Modi's next target: Ill-gotten properties

Under new law, those unable to explain source of funds for purchases face jail term

After illegal cash, the Narendra Modi government in India is going after properties bought through illicit funds - a move that experts say could prove as challenging as demonetising currency.

Prime Minister Modi said the authorities will soon start implementing a new law against "benami" property, or real estate that an individual buys under a fictitious name or someone else's name, instead of using his own name. Benami is a Hindi word for "without name".

The law, an amended version of an earlier law passed by Parliament in August, metes out up to seven years' jail for those guilty of buying property in another person's name and not being able to explain the source of their money.

"This is just the beginning. We have to win this battle and the question of feeling exhausted or stopping simply does not arise," said Mr Modi on Sunday in his regular radio programme Mann Ki Baat, or "matter of the heart" in Hindi.

"We are going to take action against the properties which are purchased in the name of others," he added.

  • The black economy

  • The size of India's black economy is around US$460 billion (S$666 billion), according to a study by Ambit Capital Research. More than 30 per cent of transactions in the real estate sector are estimated to be done with black money.

    A 2012 report by the Finance Ministry stated that the real estate sector in India constitutes almost 11 per cent of GDP.

Mr Modi came to power on the promise of fighting corruption and curbing India's black money economy, which is estimated to equal or exceed the size of India's economy.

Over the past two years, the government has been trying to go after firms and Indians who send money abroad illegally to avoid taxes.

The government's boldest step came last month when it demonetised 500- and 1,000-rupee notes, the two highest denomination notes in India, to target those who were stashing away unaccounted wealth in cash.

But the unpopular move has thrown the country into a tailspin, with cash in short supply and Mr Modi coming under fire from critics who note that only 6 per cent of unaccounted wealth in India is held in cash.

Most is estimated to be parked in real estate and gold, with no real data on the sizes of these holdings.

While the tax authorities are gearing up to identify such properties, experts say it would be tough to find out who owned such unnamed property in a country where land records are kept in numerous files in municipal or local bodies.

"Implementation and execution is going to be an issue," said Mr Ashutosh Mishra, a governance expert. "We haven't moved ahead with digitisation of land records. How are you going to match everything?"

In India, buying real estate is shrouded in illegal practices.

Sellers may demand a large chunk of the money - from 20 to 60 per cent - in cash to evade income tax.

As a result, some  are forced to pay cash under the table to buy real estate. The cash crunch has caused real estate sales to decline and observers expect the new benami law to lead to a fall in property prices.

"We expect the government to further tighten property transaction disclosure norms to clamp down on benami deals," said Mr Amit Oberoi of Colliers International, a real estate services company.

Professor Arun Kumar, an economics professor and author of The Black Economy In India, said the government needs to introduce a wealth tax and a mechanism to figure out who owns benami property.

"There is a lot of benami property and most of it is with 5 per cent of the population.

"The difficult part is to find out who is the true owner of the property," said Prof Kumar.

He added that he doubted the new law will be effective.

"They are only trying to scare the population so that maybe some people get scared and declare.

"Businessmen and black money people are hardened people. They know how to work around the system," he said.

A version of this article appeared in the print edition of The Straits Times on December 28, 2016, with the headline 'Modi's next target: Ill-gotten properties '. Print Edition | Subscribe