A Rs 1.85 Lakh Crore Scam? – HT Estates – 22-Nov-2014
November 22, 2014 - Uncategorized
The inability of the Haryana government to implement a 15% profit clause in the Development and Regulation of Urban Areas Act, 1975, could have led to massive losses for the exchequer
Should an investigation be initiated by the Comptroller and Auditor General (CAG) of India, the mother of all scams is likely to be unearthed in Haryana’s real estate sector. This is because successive state governments, after 1981, when the first licence was granted under the Haryana Development and Regulation of Urban Areas Act, 1975, have failed to invoke a license clause stating that developers can make a maximum profit, after taxes, of just 15% on a project. Any excess amount has to be deposited within two months in the state government treasury by the owner or spent on building amenities/facilities in the colony for the benefit of the residents.
As the clause has not been implemented, a simple calculation assessing losses incurred by the state exchequer in Gurgaon from 2007, till this year, because of non-deposit of profits by developers, could add up to 1.85 lakh crore.
“If this assessment is done from 1981 and all other areas such as Faridabad, Sohna, Dharuhera etc are to be included for assessment, the amount could be mind-boggling. It’s important to remember that the 2G spectrum loss was estimated at 1.76 crore and the coal block allocation loss was about 1.85 lakh crore,” says Sanjay Sharma, MD, Qubrex, a property consultancy and brokerage firm in Gurgaon.
Before a developer gets the license for construction of the group housing project, he signs a bilateral agreement with the Department of Town and Country Planning (DTCP) agreeing to submit a certificate from a chartered accountant declaring that the overall net profit, after taxes, has not exceeded 15% of the total project cost. This certificate has to be submitted within 90 days of the completion of the project.
Another clause states, “The owner while determining the sale price of the apartment in the open market shall compute the net profit at the rate of 15%, the details of which, including the cost of acquisition of land, shall be supplied to the director (DTCP) as and when demanded by him. The total project shall mean a defined phase or a compact area of the colony, as approved by the director.”
Experts believe that developers exploit the loopholes in the license agreements and the Haryana Development and Regulation of Urban Areas Act, 1975. For instance, a developer can get the term of his license renewed every five years and as many times as possible. Also, there is no time limit for completion of the project and for acquiring the completion certificate. As a result, projects which were started in the 80s did not get completion certificates till 2011.
“Developers normally take partial completion certificate, 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 have not. However, the actual profit can be assessed only through a final audit report,” says Sharma.
Says Ashish Kaul, an RTI activist, “As per an RTI reply, no developer has taken any completion certificate till 2011 because if he does so he would have to produce the full and final audit report to the DTCP, revealing his total earnings.”
However, in March 2011, the previous Haryana government amended the Haryana Development and Regulation of Urban Areas Act, 1975, allegedly giving developers an escape route from the 15% profit clause. The amendment says that the developer has the option to either deposit the infrastructure augmentation charge as applicable from time to time at any stage before the grant of completion certificate and get exemption from the 15% profit restriction.
“What is surprising is that the maximum infrastructure augmentation charge is just 20 lakh per acre and it’s applicable from retrospective effect. Many developers who were granted licenses for group housing projects and started construction in the 1980s and 90s, did not get completion certificates and one of the reasons is that they did not want to give a full and final audit report to the DTCP. Under the amended provision, they can pay 20 lakh and get away with their all profits beyond 15% of the total construction cost of the project,” says Saurabh Prakash, a Delhi High Court lawyer and a resident of a group housing project in Gurgaon. Prakash, who is contemplating filing a PIL in the Punjab and Haryana High Court on the issue, says. “I have also filed an RTI to find out how many developers have applied for completion certificates after 2011 by paying infrastructure augmentation charge. Once we get a figure, we can question why no developer has ever applied for any completion certificate from 1981 till 2011.”
“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 commercial construction too,” says Sharma.