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How Industry Status can help Mumbai Real Estate

“What comes to your mind when you think of Mumbai ?”

A collection of replies from randomly selected people across the globe would comprise Bollywood, Commercial Capital of India, Hotel Taj, Gateway of India, Textile mills etc. No one of us expects anyone to remember Mumbai because of the homes that house its 15 million citizens…!

To many outsiders, the term ‘Homes in Mumbai’ conjures up images of slums or dilapidated chawls. A strange paradox emerges since ‘most expensive homes in India’ also means Mumbai. One therefore wonders that despite high prices why does not one find quality housing in India’s commercial capital. And this too after 25 years since quality became a buzzword for Indian consumers, thanks to the liberalization and de-licensing of industries in India.

The answer to the above lies in the question itself. Is Housing an “industry” ? It may surprise many but the fact remains that Real Estate is still only a ‘business activity’ and not an industry, both in word and in spirit. And this remains the root cause of a large number of problems associated with housing in Mumbai.

Almost every industry in the country has experienced lowered tariffs in the last 25 years. For Real Estate, especially in Mumbai, the journey has been in the reverse direction. Today, 25%-30% of what a home purchaser pays in Mumbai, goes to the government in some form or the other ; and this figure is amongst the highest for any business in the country. Tariff rates can always be a subject of debate but what makes matters worse is the time of collection of these govt duties.

A manufacturing factory is liable to pay excise duty at the time of delivery of goods. A trader is liable to pay VAT after the goods have been sold. Service Tax is payable by a consultant after the service have been rendered. But VAT and stamp duty on property purchase are not linked to delivery of property. They are payable on signing the agreement, which could be three years before the actual delivery. Payment towards premium for fungible FSI is even worse, it is payable even before the plans are approved.

This unique phenomenon of pre-collection of taxes means a large portion of the initial capital (which is generally the most expensive capital) goes towards payment of govt taxes than towards improving the quality of the product. Contrary to this an industry spends its initial capital on Research and Development.

The second biggest contributor to problem of housing in Mumbai is the large number of disputes. Long disputes and lack of clarity on regulation means developers spend their energies and resources on litigation & liasioning. Industries have the luxury of focusing their energies on design and innovation.

The third biggest problem faced by Mumbai Housing is the poor city infrastructure. Good infrastructure makes far-flung areas accessible, making available quality homes in large numbers. The current state of roads in Mumbai, unfortunately, is far from what citizens of a metropolitan should expect. Public transportation still remains within the government domain and needs a substantial overhaul. Contrary to this, the infrastructure impacting industrial activities i.e. ports, national highways, airports, airlines etc. are all predominantly within the private domain and thus have seen huge quality improvements since 1990s.

Better infrastructure and lowered tariffs have helped Indian industry innovate and thus achieve substantial gains both in quality as well as affordability of their products. If the Government expects similar benefits for home purchasers then the agenda of the Government should not stop just at Real Estate Regulation Bill or the new Development Control Regulations. The Regulator and the Legislation will need to approach issues in Real Estate with an industrial mindset.

A few steps in this direction would be :

a) Govt Cess : From Value Extraction to Partnering Growth

In almost all industries payment of taxes is linked to delivery of goods. In Real estate, approval relates charges are to be paid years before the actual delivery of goods. This results in substantial increase in the cost of development. If these charges are linked to Occupation Certificate instead of IOD/CC (approval of plans), then costs for developer would reduce considerably while still retaining control and monitoring with BMC

Similarly, instead of charging VAT and stamp duty at the time of registration of agreement, their payments can be linked either to delivery of apartment (as done by many states) or to installment of payment, as is done for Service Tax. This will improve the cash flow for the home purchaser thus increasing her affordability.

The biggest advantage of this approach is that linking Govt’s revenues to the completion of the project would make Govt a stakeholder in every project. When projects get stuck to delays in approvals, the only sufferers are the developers, existing tenants and purchasers. Having earned all its revenues in advance, the Govt remains completely unaffected by such delays. No officer then owns any sense of responsibility towards solving the problems of stuck up projects.

Linking tax receipts to completion of projects would impel officers to own responsibility towards completion. Besides being Regulators, these officers will be forced to own dual responsibility as Government’s Business Development Officers. The role of the govt will also shift from being a ‘Value Extractor’ to ‘A Partner in Development’. And this is the BIG change that one is looking for.

b) From Long Litigations to Quick Practical Solutions :

Whether it is grievance related to a tenant in a redevelopment project or a lessee of a land or violation of DC Regulations, all of them ultimately end up in High Court. This not only increases the cost and time spent on litigation but also blocks the already congested bandwidth of the High Court.

Regulations like Income Tax, Excise, Land Revenue have their own tribunals/courts. Tribunals not only offer quicker and cheaper solutions but also are able to see things at a more practical level than purely from a legal lens. It is high time that government considers setting up a tribunal to look at all redevelopment related disputes. This will ensure affordable justice for tenants and faster redressal for developers.

Similarly, to address issues with respect to all disputes related to approvals, BMC can set up a Referral Body comprising technical experts like Architects/Engineers/ex-Officers where all issues with respect to interpretations/violation of DC Regulations can be addressed. Once that is done, officers will have comfort against future judicial scrutiny of their decisions and also against impending nuisance of miscreant RTI Applicants. Of late, these fears have been a major cause for laggardness in the decision making process of the officers. For developers, this body will be a useful cushion against unmerited harassment by officers

c) Road Contracts with CRM (Customer Relationship Management)

Quality of roads is a key determinant of quality of Real Estate. While there are efforts to increase transparency in award of road contracts but what is also important is Accountability & Quality.

The roads in Mumbai are constructed by contractors and are ultimately paid for by the citizens. But citizens (i.e. the clients) can raise their grievances only with Municipal Corporator, who lays the blame on the municipal officers, who lay the blame on the contractor. The decoupling of the client and the contractor prevents the pressure of accountability getting transferred to the contractor.

If a system can be devised where the contractor can be made responsible to citizens then the quality and accountability will become key deliverables. There are various ways to achieve this disintermediation.

One of the ways is that instead of awarding work of repair/construction just for one particular road, BMC should award the road contract for an entire sector to one contractor and the same should be a Five Year Construction-cum-Maintenance contract with annual payments. Additionally, all roads in the sector should display the name of the contractor along with contact details, facebook page, call centre, Relationship Manger etc.

A contract for five years along with his name displayed everywhere would build a sense of ownership as well as commitment within the contractor. The Sector approach will provide the contractor an opportunity to work on economies of scale, thus reducing his costs. Annual payment plan, besides reducing scope for corruption, would also ensure contractor’s responsibility and commitment towards citizens who can anytime have access to the contractor through FB, call centre, RM etc.

During the past two decades, Indian industry has reaped the benefits of innovation, disintermediation, lowered tax regime etc and delivered international quality products at prices that Indian consumers can afford. It is now upto the govt to bring these reforms to real estate development. And the day this happen, citizens will start looking at a Real Estate developer as a nation builder and not just a “builder”.

Written By: Deepesh Salgia

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