Thursday, January 7, 2010


The prevailing high rates of stamp duty act as deterrent

The Maharashtra state government has announced a hike in the stamp duty across the state. From now onwards, the stamp duty paid during property transaction will be as high as 20 per cent in some parts of the state. Invariably this step is not only detrimental for the real estate market, but also for the state government, with respect to its revenues.

As every property transaction invites a payment of stamp duty ranging from 5 per cent to 20 per cent (for example, for property registration, in Delhi, the effective property transaction rates would however be nothing less than 6 per cent for men and 4 per cent for women) — in order to dodge this duty, most of the time the property buyers undervalue their property on papers. In simple words, the declared or registered value of a property bought or sold is actually less than the actual price paid. The balance amount is paid through cash, which then forms black money as it is completely unaccounted for. Add to this, under declaration of property value also robs the government from charging further taxes like the capital gains and annual property tax. On an average, the total annual revenue of States from property transaction and stamp duty (including registration fees, land revenue) is estimated to be above Rs 21,000 crores every year. On the face of it, this forms a substantial part of the state revenue, but the loss to the state is even bigger. In spite of several studies and recommendations, state governments seem to be very reluctant in revising the prevailing stamp duty. It’s quite evident that high stamp duties reduce government revenues as — the under-declaration of property value (to evade this tax) results in the low revenues - the declared value is generally 40-50 per cent of actual price and in some cases it goes to as low as mere 10 per cent! The stamp duty oft en acts as a momentous disincentive to property deals, especially in the states where rates are high, directly hitting upon states revenues. It further reduces the quantity of transaction and thwarts property transaction as a whole. Conversely, if the rates are dropped the volume of transaction would definitely see a surge and the state government would benefit from the scale. Since the value of stamp duty would be less, it would attract more people to conduct the property transaction with actual value rather than under-declaring the value. But then the reluctance of the state government is obviously though, as the one of the safest havens to park the black money is real estate. And honestly, why should the state government care whether the state loses on revenue, till the time there are personal gains.

Worldwide, the stamp duty is far too low compared to Indian rates. The whole concept of property transaction tax is adopted from archaic British model (who introduced the system of stamp duty), but the irony is that even the UK has revised and reformed its policy with respect to property transaction. Unlike in India, there is hardly any effort to elude the duty by under-valuation of property in the UK. Going a step further, in Australia too, stamp duty rates are quite low and in a few cases have been exempted too. High stamp duties have led to rise in volume of unregistered and all-cash transactions. Most of the time, the property transfer takes place via the Power of Attorney, which again adds nothing to government’s coffers. Even the implementation of the National Housing and Habitat Policy of 1998 (stamp duty rate of 2-3 per cent) seems to be a distant dream. All in all, the construct of the real estate sector is made to operate upon an inefficient tax framework to attain an efficient and buoyant black economy.


1 comment:

  1. Dear Sir,
    Thank you very much for addressing such an important issue which immediately needs govt's intervention. There was a national conference on Public Private Partnership in Housing on 9th Oct'2009 organized by NAREDCO. We as a developer raised this issue which hopefully will be taken care in the much awaited Real Estate Regulatory bill which will be passed in this winter session . Its been quite some good time i have been working with real estate industry and found that the developer or individual finds the current rate of stamp duty is very high. Therefore they tend to do some unfair and illegal practices while transferring property or purchasing land. Reducing Stamp Duty will automatically curb those unfair practices and more transparency will be there in the system.