50 per cent reduction in premium; 100 per cent Failure in implementation

50 per cent reduction in premium; 100 per cent Failure in implementation

Real estate industry has been facing several challenges since 2015-16, and until 2019, although many small announcements were made to revive the industry, nothing could change its fate. The year 2020 was expected to be the 'ray of hope' for this industry but coronavirus pandemic hit the country and lockdown brought the real estate industry to a standstill.

With an aim to revive the same, the central and state government announced packages, however, bu much was needed from BMC which was supposed to offer some incentives for the long-term benefit.

Deepak Parekh committee shared its recommendations in July - Aug 2020 to revive the real estate industry, and as per their research, a total of 22 charges were levied by BMC and these charges are approximately twice as high as the value of the residential plot itself. Below-mentioned are some of their recommendations

  • BMC to reduce charges by 50 per cent
  • Developer to pay all charges in 2 instalments - 50% at the time of CC & 50% at the time of Occupation Certificate
  • To reduce the Land Under construction (LUC) Assessment tax

Furthermore, in September 2020, the state government made announcements stating that the government is considering the Deepak Parekh committee recommendations, following which, below-mentioned activities were reported:

In October 2020, BMC Commissioner warned of revenue fall if the builder was given the benefit of 50 per cent slash in premiums. But the industry members stated that it was difficult to explain to the BMC chief that if premiums remained higher, then no builder would take up projects. Hence, by charging higher premiums, the industry would not witness an increase in revenue. What could have worked is the decision to increase turnover which would in return fetch the desired outcome. This can be seen with a classic example of record-breaking stamp duty collections in the month of November and December 2020, whereby after reducing stamp duty by 60 per cent, the state government collected the highest stamp duty ever.

Secondly, two months after the announcement made by the BMC chief, reports about the reductions in premium was made, and it was stated that the same would be applicable until December 31, 2021, however, failed to announce the date when would start, and this hasn't been implemented as yet.

On 14th January 2021, UD ministry released announcing the reduction in premiums but with some conditions mentioned as follows:

  • LUC Assessment tax not to be reduced
  • As Congress Govt opposed, their recommendation of passing the benefit to the buyer by paying Stamp Duty by the builder was incorporated.
  • Lastly, premiums to be reduced but charges to be paid as per the land ready Reckoner rate of either 2019-2020 or 2020-2021 whichever is higher. This was due to a letter written by Opposition Leader, Devendra Fadnavis that by reducing Ready Reckoner Rate of 2020-21, state Govt has purposely benefited a specific developer for land in Andheri.

Considering these statements, it is clear that the state government has twisted the reduction of premium by keeping all parties satisfied, and this reminds me of an old story of a father and son who bought a donkey from the market and were returning to their home which was in the neighbouring village.

On their way back, the father and son heard few people whispering about how foolish they were as a duo who are not sitting on the donkey. So first father sat on the donkey and as they went ahead, they heard from some other people that how selfish is the father that he is sitting and his young son is walking. So listening to their advice, the son sat on the donkey, then listening to someone other both sat on the donkey. Again listening to someone else they carried the donkey on their shoulder and at last, when they were crossing the river on a bridge, the donkey tried to escape and fell down in the river. 

Keeping this context in mind, this reduction of premium has also changed significantly from what the Deepak Parekh Committee recommended, which was to revive the real estate industry. But the state government's ruling party, BMC chief, Congress and Devendra Fadnavis, the benefit of this premium reduction will not benefit anyone in the end.

We work as PMC in the redevelopment of old buildings and hence we come across various societies to make the Project Report and check its feasibility. As per the current announcement made by UD, if there is a project cost of INR 100 crore, then it’s sale revenue should be approx INR 130-135 crores for a developer to develop. In such a project, the project cost has reduced at least by INR 4-5 crores depending on the project, but at the same time developer will have to pay INR 6.5 to 6.75 crores by way of stamp duty to get the premium reduction benefit. So, in a nutshell, the developer will have to cut his profit by 2-2.5 per cent and this has not been implemented yet as well.

Hence, I believe that all the approving authorities like MCGM, MHADA, SRA have to issue their circulars for accepting a reduction in premiums. Moreover, keeping the current trend in mind, one should not be surprised with few more amendments might be made before the final circular is issued to match the climax of the above story of father snd son who bought donkey but could not make use of it.

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