New India Manifesto – Chapter 4 : Real Estate Escrow System and Digital Stamp Paper Transaction System

Introduction

Real Estate Escrow System is the one-stop solution to end real estate black money and bring all land and property transactions in India under the GST system and digitise them.

All states joining the escrow system will enable smooth interstate transactions and higher tax revenue for the centre and states. In addition, all stamp paper-based activities should be converted to a digital stamp system.

Four interconnected systems are essential to be functional for the effective functioning of the real estate escrow system.

Real Estate Agent Licensing System
Building Inspection Authority
Legal Issue Declaration Authority
Land and Building Accounting System

Real Estate Agent Licensing System

The brokers in the real estate sector are loosely regulated by the obsolete concept of RERA agent licensing in India, which results in increased tax evasion. The RERA registration system is not enforced property, and unregistered brokers work illegally as brokers for commission facilitating black money transactions between buyer and seller in every nook and corner of India. Even among those registered after paying hefty fees like 25,000 for a 5-year license, the government has no proper regulatory control over the registered agents. Real Estate Agent Licensing System should replace the RERA agent licensing system.

Brokers get 3 per cent and above commission in the deal, thereby ensuring all parties’ silence. Document writers in India are also silent partners in these tax evasions by explaining the loopholes in laws to the sellers and buyers. Document writers are heavily paid for land sale transactions by both parties.

Real Estate Agent Licensing System will change everything from top to bottom in the Indian real estate sector. An authority like IRDAI will be established and will conduct examinations for real estate agents. The government will immediately generate one lakh+ real estate agents via examinations and continue adding new agents yearly. Moreover, the authority above all real estate agents can cancel their license in case of fraud and initiate criminal proceedings.

The real estate agents will be connected with the escrow system, and all their transactions will be associated with the escrow system. In addition, all unlicensed real estate brokers will be banned all over India.

Building Inspection Authority

The seller can pay and have an inspection to increase the market value of the building, as a building that has cleared all parameters provide additional assurance to buyers. So, the buyer can get the latest site inspection details about the property which they are about to purchase via the seller or the real estate agent.

The document issued by the authority will have one-year validity. The inspection report will be saved in the government database, and the owner of the property and the real estate agent can send this report via the website to the interested party or the other side’s real estate agent. Therefore, the buyer can download the document using a unique one-time link the seller provides. This will ensure that the data collected is restricted.

The government will also analyse the data to find if the building is disaster resilient. Floods and landslides are common issues in India, and inspection reports will help determine whether the building will be damaged in case of catastrophe. This will also help the government to assess the validity of various buildings in India.

Legal Issue Declaration Authority

This authority is to find out if any issues concerning the property, such as whether financial institutions have a claim over the property, forged documentation, claimants and heirs or any other matter concerning that land. The services this authority provides will be paid services, and there will be no compulsion to take their service before sale. However, buyers can use this to ensure they are not falling into traps. The authority can connect their services with private detective agencies.

Land and Building Accounting System

The land records collected previously are scanned and will be available in the LBAS database. The data can be used for any crosschecks.

Real Estate Escrow System

The current land and property transactions via land registration departments facilitate tax evasion. In the current method, the parties directly or via brokers engage in an agreement. The amount mentioned to the government as land value and the actual amount differ.

Let me explain through an example how tax evasion is happening in the real estate sector.

Seller A is selling 1 acre of land. The real deal between buyer B and seller A is to pay 1 lakh per cent. So, for 1 acre of land, the total amount to be paid by buyer B is one crore. During documentation, the amount quoted to the land registration authority and in the stamp paper is 30,000 per cent. This means that the legal transaction is for only 30 lakhs, and the taxes and other stamp duties are paid only for 30 lakhs. The remaining 70 lakh is paid in black money as cash by the buyer to the seller. In this scenario, the central part is that just before registering the land to buyer B, seller A will ensure that the black money of 70 lakh is received. If buyer B fails to pay the black money before registration, seller A will back out from the sale. Real estate brokers and document writers will generally play the role of intermediaries in ensuring that illegal transactions happen smoothly. Since everyone involved is a beneficiary, no one will rat out others, thereby ensuring that government does not find out about the black money. As long as cash is paid, there is no way of tracking it.

Real estate escrow system can help completely stop this tax evasion. Therefore, real estate brokers, registration department and document writers will be replaced by real estate escrow system and agent licensing system.

Working Principle of Real Estate Escrow System

An Aadhar-based fingerprint authentication system will be introduced. In the case of a company, the person or group of persons appointed to act on behalf of that company will have to use their Aadhar.

A website will be developed for the escrow system with different logins for buyers, sellers, real estate licensed agents and escrow system officials.

Current land registration offices under various states will become escrow offices.

There are different types of transactions, and the developed website should be capable of addressing them all. Consider an example of Seller A and Buyer B.

The transaction between seller A and buyer B can be direct without any brokers.
Seller A will have a real estate agent, whereas buyer B has engaged directly.
Seller A has engaged directly, whereas buyer B has a real estate agent.
Seller A and buyer B have real estate agents and are engaging only via brokers.

First type

In case there are no middlemen, then the seller and buyer should approach the escrow office and inform the conditions required to be met during the sale. The escrow agents will analyse the details and approve the transaction agreement. Once the agreement is approved, the buyer can pay the price and buy the land or property. The escrow will deduct the taxes and provide the remaining funds to the seller’s account.

Suppose the seller withdraws before the buyer pays money after registering in the escrow system. In that case, two things will happen – First, the seller will have to pay escrow system inconvenience charges, and second, the property value will be re-evaluated. The value of nearby properties will be analysed, and the property will be flagged. Once it is flagged, the next time the seller registers again, the transaction will be thoroughly investigated. If the person withdraws from the current agreement for reregistering with a higher price, then there will be no inconvenience charges and flagging. However, the reregistration of the listed property should be completed within six months. If, during reregistration, the value is lesser than the previous one, then there will be flagging and inconvenience charges. The total value of the second transaction should be higher than the first one to ensure that the seller does not lose additional money in the name of inconvenience charges.

The seller cannot withdraw from escrow after the payment has been paid by the buyer to the escrow. This is to protect the buyer’s interest and stop tax evasion. Suppose there is an agreement that if black money is provided along with a formal transaction, it will not work under the escrow system. If the seller decides to trick the government into expecting the buyer to pay black money, then under the escrow system, the buyer can choose not to pay after the transaction. The legal obligation of the buyer is complete once payment is made, and any additional expectation from the buyer by the seller can be discarded as the buyer has no other obligation to the seller. So, the seller will be the loser in the transaction as the buyer can get the land or property at a lower price if the seller is expecting black money. So, the seller will not risk trusting the buyer to pay black money and will quote only the property’s total value to the escrow system.

The seller will also be heavily protected under the escrow system. There cannot be partial payment or any alterations by the buyer other than what was previously agreed. In case of any modification, the seller has to approve the deal. There is also a token payment or advance payment system in India. So, the buyer will have to forego the money via advance payment if the buyer cannot fulfil the legal obligation or agreement. If the money is given up, there will be 18 per cent GST and the remaining amount will be transferred to the seller. If the advance amount is already transferred to the seller, the seller’s property will be flagged for the GST amount, and the flag will be removed once the seller returns the GST amount. A flagged property can only be sold once dues are cleared. Fingerprint-based authentication will be used during the transaction between seller and escrow and between buyer and escrow. Escrow should only hold money paid by a buyer for up to three days and can keep for an extended period only if there is a reasonable cause.

There will also be other forms of protection for the buyer, such as if the buyer finds out that certain information provided by the seller are false, the transaction can be cancelled, and the money paid by the buyer to escrow can be refunded. If the money is already transferred to the seller, the buyer can choose a legal route to get justice. Since all the records are with escrow, it will be easy for courts to deliver justice.

Second Type, Third Type and Fourth Type

One party uses a real estate agent in the second and third types. In the fourth type, both seller and buyer use a real estate agent. When a real estate agent is used in the transaction, the person using them has no worries about visiting escrow offices or going after paperwork, as all the documentation will be processed by the agent on behalf of the seller or the buyer.

If the seller uses a real estate agent, as in the second type, then the seller need not visit the escrow office or worry about anything else. The real estate agent will visit the house of the seller and will get all the documents signed. There will be live video capture, digital signature, OTP authentication, fingerprint authorisation using Aadhar and location mapping at the seller’s home using a website. The seller will authorise the sale via the real estate agent. The video capture will have an interactive check as the person has to speak something as told from the other side of the escrow system. The real estate agent will visit escrow offices and follow up on the remaining legal procedures. The real estate agent is engaged with the buyer, and the buyer may not even see who the seller is as there is no need for that. It will be reversed in the third type.

In the fourth type, the seller and the buyer need not visit the escrow office to complete the transaction. Instead, the whole transaction is done by the real estate agents representing both sides. There will be strict security measures to ensure that real estate agents do not do forgery and cheating, and in case of their involvement in such illegal activities, their licenses will be cancelled, and criminal proceedings will be initiated against them, including confiscating their assets and freezing bank accounts.

All transactions by real estate agents will compulsorily take Legal Issue Declaration Authority certificate to ensure they do not have liability in the matters provided outside the certificate.

Real estate agents will also sign an agreement under Digital Stamp Paper Transaction System with the buyer or seller regarding their clauses and commission structure. There will be a default structure and code of conduct for all real estate agents. The commission can be decided between the seller and the real estate agent or the buyer and the real estate agent. Consider the following example: a seller wants to sell a property for 70 lakhs, and agents promise to sell it for one crore and ask them to share a 10 per cent commission. After the sale, there will be dual GST charges on the transaction. In the 90 lakhs, which will be settled by escrow, the GST would be smaller, and the GST on income received by real estate agents, i.e., for 10 lakhs, will be 18 per cent. The escrow system will settle the amount separately to the seller and real estate agent accounts.

The agent of the seller and buyer and seller can be the same person also. In that case, the agent will get a commission from both the seller and the buyer. However, an agreement should mention the commission before the sale itself. Generally, brokers’ commission in India is 2-4 per cent. This structure can be continued in escrow, and the default commission can be mentioned as 2 per cent by the seller and 1 per cent by the buyer, and the agents can adjust it to a different percentage in the case-by-case scenario.

Buyers and sellers can change their real estate agents or register with multiple real estate agents. Real estate agents should maintain documentation accurately to ensure they receive a commission. The law favours the buyer and seller if the real estate agents do not follow the procedure. Real estate agents will spend large amounts of money to advertise properties. To ensure that their interests are safeguarded, they need to follow the guidelines provided to them strictly.

The public can check the registered real estate agents via a login system. So, after registering their property with different licensed real estate agents, they can check the agents they are registered with using a login for them on a website. There will be a smaller level of protection for real estate agents too. Buyers and sellers can cancel their real estate agents using the login system. However, they cannot cancel an agent during or just before a land sale to cut the percentage given to real estate agents. Even if they cancel and there is a complaint from a real estate agent, the escrow will hold that commission percentage and release the remaining amount to the seller. The tribunal within the escrow system will decide whether to transfer the amount to the real estate agent or other parties. The real estate agent should prove that both clients were connected via that agent.

Buyer and seller are not required to meet in person or need any direct dealings if real estate agents engage in the transactions. It will save a lot of time for buyers and sellers. Real estate agents will receive the original copies of the transaction from the escrow system and will give them to the seller and buyer by real estate agents. If the parties want to collect it directly from the escrow office, they can mention it during the sale and real estate agents can also help them do so.

Different original e-stamp papers will be provided to the buyer and seller explaining the transaction and new ownership. Real estate agents will ensure the document’s safety, and the loss of the original will activate the secondary copy available with the escrow. There will be massive penalties for agents losing the record, including forfeiting the transaction’s commission to the escrow system. Escrow will maintain a backup copy of the original and ensure the whole transaction document is digitally accessible.

Inheritances

Family property and other inheritances will also have GST applicable on the land value fixed by the escrow system. The GST rates should be minimal in such transactions as 4 per cent of the total value of the property. Real estate agents can also help in the transfer of such properties. Family members will fix the commission charges.

Free Documentation

The escrow system can provide free documentation for beneficiaries of the National Housing System. The government will be the seller, and the buyer will be the beneficiary of the houses built under this system. The government will bear the whole transaction charges. Bank will pay the loan allotted to the beneficiary via the escrow system to the government.

Escrow Website

Real estate is a region where the government has a total monopoly, which should continue to be so. A private Indian IT company can be given a contract to develop the website of the escrow system, and a per cent of the income generated via escrow can be shared with the company. By doing so, the government will not be spending a single rupee on the IT department of the escrow system forever. The private company will also maintain customer and maintenance support to ensure escrow officials can notify of bugs and provide feature requests.

The average market rates of each region will be marked on the map and published to the public. The details will be updated after every sale. The site will mention land value, not property value, as it is challenging to update the second one.

Land and Property Price Appreciation Quote

Consider a particular sale in which the government believes the property price is not quoted correctly, and there is an attempt to circumvent every legal barrier the escrow system places. Sending government informants as a buyer can quickly help identify and track any sale where there are attempts to evade taxes by quoting lower property prices. Government can also contact the region’s real estate agents to know the region’s actual market price.

The government will offer the seller 1 per cent above the legally quoted sale amount. This will apply only if the government believes that property is undervalued by more than 50 per cent. If the seller withdraws from the sale, then there will be an inquiry on the buyer’s financial sources, and the seller’s property will be flagged.

Digital Stamp Paper Transaction System

Most transactions involving stamp paper are unregulated financial transactions in India. The 11-month rental agreement is one of India’s most used stamp paper transactions. More than 1 lakh crore worth of transactions are happening in India annually via this 11-month rental agreement and informal renting. Governments can earn crores in revenue annually if 4 per cent of this amount is charged as transaction GST. Transaction GST will be charged on the amount received as rent by the house owner and not on the deposit, which is returned later.

In some states, stamp papers are bought from stamp vendors in the current system, and people draft agreements between themselves. In most states, e-stamp papers are introduced. However, the government has no control over what is written in the document if it is not registered. An 11-month stamp paper agreement is used to avoid registration for rental agreements. This should be stopped, and all stamp paper transactions should be taxed.

All agreements in India should be executed on stamp paper to be legally enforceable under Digital Stamp Paper Transaction System.

Features Required for Digital Stamp Paper Transaction System

The first type – For all agreements in which no payable transaction is involved, the value of the e-stamp paper will be collected. All stamp paper agreements, power of attorney, affidavits, declarations etc., should come under this by default. To maximise revenue, they will be moved to other transaction types according to new rules and regulations.
The second type – A particular percentage should be imposed as transaction GST for all transactions with taxable financial exchange via money or other forms. In the case of transaction GST, there will not be additional payments for e-stamp paper as money is already collected as GST. Rental agreements, property leases, land leases and vehicle leasing will come under this type. New categories can be added from the first type according to the situation’s demand.
The third type – In case of agreements that may turn into financial transactions in the future, the value of the e-stamp paper will be collected and adjusted with GST when it becomes a financial transaction. No additional amount other than stamp paper value will be collected if it does not become a financial transaction. For example, consider an agreement in which the first party agrees to pay the second party an amount of 1 lakh if the first party does not fulfil his agreed duties in a year. If the duties are fulfilled, there is no payment requirement, and no payable transaction is involved.

Two ways of engagement

Self-engagement – The parties involved directly draft the agreement in this transaction or undertaking.
Third-party engagement – Real estate agents or document writers are engaged in drafting the agreement. The parties involved do not have to worry about anything from drafting to document delivery. All existing document writers can be granted long-term licenses to continue as document writers. Real estate agents who cleared the exam can also be provided licenses to increase their ground-level reach. The government will promote third-party engagement in taxable transactions.

All stamp paper agreements and contracts should be uploaded and have a digital signature to become legally enforceable.

Digital Authorisation

Aadhar Fingerprint Authorisation, OTP-based system and Video Capture will apply to all transactions.
All witnesses will also have to initiate fingerprint authorisation. They will receive the link of the signed document as a downloadable URL text message in their Aadhar registered mobile number and email.
A digital signature will be used in the documents.

In the case of real estate, the real estate agent will bring the devices, such as an interactive pen tablet for signature, fingerprint scanner and other devices, to the beneficiaries’ place of convenience for completing the transaction.

Consider the models below in which the digital stamp can be implemented. In addition, an escrow system affiliated with the real estate escrow system will be developed for managing the digital stamp paper transaction system.

Model 1

A real estate agency named ABC in Mumbai wants to find a tenant for a house owned by B. The landlord has agreed to pay 5000 as a commission to the agency if the landlord can get a tenant who will give rent of 10,000 per month. A tenant named C from Bengaluru finds out about the property and contacts the real estate agency. The agent drafts an agreement and sends it to B and C. Once the terms and conditions are agreed upon, the real estate agent uses a login on the website to handle rental property and generates an e-stamp paper. The commission received from both parties as broker fees and the charges for drafting the agreement will be mentioned. The agreement is for 12 months and will be renewed every 12 months, including a revision of the rent amount if required.

The video of the parties involved will be collected live by the agent on the website using a webcam, and fingerprint authorisation will be used to process the agreement. Once it is completed, the landlord’s and tenant’s copies will be generated in digital form, and they need to sign the document digitally. Witnesses also need to approve it via fingerprint authorisation and digital signature. The meaning of the term witness is altered in a digital transaction. Common service centres all over India will have devices such as fingerprint scanners and pen tablets. So, people in different locations can sign in from their present location CSC centres or can do it from their home if they have such devices at their home.

Once this is complete, the final document will be generated and will become legally valid. There will be a 4 per cent transaction GST in this transaction. The security deposit is for three months, and the landlord will hold 30,000 rupees. The tenant will transfer the security deposit via the escrow system to the homeowner.

The rent for one year will be 1,20,000 in total. The deposit is not taxable, and the rental income will be taxed at 4 per cent. So, the total tax payable is 5600 rupees. However, there is no guarantee that the tenant will complete the tenure of stay and may leave midway. So, the GST cannot be charged at the beginning. So, the landlord will be charged GST at the end of a cycle which can be a maximum of 12 months. If the agreement is completed, the landlord must pay within one month of completion of the agreement. If the agreement was for a more extended period which is above 12 months, then the transaction GST payment should be made once every 12 months. The tenant should not engage in cash transfers but only via bank accounts.

If the tenant leaves midway, the house owner can cancel the existing agreement, and the GST will be calculated only until that term. If the homeowner does not inform that the tenant has left, then the homeowner is liable to pay the GST amount of the remaining tenure. So, it is the house owner’s responsibility to ensure the documents are updated.

Other than GST and commission of real estate agents, the escrow system collects no additional payment, and digital stamp papers are provided for free for transactions that involve the collection of transaction GST.

The agency commission will be outside this amount and paid separately by both parties to the escrow, and the escrow system will charge 18 per cent GST on that amount.

The house owner must return the deposit amount after reducing the maintenance and damages charges via the escrow system.

Model 2

If real estate agents or document writers are not involved, the parties can draft a rental agreement directly. The landlord or tenant can sign up using Aadhar authentication and create an agreement by following the general rules and regulations. Once they agree, a digital contract will be generated after fingerprint authentication and face capture. Then the agreement will be generated and digitally signed; once it is completed, the final agreement will be generated and become enforceable.

Suppose real estate agents use this method to avoid paying the GST collected from their commission. In that case, their license will be cancelled, larger fines will be imposed, and they will have to serve forced community programmes.

Rent Tribunal

Rent tribunal will be integrated with these models so that in case of any issues arise; it can be speedily resolved, benefitting the landlord and the tenant.

Digital Evidence

The most significant benefit of developing this model is to formalise the economy, ensure the maintenance of law and order, reduce crimes and increase tax revenue. Consider an example where a parent is 80 years old and has three daughters. Among the children, the youngest daughter promises to look after the parent well, and the other two daughters agree. Upon his demise, the youngest daughter is promised to get a share of her father’s property according to the will. However, after a few years, the youngest daughter does not take care of the father and by that time, the youngest daughter has managed to take possession of the father’s property. In this scenario, the other daughters can have a valid say to ask to return their father and property if a digital document backs their claim. Even if the youngest daughter sold has sold the property, she will be legally liable to return the property. In the case of current stamp paper agreements, there is a high probability of destroying or losing the evidence. Therefore, a digital backup stored in Digital Stamp Paper Transaction System can be a reminder to all three daughters. Will deeds will become powerful after the implementation of this system as not only the parties involved in stamp paper but also the government has a copy of the deed.

Digitally stored information on stamp papers can be used as evidence for stopping many future crimes and finding out many current crimes. Therefore, keeping all stamp paper agreements, taxable and non-taxable, is essential. Transaction GST should replace all stamp duties, cess and other registration charges.

Transaction GST

Transaction GST number will be generated in the name of Escrow System and Digital Stamp Paper Transaction System. Therefore, there is no need for GST registration for the members involved in the case of regular non-GST transactions. Instead, the government will be a registered GST holder charging GST for facilitating the transaction. In a B2C or B2B transaction done by a real estate company, their registered GST number will be used along with transaction GST on the other side. If both parties have GST, then transaction GST is not required.

Revenue Sharing

In areas where the state previously collected revenue, the centre should give the state the total amount or major share of the collected amount. The amount can be shared between the centre and states in new areas. The states will have the authority to manage the escrow system in their state via a centralised website. The central government will play the role of an intermediary facilitator of this system. The centre will take a minimal amount to maintain the system.

The new systems will bring in up upto 1 lakh crore additional revenue annually within a few years. In addition, the land and building accounting system will ensure that it is difficult to evade legal agreements as every property and land is accounted for.

Employment

The new system will merge existing employees of various state governments and will add new employment. At least 20 lakh people will benefit directly via new jobs in this system. In addition, thousands of private real estate companies will be established all over India, employing more than 5 lakh Indians.

Special Note: This is the fourth chapter of the book New India Manifesto by Blessen T. Sam. The concepts introduced in this book are unique, and referencing the book and the author is appreciated. Support the hard work of the author to modernise India by purchasing a print copy of the book from Amazon or Flipkart. For research collaborations, contact the author at blessentsam@gmail.com.