Higher Stamp Duty Will Make Real Estate Market Less Transparent

Real estate in Delhi is very expensive. This is partly because Delhi is the second most populous city in the world. Satellite cities of Delhi such as Noida and Gurgaon are the areas where more affordable housing is available. In the past few decades, people have been increasingly moving to the periphery or cities like Noida or Gurgaon to get better deals. But, the Uttar Pradesh stamps and registration department recently decided to hike stamp duty from five per cent to seven per cent.

If implemented, this would jack up property prices in Noida. Industry insiders point out that home buyers who are yet to register their houses which are in the vicinity of the Okhla Bird Sanctuary will find their costs rising unexpectedly. As other cities of Uttar Pradesh attract the stamp duty of seven per cent, the state government wants to have a uniform structure in all the districts of the state. This is likely to hit those home buyers the most who had bought their flats earlier, and are waiting to register them while paying the rent and their equated monthly installments (EMIs) simultaneously.

There is a perception that the Indian real estate market is not transparent. This is especially true of the real estate transactions in the National Capital Region. So long as the perception is true, this has much to do with the high stamp duty. By global standards, stamp duty in India is exceptionally high. There is a broad consensus among economists and real estate developers that the stamp duty should be brought down to make real estate markets more transparent.

In fact, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) aims at lowering the stamp duty in Indian cities to five per cent or less. This is because even though some Indian states have tried to reduce the stamp duty, most haven't. The high stamp duty in Indian cities is an important reason why property values are understated. Even though the stamp duty is levied to raise government revenues, they typically lead to lower revenues for state governments and urban local authorities.

High stamp duty is one of the major reasons for rampant corruption and transactions in black money. This does not mean that reducing stamp duty alone will curb black money and corruption. When high capital gains tax and other taxes exist, people who engage in real estate transactions may still understate the value of the property. But, lowering stamp duty will be a major step in the right direction.

But, this is not the only effect of a high stamp duty. High stamp duty lowers economic growth and hurts the economy. This is because it prevents many potential transactions from happening. Such transactions may be very important for the proper functioning of Noida's economy.

Moreover, when the stamp duty is high in some Indian states and low in other, people are more likely to invest in states where stamp duty is lower. This will divert capital from Indian states where there is a great demand for investment to Indian states where there is less demand for capital investment. However, as stamp duty is the third most important source of revenue for state governments, it is unlikely that it will be lowered significantly in the near future. Even though there are no recent studies on the effect of stamp duty, but the World Bank estimated in 2004 that the cost of stamp duty related fraud was $17 billion in a decade.

However, if stamp duty is lowered, Non-Resident Indians (NRIs) are more likely to invest in Indian real estate markets. Similarly, there is likely to be greater foreign direct investment (FDI) in Indian real estate markets. This is because NRIs and foreign investors will find their cost of investment declining. This is not all. Real estate developers, home buyers and businessmen will find it much easier to engage in real estate transactions. This will raise the volume and velocity of real estate transactions in Indian markets. This is essential in a rapidly urbanising country, to meet the needs of the quickly growing urban population.

If stamp duty is lowered, with complementary legal and administrative reforms, revenues from other taxes like property tax and wealth tax are likely to rise significantly. Property taxes are, in fact, a less harmful way of meeting the needs of urban local authorities.

The World Bank has often pointed out that stamp duty and registration charges do not generate much revenue to build a city-wide infrastructure, and that such transaction charges often hamper the real estate development.

Moreover, when the stamp duty is high and property taxes are relatively low, land is not likely to put to its full use. This is because when property taxes are high, and related to the value of the land, land owners will be forced to put the land to its best possible use.