CAG report touches just the tip of the iceberg as crores flow out through land law loopholes
CAG report touches just the tip of the iceberg as crores flow out through land law loopholesrealestate Updated: Apr 10, 2015 13:53 IST
A report released on March 25, 2015, by the Comptroller and Auditor General of India was widely reported in the media because of its reference to M/s Skylight Hospitality Private Limited (a company owned by Robert Vadra). One part of the report, titled Profits on sale of land, mentioned five companies, namely Skylight Hospitality Private Limited, Sun Star Builders Private Limited, Witness Pvt Housing Limited, Uppal Housing Pvt Ltd and Mark Builtech Pvt Ltd for selling “land for Rs. 267.47 crore they had purchased for Rs. 52.26 crore and earned a profit of Rs. 215.47 crore in such transactions”. According to CAG, these transactions deprived the state government of crores in revenues.
What the CAG missed mentioning, however, was that hundreds of developers in Haryana were bypassing real estate rules and licence conditions to avoid paying the state government its share of profits.
Realty rules require developers to keep 15% profit they made from a project and deposit the rest with the government.
Legally, in Haryana, only a landowner can apply for a license to set up a colony. Land prices shoot up once such licenses are granted. To get a licence, government rules require that the owner “derive maximum net profit at the rate of 15% of the total project cost of development of a colony after making provisions of statutory taxes. In case the net profit exceeds 15% after completion of the project, the surplus amount shall either be deposited within two months in the State Government Treasury by the owner or he shall spend this money on further amenities/facilities in his colony for the benefit of the residents.”
Bypassing rules is simple. Developer A plans a project and sells it to developer B without completing a project and making a huge profit as value of his land has appreciated after he acquires a licence. Since he has sold the project before completion, A does not comply with the licence provision of depositing extra profits with the government.
And that’s not all. Some developers have floated subsidiaries. One company gets the licence on the basis of land it owns; it sells the land to another company at double the cost; another company does the construction work and reports that its profits have not exceeded 15%.
However, calculations of the profits made by one developer through subsidiaries paint a different picture – and show that one entity makes profits that are double and even triple the total cost of the project. An official of the Department of Town and Country Planning of Haryana, on conditions of anonymity, says ”Often, a memorandum of understanding (MoU) or collaborative agreement is signed between two different companies to bypass rules.
“A company which gets the license on the basis of ownership of land can’t transfer or sell the license to any other company. So it sells the land to another company (which can also be its subsidiary) by signing an MoU or collaborative agreement. As per the agreement, the second company pays the total land cost to the first company but gets construction and marketing rights to the whole project. The first company earns a huge profit as land is the most expensive component of any project and the second company reports it has failed to make profits in excess of 15%. This is one of the instances. In many cases, a real estate firm has floated many subsidiary firms to evade the 15% profit clause.”
This is why the CAG in its report has recommended that “A proper mechanism needs to be put in place to ensure that in cases where land has been sold without completion of the project, net profit beyond 15% of the total cost as such sale should be deposited with the state government.”
“Procedures for entertaining applications for developing commercial colonies, criteria for determining area norms, timelines for completion of projects etc need to be clearly spelt out. There is an urgent need to make the whole process transparent and clear. Further, licenses should only be allotted to genuine developers after a careful and proper scrutiny of the applications,” the report adds.
Realty experts say that Haryana is the only state in which there is a provision under which a developer can’t make more than 15% profit as the state government thinks housing is not a money-making business. The 15% profit clause applies to both residential as well as commercial construction.
Keeping the profits – how developers do it
The CAG report tabled in the Haryana Assembly last week highlighted losses to the state exchequer through dubious land deals, but the state government needs to urgently address the problem of most developers bypassing rules requiring them to deposit with the state treasury the extra profits they make over and above 15% from housing projects.
For instance, developers are allowed to get their licenses renewed every five years and as many times as possible. Also, there is no time limit for completion of the project and for acquiring a completion certificate. As a result, projects which were started in the 80s did not get completion certificates till 2011.
“Developers normally take partial completion certificates, and not the full and final completion certificate, for which a final audit report has to be submitted. Some developers have submitted the annual audit report but a majority has not done so. However, the actual profit can be assessed only through a final audit report,” says Sanjay Sharma, a Gurgaon-based property consultant.
Says Ashish Kaul, an RTI (right to information) activist, “As per an RTI reply, no developer has taken any completion certificate till 2011. If he does so then he would have to submit a full and final audit report to the Department of Town and Country Planning, revealing his total earnings.”
In March 2011, the previous Haryana government had amended the Haryana Development and Regulation of Urban Areas Act, 1975, allegedly giving developers an escape route from the 15% profit clause. The developer now has the option to either deposit something called an ‘infrastructure augmentation charge’ of just Rs. 20 lakh per acre as applicable from time to time at any stage before the grant of completion certificate and get exemption from the 15% profit restriction.
Saurabh Prakash, a Delhi High Court lawyer and a resident of a group housing project in Gurgaon, says “What is surprising is that the maximum amount for `20 lakh per acre for the infrastructure augmentation charge is applicable with retrospective effect. Under the amended provision, developers can now pay Rs. 20 lakh and not be held accountable for profits they have made over and above 15% of the construction cost of the project.”
To find out how many developers took completion certificates after March 2011, Kaul filed an RTI application for the Department of Town and Country Planning, Haryana, but did not get a satisfactory response.
“The provision has been made to help developers get completion certificates without depositing profits over 15%. This was done by the previous Hooda government and we expect the BJP government to set aside the amendment in the interest of the homebuyers and the state,” says Kaul.