Nov 19, 2011

Understanding guideline value

When discussing real estate, one comes across the
terms guideline values often enough. It is a
significant enough factor in any property
transaction with a variety of far-reaching
consequences. The forthcoming revision of the
guideline values of land across the State to be
finalised by the first week of December this year,
has elicited significant responses across the board.
“Most people don’t want an increase in the
guideline values,” says Vimala Jayakumar who runs a service that prepares
documents and agreements for property registrations in Neelankarai. “The
current stamp duty and registration charges of land in Tamil Nadu are 8%+ 1% of
the guideline values, which were last revised in August 2007. The revision is felt
to be too steep by many people in the real estate industry. For instance,
properties that are slotted at 800 per sq ft are now being boosted to 2,400 per
sq ft. In some cases, this makes the valuation higher than the sale consideration
itself, and especially affects any person who has an agreement of sale or holds a
power attorney for extended transactions. As this has created great anxiety, it’ s
pushing many people to complete their transactions before November 30. ”
What is guideline value? The guideline value of property across the State is
calculated, based on the zone it occupies and is supposed to be a guideline for
the valuation of the property. Simply laid out, guideline values of property and
stamp charges on the registration of the sale and transfer of any property go
hand in hand. The stamp duty and registration fee levied is charged by each and
every individual State in the sale of property to register, and lend the stamp of
authenticity to the title deeds belonging to a person. So, when someone is
buying a piece of property from another, the sale agreement is laid out in detail
mentioning the schedule of property, the details of the buyer and seller and the
value of their transaction (sale consideration) on stamp paper. Once the
documents are prepared, the stamp duty and registration charges are calculated
based on the value of the transaction (sale consideration of land) or the
guideline value, whichever is higher.
But what happens when there is a variance between guideline values and the
market values of properties? There are two kinds of effects; one is the loss of
revenue for the State
and the other is the encouragement of black money in real estate. When
guideline values are lower than the market value of a piece of land, it leads to a
significant number of land deals where only the guideline valuation of the
property is mentioned on the sale document and balances are paid by cash.
“The change in guideline values comes after almost five years and is mainly to
arrest the flow of black money in real estate deals,” says S Sadagopan, a real
estate documentation and verification expert in the city. He adds, “With property
prices going up and values of deals also significantly rising, the revenue
department loses a large amount of money because the guideline values are at
odds with the market values of land. For instance, the current guideline value of
land in third main road Gandhinagar, is 3,500 per sq ft, expected to be revised
to 5,000 , while market prices are close to 12,000 . The revision is said to be
calculated at approximately 60% of the market increase. Guideline revision
pertains only to land value and specifically only to undivided share of land for
apartments.” Adds Vimala Jayakumar, “With valuations now either matching or
greater than sale consideration in some transactions, it means that the second
payment (cash) will reduce.”
“The guideline values are not fixed properly,” says RS Nambi, a city based
chartered accountant and a member of the World Bank Advisory Council. “When
there is so much disparity between market prices and guideline values, is this the
right system? We have to question the approach to affixing and even increasing
guideline values across the board. The approach cannot be arbitrary and based
on market factors alone. There needs to be clear town and city development
indices that can help determine valuation both for the government and for the
purposes of valuing property privately. There is a great leakage of revenue to the
revenue department as well as a considerable impact on the property market by
arbitrary changes in valuations.”
While a property valuation and guideline value upgrade is deemed necessary by
everyone concerned, there are conflicting views on the validity and how the
increases are being calculated. If the measure is to bring transparency to the real
estate industry and ensure no loss of revenue to the State, it is equally important
that such a significant functional mechanism of any transaction, ie, valuation, is
not left to arbitrary measures. While it is a welcome measure that the State seeks
to bring down the number of unaccounted cash transactions, it is also necessary
to ensure that the real estate and housing segment – a significant factor of
development, is not discouraged by unrealistic fees.
It is mandatory that the State creates a fluid unit that can help derive valuations
of property with a transparent set of parameters that govern this universally, as
it is a well-known fact that no property is like any another and all properties,
even adjacent ones cannot be valued equally.
Source: Times Property in The Times of India, Chennai

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