If you expected Maharashtra Government to give you a New Year gift, you would be shocked to know that, it has made buying property in Mumbai costlier for you. With effect from January 01, 2015; Maharashtra Government has raised Ready Reckoner (RR) rates for the Mumbai region. The ready Reckoner rate is considered a Government declared base rate for calculating various taxes including stamp duty. For the year 2015, RR rates have gone about 15% on an average in Mumbai with some circles witnessing a steep hike of upto 40%.

What will happen with this?

The move is targeted at reducing the gap between the RR rates of the property and the actual market rate. In the past it was observed that, due to huge difference between the RR rates and the market value, some buyers (enticed by builders) were reducing the agreement value by paying lesser amount by cheque (i.e. in white) and paying in cash (in black) the difference. This was done to reduce the outgo on part of various Government taxes including the stamp duty. As a result, the Government was losing onto valuable tax revenue. Use of black money is giving rise to more loss on direct taxes such as income tax due to under-reporting of income by the builders.

As now the gap between RR rates and market value would reduce drastically, buyers and the builders would be forced to register agreements at the higher rates. It is noteworthy that, property prices in Mumbai have gone up about 300% on an average since 2008; hike in RR rates has been less severe.

However, this is not to say that, the move won’t have any impact on you.

Impact of this move on buyers

In case the agreement value is higher than the RR value declared by the Government, there might be little direct impact on the buyer. However, for any reason including the use of black money or even otherwise, the agreement value was massively below the market rate, recent hike in RR rates might affect your outgo on account of stamp duty and other taxes, wherever applicable. Furthermore, it is noteworthy that, there are certain costs which are linked to RR rates might also go up. Costs that are linked to RR rates include:
 

• Transfer of Development Rights (TDR)
• Fungible FSI (Floor Space Index)
• Open Space Deficiency Premium
   

It expected that, hike in RR rates may affect the pace of redevelopment activity in the city of Mumbai. It is also possible that, there could be delays in development of some properties as it may become unviable for the developers to develop properties in some cases.

PersonalFN is of the view that, although hike in RR rates might affect the sale of properties on account of various factors discussed above; the move would have a positive impact on curbing the use of black money in property transactions. Initially, affordable housing, redevelopment projects may be negatively affected with the move as rise in RR rates would directly inflate the project cost. Having said this, it would put tremendous pressure to lower rates. Many developers are already facing a financial crunch yet holding on to inventory to be able to quote high rates. As the gap between RR rates and market rates would be bridged, use of black money may be discouraged. Black money possibly has helped builders hold onto higher rates despite of having inventory of thousands of unsold residential accommodations. Investors that initially finance the project in anticipation of realising higher value on sale may also be discouraged going forward.

PersonalFN believes, hiking RR rates would have both, positive as well as negative effects on the property market of Mumbai. Having said this, the real challenge for the Government would be to establish a scientific approach to arriving at RR rates to link them with market prices. It also remains to be seen how much protest this move attracts from the mighty builders’ lobby and whether the Government rolls back the hike partially.

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