its prevailing market rates is a positive process.

— The author is senior manager, Research & REIS, JLL India

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