Note4Students
From UPSC perspective, the following things are important:
Mains level: Private Property; DPSP;
Why in the News?
A 9-judge Constitution Bench of the Supreme Court, in a majority judgment (8:1), held that not every private resource can be considered a ‘material resource of the community’ to be used by the government to serve the ‘common good’ under Article 39(b).
- This overturns the earlier interpretation formed in 1977 that has been followed by the Supreme Court till 1997.
What are Constitutional Provisions?
- Part IV of the Constitution contains the Directive Principles of State Policy (DPSP) where government should strive to achieve social and economic justice in our society.
- Article 39(b) in Part IV provides that ‘ownership and control of material resources of the community are so distributed as best to subserve the common good.’
- Articles 19(1)(f) and 31 originally guaranteed right to property and compensation for acquisition as a Fundamental Right respectively.
- Article 31C that was added through the 25th amendment in 1971, provided an exception that laws made to fulfil the principles under Articles 39(b) and (c) shall not be void on the ground that it violated Fundamental Rights including right to property.
- In the Kesavananda Bharati case (1973), a 13-judge Bench of the Supreme Court upheld the validity of Article 31C but made it subject to judicial review.
- In 1978, the right to property was omitted from Fundamental Rights and made a constitutional right under Article 300A.
- Any law to acquire private property by the government should only be for a public purpose with adequate compensation meted out.
What were earlier judgments?
- In the State of Karnataka vs. Ranganatha Reddy (1977) case, the Supreme Court upheld a law nationalizing private bus services, with Justice V.R. Krishna Iyer interpreting “material resource of the community” in Article 39(b) to include all national wealth.
- This minority opinion influenced the Sanjeev Coke Manufacturing Company vs. Bharat Coking Coal Limited (1982) case, which also supported nationalization, and was referenced in Mafatlal Industries Limited vs. Union of India (1996).
What is the current ruling?
- The SC recently ruled in the Property Owners Association vs. State of Maharashtra case that not all privately owned properties qualify as “material resources of the community” under Article 39(b).
- A 9 judge bench, stated that only certain properties, based on their nature and impact on public welfare, can be considered for state acquisition to serve the common good.
- This decision marks a shift from earlier interpretations that emphasized that individual property rights are protected and not every private asset can be appropriated by the state.
- The ruling also noted that the term “distribution” in Article 39(b) includes both state acquisition and redistribution to private entities when it benefits the community.
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What criteria should determine if a privately owned resource qualifies as a ‘material resource of the community’?
- Purpose and Public Utility: Privately owned resources may be classified as “material resources of the community” if they are essential for societal welfare, addressing collective needs, or fulfilling significant public purposes, such as energy, water, or land critical for infrastructure.
- Proportionality and Fairness: The court emphasized that any state action must be proportional, balancing public benefit with the impact on private owners.
- Economic Impact and Control: Resources that substantially impact the national economy or are crucial for maintaining societal equity (such as natural resources) may be considered community resources, but this does not apply to general private property.
How does this ruling impact the balance between individual property rights and the state’s ability to intervene for public welfare?
- This ruling reinforces individual property rights, clarifying that private property cannot be arbitrarily acquired under the guise of benefiting society. The state must justify the acquisition based on substantial, verifiable public welfare needs.
- Limitations on State Power: By rejecting an expansive interpretation of Article 39(b), the court limits state power, ensuring that only properties directly tied to public interest and welfare fall under this category.
What are the potential economic implications of this ruling in India?
- Investment Climate: This ruling strengthens protections for private property, likely improving investor confidence by assuring that property rights are safeguarded from excessive state intervention.
- Economic Development and Social Equity: By narrowing the scope of Article 39(b), the ruling limits redistributive policies to sectors where public welfare is a clear priority, allowing economic resources to be distributed in a manner that considers social equity while respecting individual rights.
- Real Estate and Industrial Sectors: The ruling could positively affect sectors with high-value assets, such as real estate and industry, as businesses will have greater certainty regarding property ownership and security.
How might this decision influence future legal interpretations and legislative actions?
- Refined Scope for Article 39(b) Applications: Future legislation under Article 39(b) must specifically justify how resources qualify as “material resources of the community,” likely limiting nationalization or acquisition to specific, strategically important sectors.
- Increased Judicial Scrutiny on Property Rights: Courts are likely to more critically evaluate state actions that aim to redistribute private property, requiring robust evidence of public interest and alignment with constitutional principles.
- Potential for Policy Revisions: Laws that invoke Article 39(b) and related provisions may need to be reviewed to ensure they comply with this interpretation, leading to a more nuanced application of public welfare policies.
Way forward:
- Establish Clear Guidelines for Public Interest Acquisition: The government should define transparent criteria for categorizing “material resources of the community,” ensuring acquisitions serve substantial public welfare needs and align with societal priorities, especially in areas like infrastructure and essential services.
- Strengthen Judicial and Legislative Safeguards: Introduce legal safeguards to protect individual property rights, allowing courts to rigorously assess state actions on property acquisition, ensuring proportionality, fairness, and adherence to constitutional principles.
Mains PYQ:
Q How did land reforms in some parts of the country help to improve the socio-economic conditions of marginal and small farmers? (UPSC IAS/2021)
Note4Students
From UPSC perspective, the following things are important:
Prelims level: Model Tenancy Act
Mains level: Read the attached story
More than a year since the Union Housing and Urban Affairs Ministry circulated the Model Tenancy Act (MTA), only four States had revised their tenancy laws to be in line with the MTA.
What is the Model Tenancy Act?
- MTA is aimed at opening up of the vacant housing stock for rental housing purposes and helping bridge the trust deficit that exists between tenants and landlords by clearly delineating their obligations.
- The housing and urban affairs ministry had floated the draft model tenancy law in July 2019.
Major provisions of MTA
(1) Rent Court and Rent Tribunal:
- To ensure speedy redressal of disputes, the Act calls for establishing a separate Rent Court and Rent Tribunal in every state/UTs to hear appeals for matters connected to rental housing.
- Only the rent court and no civil court will have the jurisdiction to hear and decide the applications relating to disputes between landowner and tenant and matters connected with it.
- It calls for the disposal of complaints and appeals by the Rent Court and Rent Tribunals within 60 days.
(2) Tenancy Agreements:
- It also seeks to establish an independent authority in every state and Union Territory for the registration of tenancy agreements.
- Under the Act, unless otherwise agreed in the tenancy agreement, the landlord will be responsible for activities like structural repairs except those necessitated by damage caused by the tenant etc.
- On his part, a tenant will be responsible for drain cleaning, switches and socket repairs, kitchen fixtures repairs, replacement of glass panels in windows, doors and maintenance of gardens and open spaces, among others.
For residential and commercial properties
- The Act will apply to premises let out for residential, commercial or educational use, but not for industrial use. It also won’t cover hotels, lodging houses, inns, etc.
- This model law will be applied prospectively and will not affect existing tenancies.
- It seeks to cover both urban as well as rural areas.
- The Act says that a security deposit equal to a maximum of two month’s rent in the case of residential premises and a maximum of six month’s rent in the case of non-residential premises would have to be paid by the tenants.
How will states implement it?
- As per the MoU signed under PMAY-U, the states and union territories would legislate or amend the existing rental laws on the lines of the MTA.
Why was a need felt to bring this on?
(1) For a rental economy
- Without a well-rounded rental policy and the proper implementation of the rental contracts, there was no sound mechanism to resolve tenant-landlord conflicts.
- Property owners find it challenging to evict tenants if they misuse the property.
- To steer clear of such complications, such property owners often chose to keep these homes vacant instead of renting them out.
(2) Unattractive rental yield
- In India, the rental yield for residential property is quite low, even in bigger cities. It is in the range of 1.5% to 3% of the capital values.
- This has disincentivized people from investing in second or third homes which could be rented out.
- Often, they also prefer to leave their properties vacant in case they return to India.
- NRIs avoid leasing their residential properties for fear of squatters and dealing with the legalities of eviction.
How will MTA help?
(1) Unlocking homes
- It will unlock vacant houses for rental purposes
- It will enable the creation of adequate rental housing stock for all the income groups thereby addressing the issue of homelessness.
(2) Helping migrants
- Rental housing is a preferred option for students and migrants.
- It will balance the rights of both landlords and tenants.
(3) Effective negotiations
- There is no monetary ceiling under MTA, which enables parties to negotiate and execute the agreement on mutually agreed terms.
- It will give confidence to landlords to let out their vacant premises, the housing ministry said.
- The Act also tries to address how a renter can legitimately increase the rent.
(4) Control over encroachments
- It has proposed limiting the advance security deposits to two months’ rent and has also suggested heavy penalties for tenants who decide to overstay.
- Those who do may have to shell out double the rent for two months and even four months.
(5) Rights of tenants
- The landowner cannot cut power and water supplies in case of a dispute and would have to provide a 24-hour notice to tenants to carry out repair work.
- Should the landlords wish to increase the rent, they will need to provide a three-months notice to the tenants.
- These measures would go a long way in protecting the rights of a tenant as it regulates the rent hikes that tenants have had to face.
Challenges ahead
While the proposals of the Act have been widely welcomed, their implementation may not be very simple.
(1) Not binding nature
- The Act is not binding on the states as land and urban development remain state subjects.
- Like in the case of RERA, the fear is that states may choose not to follow guidelines, diluting the essence of the Model Act.
(2) Issues over paltry rents
- Also, the Model Act is prospectively applicable and will not affect the existing tenancies.
- The repeal of rent control Acts can be governed by political exigencies.
- This may be a complicated process in cities like Mumbai, where tenants have occupied residential properties in prime areas for absurdly low rents.
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Note4Students
From UPSC perspective, the following things are important:
Prelims level: RERA
Mains level: Real Estate issues
The Supreme Court has asked the Chief Secretaries of the States to respond to queries raised by the Centre on the implementation of rules framed under the Real Estate (Regulation and Development) (RERA) Act, 2016 in their respective jurisdictions.
What is RERA, 2016?
- The Real Estate (Regulation and Development) Act, 2016 seeks to protect home-buyers as well as help boost investments in the real estate industry.
- It establishes a Real Estate Regulatory Authority- RERA in each state for regulation of the real estate sector and also acts as an adjudicating body for speedy dispute resolution.
- It was enacted under Entry 6 and 7 (dealing with contracts and the transfer of property) of the Concurrent List.
- It is followed by the principle “buyer is the king and builders will have to ensure compliances to avoid punishment”.
- Its main objective is to reduce delay in the work or timely delivery of the project without compromising the quality.
Objectives of this Act
It has the following objectives:
- To protect the interest of the allottees and ensure their responsibility
- To maintain transparency and reduce the chances of fraud
- To implement Pan-India standardization and bring about professionalism
- To enhance the flow of correct information between the home buyers and the sellers
- To impose greater responsibilities on both the builders and the investors
- To enhance the reliability of the sector and thereby increase confidence amongst the investors
Key Provisions of RERA Act
- Compulsory registration: According to the central act, every real estate project (where the total area to be developed exceeds 500 sq mtrs or more than 8 apartments is proposed to be developed in any phase), must be registered with its respective state’s RERA.
- Establishment of state level regulatory authorities: It provides for State governments to establish more than one regulatory authority such as RERA to:
- Register and maintain a database of real estate projects; publish it on its website for public viewing
- Protection of interest of promoters, buyers and real estate agents
- Development of sustainable and affordable housing
- Render advice to the government and ensuring compliance with its Regulations and the Act
- Establishment of Real Estate Appellate Tribunal: Decisions of RERAs can be appealed in these tribunals.
- Mandatory Registration: All projects with plot size of a minimum 500 sq.mt or eight apartments need to be registered with Regulatory Authorities.
- Deposits: Developers needs to keep 70% of the money collected from a buyer in a temporary pass through account held by a third party (escrow account) to meet the construction cost of the project.
- Liability of the developer: A developer’s liability to repair structural defects would be for 5 years.
- Cap on Advance Payments: A promoter cannot accept more than 10% of the cost of the plot, apartment or building as an advance payment or an application fee from a person without first entering into an agreement for sale
- Carpet Area over super built-up: Clearly defines Carpet Area as net usable floor area of flat. Buyers will be charged for the carpet area and not super built-up area.
- Punishment for non-compliance: Imprisonment of up to three years for developers and up to one year in case of agents and buyers for violation of orders of Appellate Tribunals and Regulatory Authorities.
Which projects can get RERA approval?
- Commercial and residential projects including plotted development.
- Projects measuring more than 500 sq mts or 8 units.
- Projects without Completion Certificate, before the commencement of the Act.
- The project is only for the purpose of renovation/repair / re-development which does not involve re-allotment and marketing, advertising, selling or new allotment of any apartments, plot or building in the real estate project, will not come under RERA.
- Each phase is to be treated as standalone real estate project requiring fresh registration.
Benefits offered by the RERA Act
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Industry
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Developer
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Buyer
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Agents
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- Governance and transparency
- Project efficiency and robust project delivery
- Standardization and quality
- Enhance the confidence of investors
- Attract higher investments and PE funding
- Regulated Environment
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- Common and best practices
- Increase efficiency
- Consolidation of sector
- Corporate branding
- Higher investment
- Increase in organized funding
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- Significant buyers protection
- Quality products and timely delivery
- Balanced agreements and treatment
- Transparency – sale based on carpet area
- Safety of money and transparency on utilization
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- Consolidation of the sector (due to mandatory state registration)
- Increased transparency
- Increased efficiency
- Minimum litigation by adopting best practices
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Note4Students
From UPSC perspective, the following things are important:
Prelims level: Capital Gains Tax
Mains level: Not Much
The capital gains tax structure in India is complicated, and it is time for a relook since the union budget has provisions for 30% tax on cryptocurrency.
What is Capital Gains Tax?
- Capital gains tax is levied on the profits made on investments.
- It covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.
Types
- It is divided into long-term capital gains tax (LTCG) and short-term capital gains tax (STCG) depending on how long you have held the investment in question.
- Unlike income tax, the percentage of tax does not change on the basis of your overall tax slab.
- The LTCG tax, excluding surcharge, on equity is the same for gains of ₹10 lakh or ₹10 crore.
- There is also a separate set of deductions that apply to LTCG, which do not apply to ordinary income.
Why is it so complicated?
Capital gains tax is complicated for a few primary reasons.
- First, the rate changes from asset to asset. LTCG tax on stocks and equity mutual funds is 10% but on debt mutual funds is 20% with indexation.
- Second, holding period changes from asset to asset. The holding period for LTCG tax is two years in real estate, one year for stocks, and three years for debt mutual funds and gold.
- Third, exemptions available against it come with their own complex conditions. For instance, buying a house after selling one can get you an exemption, but the new house must be bought in two years or built in three years of the sale.
Is cryptocurrency taxed as capital gains?
- The 2022 budget has proposed a 30% tax on cryptocurrency, which is higher than capital gains tax in many cases.
- Besides, under capital gains tax, investors can adjust profits and losses on different investments against each other or against profits/losses in the future.
- However, this cannot be done with cryptocurrency.
What distortions does it create?
- As capital gains tax is the same regardless of your overall income it can compound inequality.
- For instance, a person with a salary of ₹40 lakh will pay 30% tax on it but just 10% LTCG tax on gains from stock trading.
- A person with a salary of ₹5 lakh will pay a 5% tax on it but the same 10% LTCG tax on stock trading.
- Second, the smaller one-year qualifying period for LTCG in stocks compared to three years in debt mutual funds may encourage short-term trading in equity.
What can be done to fix these anomalies?
- The government can bring about uniformity in rates and holding periods for various assets to ensure that the tax for one asset is not more attractive than another.
- A uniform and long holding period to qualify for LTCG can also discourage short-term trading and speculative behavior in assets such as stocks.
- The exemptions for LTCG such as reinvestment in another house property or capital gains bonds can also be made simpler, with fewer conditions.
- Small investors can also be given relief by reducing rates of capital gains.
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Note4Students
From UPSC perspective, the following things are important:
Prelims level: Article 254 of Indian Constitution
Mains level: Paper 2- RERA and its benefits to the consumers
The article highlights the various provision of RERA and its overall impact on the sector.
How it changed the real estate sector
- Real Estate (Regulation and Development) Act (RERA) was enacted in 2016 and it had been in the works for more than a decade.
- RERA has infused governance in a hitherto unregulated sector.
- Along with demonetization and GST, it has, to a large extent, cleansed the real estate sector of black money.
- It has transformational provisions, conscientiously addressing issues that have been a constant bane for the sector.
Important provisions of RERA
- The Act stipulates that no project can be sold without project plans being approved by the competent authority and the project is registered with the regulatory authority.
- This provision ended the practice of selling on the basis of deceitful advertisements.
- Promoters are required to maintain “project-based separate bank accounts” to prevent fund diversion.
- The mandatory disclosure of unit sizes based on “carpet area” strikes at the root of unfair trade practices.
- The provision for payment of “equal rate of interest” by the promoter or the buyer in case of default reinforces equity.
- These and many other provisions have empowered consumers, rectifying the power asymmetry prevalent in the sector.
How RERA is an effort in cooperative federalism
- Though the Act has been piloted by the Central government, the rules are to be notified by state governments.
- The regulatory authorities and the appellate tribunals are also to be appointed by them.
- The regulatory authorities are required to manage the day-to-day operations, resolve disputes, and run an active and informative website for project information.
- Since RERA came into full force, 34 states and Union territories have notified the rules, 30 states and Union territories have set up real estate regulatory authorities and 26 have set up appellate tribunals.
- The operationalization of a web-portal for project information, which is at the heart of ensuring full project transparency, has been operationalized by 26 regulatory authorities.
- Around 60,000 projects and 45,723 real estate agents have been registered with regulatory authorities.
- Twenty-two independent judicial officers have been appointed to redress consumer disputes, and 59,649 complaints have been disposed-off.
Consider the question “What were the various problems faced by the consumers in real estate sector? How various provisions in RERA helped in the protection of consumers’ interests?”
Conclusion
RERA is to the real estate sector what SEBI is to the securities market. It helped consumers from the various malpractices in the real estate sector.
