A few days ago, Maharashtra reported that it had seen a spurt in revenue collection after having reduced stamp duty on sale deeds. So we thought we could take a closer look at this story and perhaps explain how stamp duty has been evolving over the years.

Policy

The Story

Think of stamp duty as a tax the government imposes on certain kinds of documents related to certain transactions. For instance, when you transfer property. And while it can be a bit annoying, it also has a certain elegance to it. Think about it. The government can raise a lot of money by expending very little resources, and they can do it without burdening any particular class of individuals. You’ve probably paid stamp duty while you bought your favourite stock a couple of days ago. Your mum probably paid for it when she sold that nice property a few months back. And most people have probably paid some sort of stamp duty whilst dabbling with government records. In effect, people from all walks of life pay this charge.

But more importantly, it’s determined “ad valorem,” in most cases. It’s a fancy way of saying — “The duty is paid in proportion to the total transactional value.” For instance, a 5% duty on a land parcel valued at 1 Cr is obviously more taxing than a 5% duty on a property worth 10 lakhs. So if you’re an individual of modest means, you won’t be impacted as much — although many people would like to disagree with this assessment. And as such, there has been a lot of clamour from both the public and the central government to reduce stamp duties for a while now.

In fact, only a couple of decades ago, stamp duties on property transfers were as high as 14% in some states. People were obviously upset. But the central government joining this movement in solidarity doesn’t make any sense. At least not immediately. Until you realise that stamp duties are collected by the state government. In fact, in most states, stamps and other registration charges bring in so much money that they are the third or the fourth biggest revenue contributors. However, if you have a disproportionately high charge, people will find sneaky ways to evade it. Or in other cases, underreport the value of the transaction. And while this obviously affects the state’s revenue, it also does something else.

When people underreport the final sale price, they are also effectively saying — “We aren’t making a lot of money from the transaction.” And when the central government taxes the gains made on the sale, they’ll be raking in less money. So the Centre has a lot to lose here as well. Also, when the union government pursues an agenda to house everyone, these high stamp duties can be a bit of a problem. And as a result, the central government has been incentivizing states to reduce stamp duties and it’s been on a steady decline since 2003–04 ,  at least for the most part.

This sets the context adequately and we can begin addressing the actual headline. So a few months back, the state government in Maharashtra decided to reduce stamp duty once again by 3% — for the period between September and December. This put the effective stamp duty rate at 3% in urban areas and 2% in rural areas. The hope was that this would spur demand for houses in Maharashtra. And guess what?

It seems to have done exactly that.

According to a statement from the Revenue Minister, registration of documents rose by about 4 lakhs and brought in extra revenues of Rs 367 crores, compared to the same period last year. And while you might be inclined to think this is an obvious outcome, do bear in mind — “Lower taxes don’t automatically increase tax revenue.” Yes, people are less likely to underreport the final sale price. And sure, they might also transact in a transparent manner. But that doesn’t mean it will always benefit the state. In effect, lower taxes in some cases could increase revenue; but figuring out the exact details of those circumstances require a lot of research.

And while it has worked out for the government quite nicely this time around, it doesn’t mean it will always benefit them. But hey, low stamp duties are always nice to have. So I am pretty sure, nobody is complaining here.

Until next time...

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