Rent is not keeping pace with inflation- a cause of serious concern

[CA DEV KUMAR KOTHARI]

Summary:

House properties are basic need for personal living, trade, commerce and industry. Housing is a big employment provider. There should be enough encouragement to housing sector by ensuring that landlords derive reasonable rate of return by way of rent based on fair market value of property. Unfortunately, by making laws unreasonably in favour of tenants, landlords are deprived of even regular rent even at old rates , leave aside fair return on market valuation basis. Heavy doses of tax by municipalities, State Government and Central Government leaves very little net return for landlords. Simply rents are not keeping pace with inflation leave aside revised rent based on appreciated value of properties. Governments must take suitable steps to ensure fair return and fair treatment to landlords. Rent earners must also be freed from legal complications due to complex and varied taxes and regulatory provisions.

It is only hope of appreciation in value of properties which has kept landlords still interested in making investment in house properties. If there is no appreciation, people will like to live in rented properties and avoid investment in properties at all.

House properties are basic infrastructure:

House properties are basic infrastructure. House properties are required for all – working people, non-working people and children. Housing is also required for domestic animals.

House properties are also required for trade, commerce and industry. Buildings in any organization is an important asset.

Development, repair and maintenance of housing properties is a big source of employment to various kind or working people and market of manufactured products.

Therefore, investment in house properties must be encouraged by liberal financing, tax treatment and by assuring adequate return on investment and adequate return on market value of properties acquired long ago.

Rent of properties:

Rent of properties hardly provides return after tax of 2-3% per annum of market value of property. Where rent laws are applicable or where tenants are in habit of litigation, non-payment of rent, freezing of rent, are common. In spite of amendments in rent law which provide for a meager increase of rent, litigant tenants are not paying revised rent- thanks to slow procedures of revision of rent. In fact, on ground of being sub-judice, some tenants stop paying rent. www.taxmanagementindia.com

Under West Bengal Premises Tenancy Act, rent of old tenancies (over 20 years) is to be revised as per schedules provided in the Act. The increase is also in four annual installments. Maximum increase allowed is just four times of rent which was 20 or more years ago. Whereas we find that during last 20 years actual inflation has been around 512%.

Most of old tenants do not pay fair rent as per law and the landlord has to make application to the Rent Controller for fixation of fair rent. The tenants adopt delaying tactics and cases are pending for more than 8-10 years. Fixation of rent is only about increase in rent, which might have been fixed long ago as per then prevailing market rate of property. The market value of property has increased, cost of living of land lord has increased but rent remains almost freezed.

Suppose 20 years ago a flat had market value of Say Rs. one lakh. It was let out at a monthly rent of Rs. 600/- after deducting outgoings for municipal tax, insurance, repairs, services etc. say net income per month was Rs.500/-. This provided an annual return of Rs. 6000/- that is 6% of market value.

However rent is not revised. Even if rent is revised @10% every five (as was normal terms then prevailing) years on then prevailing rent the rent from 21^st year will be Rs. 966/- After tax monthly income will be Rs.802/- per month as against Rs.500/- twenty years ago.

After 20 years if we take only inflation into account the market value of property will be Rs.5.12 lakh. 6% annual return must be Rs. 30720/- whereas net return, if rent was revised as above, will be only Rs. 9624/- which comes to 1.87%

Even in case of new tenancies agreements for which were entered during last5 -10 years increase of rent is very nominal 10-15% over cycle of 3 to 5 years as maybe negotiated. Such negotiations depend on location, type of property, type of tenant, development in area etc.

Provision for rent in the West Bengal Premises Tenancy Act:

For an example, provisions of the West Bengal Premises Tenancy Act 1997 relating to rent, are reproduced below with highlights added for analysis and understanding:

17. Fixation Of fair rent.—(1) The Controller shall, on application made to him either by the landlord or by the tenant in the prescribed manner, fix the fair rent in respect of any premises in accordance with the provisions of this Act.

(2) The fair rent for a year in respect of any premises constructed and let out after the year 1984, shall be fixed '[on the basis of annual payment of an amount equal to six and three-fourth per cent per annuam of the aggregate amount of the actual cost of construction and the market price of the land on the date of commencement of construction.]

Explanation.—The cost of construction of a premises shall include the cost of water supply and sanitary and electric installation and shall be determined with due regard to the rates adopted for the purpose of estimate by the Public Works Department of the State Government for the area concerned. The Controller may allow or disallow the variation of estimates upto ten per cent, having regard to the nature of the premises :

Provided that while calculating the market value of the site on which the premises was constructed, the Controller shall take into account only the portion of the site on which the premises was constructed and sixty per cent of the portion of the vacant land, if any, appurtenant to such premises, the excess portion of the vacant land being treated as amenity.

(3) Where a tenancy subsists for twenty years or more in respect of the premises constructed in or before the year 1984, the fair rent shall be determined by adding to the rent as on 1.7.1976 not more than three times, and then deducting the increase, if any,in the manner provided in Schedule II, or by accepting the existing rent if such rent is more than the increased rent determined according to that Schedule.

(4) Where a tenancy subsists for ten years or more but less than twenty years in respect of the premises constructed in or before the year 1984, the fair rent shall be determined by adding to the rent as on 1.7.1986 not more than two times, and then deducting the increase, if any, in the manner provided in Schedule III, or by accepting the existing rent if such rent is more than the increased rent determined according to that Schedule.

[(4A) Where a tenancy subsist for twenty years or more in respect of the premises constructed in or before the year 1984 and used for commercial purpose, the fair rent shall be determined by adding to the rent as on 1.7.1976 five times or by accepting the existing rent if such rent is more than the increased rent determined under this subsection.

(4B) Where a tenancy subsists for ten years or more but less than twenty years in respect of the premises constructed in or before the year 1984 and used for commercial purpose, the fair rent shall be determined by adding to the rent as on 1.7.1986 three times or by accepting the existing rent if such rent is more than the increased ret determined under this sub-section.]34

(5) Where at the commencement of this Act, any proceeding is pending for fixation of the fair rent of such premises under the West Bengal Premises Tenancy Act, 1956; the rent fixed under the said proceeding shall be the fair rent under this Act.

(6) Where none of the foregoing provisions of this section applies to any premises, the fair rent shall be such as would be reasonable, having regard to the situation, locality and condition of the premises and the amenities provided therein and, where there are similar or nearly similar premises in the locality, having regard also to the rent payable in respect of such premises.

18. Revision Of fair rent.—The fair rent initially fixed shall be automatically increased by five per cent every three years :

Provided that the State Government may issue notification varying such rate of increase every four years from the date of commencement of this Act.

An analysis:

A gross return by way of rent equal to 6.75% per annum of the market value of land at the time of commencement of construction and cost of construction is considered as fair rent. Any regard is not given for value addition and appreciation in value and inflation factor etc.

In case of old tenancies (more than 20 years old), rent is revised 3- 5 times of rent on cutoff date

This shows that rent is fixed in a manner that hardly provide gross rent equal to 5% of market value of property let out.

The increase @ 5% at interval of three years is allowed.

This shows that rent is not and cannot keep pace with inflation for cost of property, appreciation in market valuation, and increased cost of living of landlord.

High taxes:

We find that municipalities are also levying higher tax on properties which are let out. There is no justification of such higher tax – readers may refer to other articles on this subject available on the www.taxmanagementindia.com. In Kolkata under the area wise tax scheme, the proposed formulae provide that in case a property is let out the tax will be two times of tax in case of self occupied property. In case of commercial properties tax is four times in case of own use and eight times in case of use allowed to tenant. There is no justification for such multipliers when in fact the Kolkata Municipality is not providing any additional or extra service to commercial properties or to let out properties.

The properties may remain vacant yet annual valuation may be taxable and the landlord is asked to pay income-tax, though no rent was realized. This is also not justified.

Service tax is another burden on landlords, though landlords do not render any service by letting out property, yet our law makers deem that there is service provided by landlord. This is also not justified.

An analysis of inflation:

An analysis of inflation since 1981-82 is made in the following table. This shows that rent of premises is not keeping pace with inflation.

ANALYSIS OF INFLATION - COST INFLATION INDEX UNDER INCOME TAX ACT, 1961 FOR COMPUTATION OF CAPITAL GAINS , REAL INFLATION AND INFLATION IN CYCLES OF FIVE YEARS.

FINANCIAL YEAR	COST INFLATION INDEX for capital gains	Increase and 75% of percentage of real inflation   allowed	Real inflation % of CII Increase allowed / 3 X 4	75% of inflation index in cycle of 5 years/ simple average pa	75% of inflation in cycle of 5 years	Real % inflation in cycle of 5 years
1981-1982	100
1982-1983	109	9 = 9%	12%
1983-1984	116	7= 6.422	8.563%
1984-1985	125	9=7.7586	10.344%
1985-1986	133	8=6.4	8.5333%
1986-1987	140	7=5.263	7.0173%	40 / 8	40	53
1987-1988	150	10=7.1428%	9.5237%
1988-1989	161	11=7.333%	9.7777%
1989-1990	172	11=6.8323%	9.1097%
1990-1991	182	10=5.8139%	7.7519%
1991-1992	199	17=9.340%	12.4542%	59 / 11.88	42	56
1992-1993	223	24=12.060%	16.080%
1993-1994	244	21=9.4170%	12.556%
1994-1995	259	15=6.1475%	8.1967%
1995-1996	281	22=8.494%	11.325%
1996-1997	305	24=8.5409%	11.388%	106/ 21.20	53	71
1997-1998	331	26=7.8549%	10.473%
1998-1999	351	20=6.0423%	8.0564%
1999-2000	389	38=10.826%	14.435%
2000-2001	406	17=4.370%	5.827%
2001-2002	426	20=4.926%	6.568%	121/ 24.20	39	52
2002-2003	447	21=4.929%	6.573%
2003-2004	463	16=3.579%	4.773%
2004-2005	480	17=3.6717%	4.896%
2005-2006	497	17=3.5416%	4.7222%
2006-2007	519	22=4.4265%	5.902%	93 / 18.60	21	28
2007-2008	551	32=6.1657%	8.221%
2008-2009	582	31=5.6213%	7.501%
2009-2010	632	50=8.591%	11.455%
2010-2011	711	79=12.36	16.485%
2011-2012	785	74= 10.40%	13.87%	266 / 53.20	51	68
2012-2013	852	67= 8.54%	11.39%
2013-14	939	87=10.21%	13.61%	154 / 77 in two years	19 in two years	25 in two years

Inflation during last five years (2008-09 – 2013-14) - 939 from 582 = 61% / 3 x 4 = 81.33%

Inflation during last three years (201-11 – 2013-14)-   939 from 711 = 32% / 3 x 4 = 42.66%

Inflation during last 20 years (1993-94 – 2013-14)-   939 from 244 = 384%/ 3 x 4 = 512 %

Inflation during last 32 years (1981-82 – 2013-14)-   939 from 100 = 939% / 3 x 4 = 1252 %

From above table and analysis and ground realities about rent we can say that earning by way of rent is not adequate and is not keeping pace with inflation. Thank god to appreciation in value of properties which has kept landlords still interested in making investment in house properties. If there is no appreciation, people will like to live in rented properties and avoid investment in properties at all.