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Why the stamp duty needs to be abolished

Why the stamp duty needs to be abolished Why the stamp duty needs to be abolished

Some estimates have suggested that it takes a Mumbaikar an average of 34 years of income to buy a house. While the situation may be better in other cities, compare this to an average of 3 years in USA and 5 years in UK. While there are financial reasons such as inflow of black money and easy bank loan availability to real estate companies, at least some blame is to be given to the stamp duty structure.

At its core, the stamp duty and registration fee is a levy by the state governments on each transaction of an immovable property, charged as a percentage of the transaction value. These duties are generally governed by Indian Stamp Act, 1899 and some states have enacted their own stamp duty acts. Over the years the state governments have been trying to increase their revenue by way of stamp duty by increasing the rates and / or bringing more and more instruments within their purview.

The rates vary from around 6 per cent in Mumbai to about 13 per cent in Kerala. Haryana charges 7 per cent as stamp duty on properties, while it is 8 per cent in Uttar Pradesh. Most of the States charge around 6-8 per cent. Most countries around the world have either very low rates of duty or are planning to move to a different tax structure.

Here’s what the stamp duty does: 

1. Hits where it hurts the most: the first time home owners 

From a home purchaser's perspective, stamp duty comes at the worst possible time, on top of a raft of other costs – when they would have already taken a mortgage from a bank to finance the purchase. In fact, the consumers have to pay stamp duty while taking possession of the flats, even when the developers have already paid the stamp duty while registering the land. Hence, the stamp duty effectively increases the cost of purchase and prevents economic upliftment.

2. Leads to escalation in real estate prices 

The stamp duty introduces artificial inflation into land prices. As soon as a transaction is completed, the prices for the next buyer for that property automatically go up by the amount of stamp duty paid. Keeping this in mind, the sellers in the neighbourhood also raise their prices, as many of them are in the market as investors looking to make quick money anyway. Hence this has a cascade effect resulting into rapid inflation.

3. Discourages efficient allocation of real estate 

A very big problem with stamp duties is that they create hindrance for conclusion of transactions. In the absence of the stamp duties, a transfer will occur if the buyer believes the property to be worth more than the seller; with the duties, the buyer must believe the property to be worth more than the seller by at least the amount of the tax. Essentially it leads to what is called a sub-optimal allocation - i.e. people stay in homes that are too small or too big, or in an inconvenient location. Even the manufacturing activity suffers a similar fate because small industries cannot find suitable land.

This is the same argument as in the case of Sales Tax vs GST and the reason why VAT has replaced the traditional sales tax model everywhere in the world.

4. Encourages black money involvement 

Stamp duty is charged as a percentage of the land value. Hence there is a natural incentive to underquote the value and execute rest of the transaction as “black” money.

For example, some observers claim that undervaluation may approach 50 per cent for many kinds of transactions. To counter this, many urban development authorities have raised the “circle rates”, or the minimum value at which transactions need to be done. However, the circle rate cannot reflect the true market price beyond a point simply due to the fact that each asset is unique.

The under-declared value of the property must be paid in cash which lands the seller in possession of black money. Next, their payments to materials suppliers could be made in cash, thus evading sales and excise taxes. Also, they would not be able to declare the associated profits for income tax purposes. This money continues to circulate, leading to complete parallel “black economy”. Abolishing of stamp duty will strike at the core of the black economy.

5. Increases burden on judiciary

Indian judiciary is overburdened and the justice system is severely delayed. Some estimate that 50 per cent of disputes pending in Indian courts are property disputes. While land title records are the ultimate solution, we can begin with elimination of stamp duty which again is a cause of distortion here. Because of high burden, people have found various ways of stamp duty avoidance or evasion. When such a matter lands up in court, it leads to complications and delay.

Further, there are complicated state laws that specify different duty rates for different instruments and it becomes a matter of great legal expertise to determine the lowest duty payable which will be admissible in court.

6. State Revenue 

Stamp duty is one of the major sources of state revenues and has been subject to successive rate increases. A closer look at the state finances reveal that the major sources are sales tax (47 per cent) and state excise tax (11 per cent). Stamp duties come third – around 7 per cent. Since we are already evolving a state compensation mechanism for GST, we can also evolve a mechanism to compensate states for the stamp duties.

Conclusion 

The stamp duty needs to be abolished in its current form as a source of revenue. The government may still charge a small fee (less than 1 per cent or fixed) for providing registration services. The states may be compensated on the basis of the capital gains tax from property sale arising from the state, which the central government is already charging. (KNN)

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