Benami law is not a magic wand to fight the black economy

The original law, called the Benami Transaction (Prohibition) Act, 1988, was enacted during the Congress rule. It remained on paper as the rules to empower an authority to acquire benami properties were never framed. There were unconfirmable murmurs suggesting the file had disappeared briefly when there was a whiff about writing the rules. Not surprising, as the benami real estate sector has always been a big supply of political and electoral campaign funding in India — something that also explains how and why it survives even the best intentions of governments to clean it up.

You might also like

A five-chart report card on government finances in FY23 so far  

Savings fuel India's post-pandemic spending spree 

A wary govt adopts 2-stage process for IDBI stake sale

SUV play will bring Maruti benefits but just not much

Cut to 2016. Parliament approved an amended version of the original 1988 law piloted by the Modi government. The law was not only wider in scope and with harsher punishment, but also applied retrospectively. Apart from striking down the retrospectivity, the Supreme Court also quashed the jail terms in the original 1988 law, deeming it as unconstitutional and manifestly arbitrary.

Following which, the Business Standard reported on Monday, the government is planning to amend the law to write a new threshold for benami deals into it. The idea being that benami transactions with a value higher than the threshold would be invalidated and assets involved will be confiscated. This, the government hopes, will fast-track the confiscation process, reducing the load of the backlog on the adjudicating authority.   

However, the notion that a value threshold will place checks on the black economy and help crack down on benami deals is plain naïve.

The real problem lies elsewhere.

The real problem is that real estate continues to be a sink for black money; benami properties and under-reporting or mis-reporting of land transactions are the apparent instruments.

First, there’s the policy-induced artificial scarcity of land. Pray, why should the Railways and Defence sit on huge unused tracts of land? Or why should states have an outdated classification of whether land is for farming or to set up industrial units? These contrived rules on usage must go. The government must release more land for urban development. Being speculative in nature, benami deals drive up demand, and therefore, prices in the property market. Over time, therefore, they become more and more lucrative. A serious crackdown needs the supply side to be addressed by the government.

Second, and more importantly, frauds are rampant and benami transactions are convenient due to unclear land titles. The state guarantees ownership and turns out to be the keeper of all land and title records. When the title becomes a certificate of valid ownership, benami deals will fall dramatically.

Land is a state subject. It is imperative for state governments to come on board to implement land market reforms that will help lower disputes and improve governance to reduce benami transactions.

Many states have rightly modernised land records and captured electronic records of land ownership — just like in the case of dematerialisation of shares — to bring in transparency.  What is further needed is conclusive titling as presumptive titles result in frauds.

The Land Titling Bill, piloted nearly a decade ago, was meant to provide conclusive titles. Unfortunately, the bill remains on paper. Initiatives by the Centre such as the Digital India Land Records Modernisation Programme which involve surveying of plots and assigning the Unique Land Parcel Identification Number are useful. More reforms must follow.

Ideally, India should adopt the Torrens system of direct registration of titles in a central registry. This system, first adopted by Australia, is also followed in the United Kingdom. This is how it works — Once a person’s name is registered on the Torrens Title register, they become the owner of the property to the exclusion of all others. A certificate of title exists for every separate piece of land, containing references that include a volume and folio number, ownership details, rights of way affecting the land and any encumbrances including mortgages, leases and other interests in the land. This eliminates most litigation and reduces the cost and transfer of land. The process would involve naming all the parcels of land, entering them in a register and identifying the owner.

Third, there should be no delay in bringing real estate under the ambit of the GST that creates audit trails and allows service providers to claim credit for the taxes paid on inputs. Benami deals can be pinned down by pursuing these audit trails. A task force set up by the Thirteenth Finance Commission had recommended integrating the real estate sector into the GST framework by subsuming the stamp duty on immovable properties levied by the states.

Immovable property also includes land. But where land is used for construction of a property, it can be treated as an input. In such cases, the GST paid on land would be allowed as input tax credit in the same way as other inputs used in construction. States must see reason and allow this reform to go through.

The government, thus, needs to look beyond the benami law to fight the underground economy. Of course, removing anomalies in the legislation is needed, but they must be carefully thought through, given the patchy drafting of this law so far.

Elsewhere in Mint

In Opinion, Vivek Kaul reveals the British Raj did not steal just the Kohinoor. Deepro Guha & Aishwarya Viswanathan tell how to future-proof UPI’s ‘glocal’ payments model. Tyler Cowen presents a contrarian view on British PM Liz Truss's economic plan. Long Story narrates how China is forced to reel in its global tentacles.