The dy­nam­ics of cir­cle rates

HT Estates - - HTESTATES - 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 length’s 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 per- ceive 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 de­ter mined by t he 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 cir­cle rates are not re­viewed reg­u­larly to bring them in line with the mar­ket prices, 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 gover nment’s drive to­wards curb­ing the in­ci­dence of black money and money laun­der­ing in real es­tate.


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