are “most arbitrary and draconian.” It further
Real Estate (Regulation and Development) Act, 2016: Section 2 Clause (z) (zk)
States that have notified the rules, 2017,
Accessed 28th August, 2017
Section 4 Sub Section (1) Clause (l) sub clause (D)
Economic times report,
Accessed 4th September, 2017.
Section 59 Sub-section (2)
Section 14 Sub-section (3)
Hindustan Times Article
Accessed 6th September, 2017, Paragraphs 3 and 4.
Hindustan Times Article
Accessed 6th September, 2017, Paragraphs 3 and 4.
Due to the implementation
of RERA, not only are builders facing financial crisis, but also mental torture
which can be clear from the fact that the allottees are putting a lot of
pressure on the builders, in recent weeks, in the form of protests. Recently,
the buyers of the Amrapali projects (Which are amongst top 10 builders in
Noida) threatened to go on a sit in protest if the promoters were not booked by
the police. Hence, in this way, Even though it has many benefits for the
buyers, the promoters are the ones who have to face this difficult phase of
implementation of the act, and pay many penalties even though several state
governments are still working on the notification of the rules, ultimately
leading to a situation of deadlock. Hence, we can say that it is too harsh on
In the petition filed by four developers, namely Swapnil Promoters and Developers, Swapnil
Associates, Sukhyog Constructions and M/s Guru Constructions in
the Bombay High Court, they have said that the provisions of the act are “most
arbitrary and draconian.” It further reads,” ….the provisions of the Act are impracticable and onerous conditions
have been imposed upon the promoters which cannot be fulfilled how-so-ever the
promoter tries to comply with the same.” This clearly brings out the opinions of the promoters as to the
arbitrariness of the provisions of the act. Furthermore, the petition says, “The penal provisions are made applicable to
ongoing projects ignoring the settled legal principle that penal provisions can
never have retrospective operation.” The Builder and Developer association
(petitioners), which represents a group of builders, in Madhya Pradesh
contended against the impracticality of depositing 70% of the amount collected
from buyers in a separate account, in addition to the sections in ongoing
Two distinct group of builders have moved the High courts in
Maharashtra and Madhya Pradesh challenging the law, in particular, those
sections that put old project, started before the law was passed and are yet to
be completed, under the ambit of this act. The courts have asked the central
government to respond to the petitions, which mentions that Section 3
that talks about ongoing projects is applied retrospectively and is against
constitutional safeguards. They have also challenged section 59, which defines
the penalty of the violations of the act7.
the promoters contending in the courts?
Moreover, in case of structural defect or any other defect in workmanship, quality or
provision of services or any other obligations of the promoter as per the
agreement for sale relating to such development, brought to the notice of
promoter within five years from the date of handing over the possession, The
promoter shall rectify those defects within a period of 30 days with no charge,
and if he fails to do so, he shall be liable to compensate in a manner provided
by this act6.
Getting the rectification done within thirty days without any charge is
again harsh on the promoter, because the promoter will now be liable to extra
costs that have to be spent on the rectification of the defect. And five years
is a really long time to notice a structural defect or any defect as mentioned
above. A building, even if it is not having any structural defects for a period
of four years but due to excessive rain or any other natural calamity, it has
now become noticeable, the promoter will be liable even if he used materials
according to prescribed standards.
The chapter VIII of RERA talks about the offences, penalties and
adjudication. A promoter, if he fails to register their project under RERA, shall
be punishable with imprisonment, which may be extended up to three years, or
with fine, which may be extended up to a further ten percent of the estimated
cost of the real estate project, or with both5.
The cost of the real estate projects are really very high and paying 10% is hefty.
After the implementation of RERA, a lot of
builders/developers/promoters have been facing a lot of problems. The centre,
in order to have transparency between the allottees and the promoters, have
taken a lot of stringent steps against the latter. The entire procedure of the
real estate market, which has been followed since a very long time has been
changed. This will adversely affect the builders. All of their plans, to
complete certain stages of the project, to advertise it, will all be delayed
because now, the builders have to register their projects under RERA, which is
a tedious process. Several states have not notified the rules that are to be
followed, which leaves not only the promoters but also the allottees in a
helpless position. This has ultimately lead to a deadlock where neither the promoters can carry on with their
construction activities, nor can the allottees be given their homes for which
they have already paid because the buildings are not receiving completion as
well as occupancy certificate. The real estate sector has been facing a lot of
losses on account of the delay that has been caused due to the implementation
Why is RERA too harsh on the promoters?
But, if a person buys a ready to move flat, that is a flat in a building,
which has obtained occupancy certificate, GST won’t be applicable. It is
payable only in the flats which are under construction. Thus, the flats with
Occupancy Certificate are outside the ambit of both RERA as well as GST.
Hence, even after the input tax credit benefit to the promoters,
the prices for the end users are expected to rise.
For example: A promoter purchases bricks, cement, steel etc. for
the construction of the building. He pays taxes on purchasing those items in
accordance to their respective invoices. So, later, when he has to pay tax on
the finished product, he can claim exemption for the taxes previously paid by
him for the raw materials. In this way he can claim input tax credit.
But, the costs are not expected to rise
much because the builders can now claim input credit from the taxes paid on the
materials used for construction. Input tax credit is basically exemption given
to the overall tax to prevent double taxation.
With the GST system of taxation being introduced on 1st
July, 2017, the real estate sector saw a significant change in the taxation
system of the real estate. Previously, for under construction buildings, each
state levied Value Added Tax (VAT), the Centre levied the Service tax. Along
with this, there are additional levy, which include Registration charges and
stamp duty. But with the implementation of GST, The tax rate is fixed to 12%
for under construction buildings (excluding registration charges and stamp
duty). The number is quite high as compared to the previous taxation system,
which summed up to nearly 5.5% of the total cost of the property (an increase
of 6.5% – VAT and Service tax summed up to 5.5%).
What will the
effect of GST and RERA be on the real estate sector?
Rohit Gera, MD, Gera Developments and VP Credai,
Pune Metro, says, “Before the introduction of RERA, the risk on account of
delays, quality, title, and changes in the project were all borne by the
customer. As a result, most customers had to deal with some sort of the default
and were forced to bear the cost of this default. These costs will now be borne
by the developer and there will be a consequential premium that the flat
purchasers will have to pay for transferring this risk to the developer. In my opinion, there is no headroom for developers to absorb these
increased costs and immediately upon the first opportunity we will see this
cost being transferred on to the home purchase by way of an increase in prices4.”
After passing of the act,
there were a lot of additional expenses that were to be incurred by the
promoter which include Registration charges, Quarterly filings, Maintenance of
the website. Also, Restriction on the sale of open parking spaces, restriction
on use of the cash from the escrow account that
has to be created which will contain 70% of the entire amount of money
paid by the allottees. These extra expenses will be covered by the promoter by
increasing the prices of the property. Hence, the rates in the real estate
sector are expected to rise up.
For example: If
previously, The area of sale according to super built up area of an apprtment
was 1000 sq feet with a rate of Rs. 3000 psf, the cost of the total apartment
including built up area and the common area will be Rs. 30 Lakhs. But after the
implementation of RERA, only the carpet area has to be considered, which is
approximately 70% of the super built up area, and is equivalent to 70% of 1000
sq ft. that is 700 sq ft. Now, in order to maintain the Rs. 30 Lakh price, the
builder/promoter will increase the price of the real estate land to Rs. 4286
(approx). That is an increase of about 42% in the prices of the apartment psf.
The real estate prices
are expected to rise after the implementation of RERA. That is because
previously, the real estate were sold on basis of the “Super built up area” but
RERA proposes the “Super area” or the “Carpet area” basis. Carpet area is the
total area of the apartment excluding the thickness of the inner wall. It is
the actual area you get for use in the real estate property purchased. “Built
up area” is the total are of the apartment including the thickness of the inner
walls. Generally, 70% of the built up area is equivalent to the carpet area of
the apartment. The “super built up area” is the sum of the built up area and
the common area that includes stairway, corridors, lifts, etc. In the Pre-RERA
system, the properties were sold on basis of Super built up area, which was
very profitable to the promoters, but post RERA implementation, Carpet area basis
has to be used which will cut the profits of the promoters to a very large
extent as the area sold is being cut by
30% to 35% . As a result, to neutralize this, the promoters will obviously
increase the prices of the apartment per square feet (psf) in order to maintain
the previous prices of the apartment.
will RERA affect the prices in the Real estate sector?
The promoter has to make
a declaration supported by an affidavit which shall be signed by the promoter
or any other person authorized by the promoter which states that seventy
percent of the amounts realised for the real estate project from the allottees,
from time to time, Shall be deposited in a separate account maintained in a
scheduled bank to cover the cost of construction and the land cost and shall be
used only for that purpose, provided
that the amount of money withdrawn from this account is proportional to the
percentage of completion of the project only after it is certified by an
engineer, an architect and the Charted Accountant in practice and this account
shall be audited within six months after the end of the financial year by a CA
So this separate account basically acts as an Escrow Account which means that
the money will be kept in that account only for the purpose of the construction
of the specific real estate project and nowhere else. This provision in the act
is a response to the wrongful trade practices that were carried out by the
promoters like diverting the money realized from one project to a different
project. This led to delays in providing the possession of the houses to the
is the money to be managed under RERA?
this act. This includes
all 29 states and 7 Union Territories excluding Jammu and Kashmir. All the
states and Union territories in India excluding Jammu and Kashmir were supposed
to notify the RERA rules by 31st July, 2017. But, as on 28th
August, 2017 only 17 states have notified the rules which include Andhra Pradesh,
Bihar, Chhattisgarh, Gujarat, Haryana, Himachal Pradesh, Karnataka, Kerala, Madhya,
Pradesh, Maharashtra, Odisha, Punjab, Rajasthan, Tamil Nadu, Telangana, Uttar
Pradesh, Uttarakhand. All of the union Territories have notified the rules. The
states, which are yet to notify the rules, include Arunachal Pradesh, Assam,
Jharkhand, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura, Goa, and
According to section 3 Sub-section (1) of the act, The promoter shall not
advertise, market, book, sell, and offer for sale, unless registered under The real
estate regulatory authority established under this act, provided that the
projects that are ongoing on the date of commencement of this act and for which
the completion certificate has not been issued, the promoter shall make an
application to the authority for registration within three months from the
commencement of this act. Various states have kept several ongoing projects out
of the scope of RERA even though those projects have not received completion
and occupancy certificate and this has led to the dilution of the Central RERA
act. However, since the state rules are subordinate legislations, they cannot
as a general rule of law, be in violation of the provisions of the principle
legislation. The position on this discrepancy is yet to be settled, the courts
and the central government have reached out to such states and asked them to
align the provisions of the state rules with the central legislation.
months of commencement of
the act, by notification, make rules for carrying out provisions of
According to the section 84 of the act,
the appropriate government, within the period of six
are the RERA rules to be implemented?
Section 2 Clause (d) of
the Real Estate (Regulation and Development) Act, 2016 defines an allottee. An
allottee in relation to a real estate project is a person to whom a plot,
apartment or building, as the case may be, has been allotted, sold or
transferred by the promoter. It does not include a person to whom a plot,
apartment or building is given on rent.
is an ‘Allottee’?
person who constructs any building or apartment for sale to general public1.
person who acts himself as a builder, colonizer, contractor, developer, estate
developer, or any other name claims to be acting as the holder of power of
attorney from the owner of the land.
apex State level Co-operative housing finance society and a primary housing
society which constructs apartments or buildings for it members.
development authority or public body in respect of allottees of buildings or
apartments constructed by such authority or plots owned by such authorities or
placed at their disposal by the government.
person who develops a land into a project whether or not it contains structures
for selling it to other persons.
person who constructs a building or a part of building into apartments for
selling all or some of the apartment to other persons.
2 Clause (z) (zk) of the Real Estate (Regulation and Development) Act, 2016
defines a promoter. In simple terms, Promoter is:-
Who is a ‘Promoter’?
Real Estate (Regulation and Development) Act, 2016 or commonly known as RERA
2016, is a recent legislation passed by the Indian Parliament, which regulates
the trade practices in the real estate sector.
Rayja Sabha passed the act on 10 March 2016 and by the Lok Sabha on 15th
of March 2016. There are 92 sections in the act. 52 sections out of these 92
Sections came into force on 1st day of May 2016 and the rest of the
sections on 1st day of May 2017. RERA aims at not only new real
estate projects but also the on-going real estate projects where the completion
as well as the occupancy certificate have not been received. A completion
certificate is the one, which is provided by local authorities after evaluation
of the real estate project if it has been executed in accordance to the defined
norms and approved designs. It is very important to obtain a completion certificate
because in case properties operate without it, residents are threatened to be
evicted and the city engineering department will penalize the properties for
not paying property tax. So, to get a completion certificate, the promoter
first has to register his real estate project under RERA. Though there are
exceptions to this mentioned in section 3 Sub-section (2) of the act, which
state that a project does not require registration where the land proposed to
be developed does not exceed 500 sq. meters or the number of apartments to be
developed does not exceed eight (8), When the promoter has already obtained a
completion certificate and for the purpose of repair, re-development which does
not include sale of property. The sections 4 and 5 of the act state the
procedure of registration and grant of registration respectively.
is the Real Estate (Regulation and Development) Act, 2016?