What is benami transaction?

Benami Transactions (Prohibition) Act, 1988 is an Act of the Parliament of India
that prohibits certain types of financial transactions. The act
defines a ‘benami’ transaction as any transaction in which property is
transferred to one person for a consideration paid by another person.

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In other terms
benami property implies the property which has bought in the name of some
individual other than the individual who has financed it. The individual who
has rendered the required cash for the said property has not purchased it in
his name however had done so in some different person’s name.

Retrospective and Prospective law

In simple words ‘Retrospective’ is normally connected
to those acts of the assembly, which are made to work upon some subject,
contract and so on which existed before the section of the act, and they are
along these lines called review laws. Hence, a retrospective law is one that is
to produce results, in purpose of time, before it was passed. Similarly, a
Prospective Law is the one which accommodates, and manages the future acts of
men, and does not meddle at all with what has past

Recent Developments in Benami Act, 1988

 

Parallel
economy has been growing in India for a long duration of time. It is expected to
be 1.4 trillion dollars which is equivalent to Rs 70 lakh crores. This is much
more than the national income which is approximately Rs 50 lakh Crore.

Keeping in mind
the end goal to check the collection of black money in the nation, Modi
Government has made a noteworthy stride by demonetizing the higher currency
notes from the course. It isn’t the main advance which has been taken by the
Government in such manner, as Benami Transaction Amendment Act, 2016 has additionally
been passed. This amendment will come into effect from 1st November
keeping in mind the end goal to cut the stream of black money from the estate
market. The double move taken by the Government was to make sure that the
legalized money should be available for circulation and illegalize all type of
money collection.  

The Benami Transactions (Prohibition) Amendment
Act, 2016 was passed by both the houses of the parliament and became effective
from 1st November 2016. It is fascinating to take note that the
parent act of 1988 had just 9 sections while the new amendment of 2016 has 71
segments which is approximately 8 times more than the past act

According to Justice Vibhu Bakhru in
an interview with Times of India, on 11th October, 2017 the newly
amended benami law will huge ramifications on the society. According to him the
income tax department viewed it in such a manner to give it retrospective
effect from 1988, when this legislature was passed for the first time. This
would lead to opening of 20-30-year-old cases out which some have been moved all
the way up to Supreme Court of India.

The 2016 benami transaction (prohibition) act has
defined ‘Benami property’ as any property which is the subject matter of a
Benami transaction and also includes the proceeds from such property.

The major amendments that have brought into
place that distinguishes it its from its parent act are as follows:

 

 

Benami
Transaction Act ,1988

Benami
Transaction Amendment Act,2016

1) According to
the 1988 act the property bought for the benefit of wife or unmarried
daughter cannot fall under the scope of the act

1)
According to the 2016 Amendment act, additional clauses have been made in
order to enlarge the scope of the definition

2) Regularity
mechanisms were absent in the 1988 act

2) Regularity
mechanisms have been put in place. According to this four
authorities namely Initiating officer, Approving Authority, Administrator and
Adjudicating Authority will be appointed in order to ensure that the proper
steps are being taken against the impugned property.

 

Need for Amendment Act, 2016

 

Property
prices in India moved to an all-time high during the UPA 2 rule 2008-2013 when
corruption and black money reportedly peaked in India. The NHB Residex (2007-100)
of global property prices (graph 1) show the doubling of property prices during
the five-year period and a marginal decline after the new Government came to
power in 2014. The unsold inventory of high end properties in the top 3 cities
(Delhi NCR, Mumbai and Bengaluru) rose by 4% to nearly 5 lakh homes in 2015.
Still prices have not declined because the builders are holding on to unsold
assets with the hope that the unspent black money that is still rampant in the
ecosystem will mop up the exorbitantly high properties once the dust and din
about income declaration settles down.

Graph1-NHB Residex of global
property prices

Implementation of Benami Transaction Amendment
Act,2016

 

 

Impact of Benami transaction Amendment act
on the market

Benami transaction Amendment act, 2016 was
launched with a three-fold objective that is to amend the definition of benami transactions,
establishing control and reporting authorities and specifying the penalty for
those entering into benami transactions.

Benami Transaction become the center piece of the
art which involved other legislature such as he Real Estate (Regulation and Development) Act
and the Land Acquisition Rehabilitation and Resettlement (Amendment) Bill 2015.
This led to increased transparency and professionalism in the industry.

The motive of the benami act was that by adding
correct name to the property being bought will not only bring transparency in
the residential market but with increased transparency, the title risks will
reduce which will thereby boost the buyer’s confidence.

With increased transparency and less corruption,
the money circulation will enhance which will lower the costs of residential
market and thereby increase the spending power of the customer’s. This in-turn
would have positive effect on the economy in the long run.

Lenders
Confidence- Lenders
confidence that is either banks or private equity will see a boost in their confidence
to loan out to the property. In the event of wrong or unclear titles, the
lending financial institutions conduct its own research on a property before
approving the loan.

This is most likely to affect those with multiple
ownerships, false ownership as well as those unknown ownership players in the
market who play with the residential sectors especially in small scale metros
and non-metropolitan markets

Land
transactions-The quantity of benami exchanges in the land is substantial
and it is anticipated that the change will have a positive effect, here. Land
exchanges in India, take a normal of 1-2 years for consummation. With the by
and large buy of land no longer suitable, most developers are selecting joint endeavours.
After various discourses on income sharing and translations of reasonable FSI,
it is regularly discovered that the land title itself isn’t clear. With the new
changes, ideally, lucidity on titles will improve over the period of time. This
will help designers, to finish up joint venture exchanges on land rapidly and
open up bundles of land parcels which will eventually lead to residential
development. Exits on the basis of fund transactions will be quicker.

Supply of Residential
units- Benami
transaction amendment act will have a huge impact on the supply of residential units.
According to the amended bill, it seeks out to establish four major authorities
and the bill gives the competent authority the right to acquire such properties
without paying any consideration.

For the
purpose of smooth implementation, control and monitoring, the bill has defined
a hierarchical structure with different responsibilities which are as follows:

Authority

Functions & Responsibilities

Initiating
Officer

Notice and
attachment of the accused benami property

Approving
Authority

Notice to
extract out evidence

Adjudicating
Authority

Confiscation
& vesting of property

Administrator

Possession and Management of Properties confiscated

Appellate Tribunal

Hear appeals against the orders of Adjudicating Authority

 

On the
basis of the structure, a lot of power lies in the hand of an initiating
officer in order to declare a person benamidar. He may issue a notice to the
said benamidar person and seize his property for the next 90 days from the date
of notice, subject to the permission from the approving authority.

All the
appointed authorities will have to work in synchronization in order to
establish a property as benami property. Also, lesser number of people involved
in the process will ensure that no foul play is being played and it would be
much easier to track if any. Secondly the confiscated property will either be
auctioned or will be used by government.

On the
basis of these the overall supply in the residential market will be minimal.

Impact on pricing-
Rich investors, who
seek to allocate their unaccounted wealth, usually undertake part in benami
transactions in real estate, to dodge tax authorities and have a better return
on investments

With such investors,
be pushed out of the market, in this manner, prompting a more end-client driven
market. It is anticipated that there will be any real effect on residential
costs. End-client demand is already present in the market coupled with declining
number of active investors from this sector. Prices have stayed firm where
purchasers have lived up to their price desires. The sector has seen an
expansion in private equity funding, for well-established developers and
investors and this pattern is probably going to proceed in the future as well.

Small scale players
or small investors are probably the ones who would be hit hard with this amendment
as these small players receive a huge load of money from big investors during
construction. With few big clan investors in the market, small scale players
will have hard time for funding of their project.

Impact on Society-Stringent Penalty

The Act lays down stringent measures to discourage Benami
transactions. The re- transfer of the Benami Property is prohibited under the
act and there is defined punishment for commencing any Benami Transaction after
the date of commencement of the Bill which includes.

For guilty of offence of a Benami transaction

 › Penalty up to 25% of the fair market value
of the property

› Rigorous imprisonment for minimum 1
year up-to 7 years

For false information

› Penalty upto 10% of the fair market
value of the property

› Rigorous imprisonment for minimum 6
months upto 5 years  

 

Overview on the impact on real estate market

This act would be applicable on any kind of assets movable,
immovable, tangible, intangible, corporeal or incorporeal. It also includes any
right or interest or legal documents or instruments evidencing title to or
interest in the property; where the property is capable of conversion into some
other form, then the property in the converted form; and the proceeds from the
property. The act is expected to adversely impact transaction volumes and lower
property prices. The act will ensure that all real estate transactions shall be
in the name of actual owner

i.e actual person paying the consideration from her/his known
sources. One of the major problem in real estate transactions is clarity of
title which limits investor as well as financial Institution participation in
the sector. Transparency issue is one of the negative factor which limits the
private equity and NBFCs.

Conclusion

 

The amendment in the act is a means to reduce generation and
utilization of unaccounted (black) money. This was a pivotal election promise
made by the current government. Through this amendment the government seeks to
clearly define ‚Benami transactions, establish adjudicating authorities and an
Appellate Tribunal to deal with Benami transactions, and specifies the penalty
for entering into Benami transactions. Moreover, this will also increase the
tax revenue for the Government by curbing unaccounted money into the system.
Along with other regulatory changes such as implementation of Goods and
Services Act (GST), Real Estate (Regulation & Development) Act (RERA) and
Land Digitization, this amendment is a step in the right direction in improving
transparency in real estate transactions. In the short term it will lead to a
reduction in transaction volumes. However, in the long term it will make India
a more attractive investment destination, aligning transactions with ethical
standards and will increase international institutional investors and financial
institution’s participation in this sector.

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