NEED FOR RATIONALISATION OF STAMP DUTY RATES IN INDIA

Rahul Jain 1

High taxes . . . frequently afford a smaller revenue to the government than what might be drawn from more moderate taxes. Adam Smith 2 The fairer and lower tax rates are, the less tax evasion, avoidance and non compliance there will be. Arthur B. Laffer 3

Under the Constitution of India, the power to levy Stamp Duties is divided between the Centre and the States. As regards the instruments specified in Entry 91 of List I (Union List) of Schedule VII of the Constitution of India, i.e., bills of exchange, promissory notes, bills of lading, letters of credit, policies of insurance, transfer of shares, debentures, proxies and receipts, the power exclusively belongs to the Union Parliament and in accordance with the provisions of Section 9 of the Stamp Act, remissions and reduction on this class can be granted by the Central Government. In respect of documents other than those specified in the provisions of List I, the power is conferred upon the States under Section 63 of List II (State List) of Schedule VII of the Constitution and in accordance with the provisions of Section 9 of the Stamp Act and remissions and reductions in respect of rates of stamp duty can be granted by the State Government 4 . All matters relating to the mechanism of collection and arrangement of stamp duties in respect of both the classes of instruments, excluding the rates of stamp duty are the subject of Entry 44 of List III (Concurrent List) of Schedule VII of the Constitution. Author is LL.B from Cardiff, U.K and an Income Tax, Service Tax & Stamp Act Consultant. 2 Father of Economics 3 Propounder of famous Laffer Curve. The gist of the theory is that tax revenues would be zero if tax rates were either 0% or 100%, and somewhere in between 0% and 100% is a tax rate which maximizes total revenue. Laffer's innovation was to conjecture that the tax rate that maximizes revenue was at a much lower level than previously believed: so low that current tax rates were above the level where revenue is maximized. 4 Hindustan Lever And Another Vs. State Of Maharashtra And Another, 2004 (9) SCC 438
1

Conveyance has been defined under Section 2 (10) of the Indian Stamp Act, 1899 to include a conveyance on sale and every instrument by which property, whether movable or immovable, is transferred inter vivos and not otherwise specifically provided for by Schedule I Conveyance being document other than those specifically mentioned in Entry 91 of List I, the rates of stamp duty for conveyance are the subject matter of State Legislation. Hence the structure of stamp duty on conveyances varies from State to State in India. A review of stamp duties of States and Union Territories in India 5 as compared to other countries of Asia 6 indicate that stamp duty rates on conveyance in a number of States is exceptionally high. With these high rates, the author finds that while the stamp duty and registration has become the second/ third largest source of revenue for States, it imposes high compliance costs on taxpayers, has been subjected to considerable evasion and fraud, and the distortionary impacts appear to be large, reducing the responsiveness of real estate market. Evidence indicates that the present high duty rates, coupled with poor implementation and administration, have lead to a situation where there is considerable financial loss to the exchequer on account of understatement of sale proceeds, non-registration and consequent non-payment of stamp duty and avoidance of capital gains tax. 7 The State fears that their revenues would suffer on account of reducing stamp duties. However the author believes that revenue lost by the State Government due to reduction in the stamp duty is likely to be recovered in the long run by increased transactions that are bound to follow and most importantly through the increased revenues from Excise duty, Sales tax, Service Tax, Property tax accrual and other related revenue flows. It has been observed historically that lowering and rationalization of direct and indirect tax rates generate superior revenues both in terms of generation and collection. The Author believes that lowering of Stamp Duty would boost state government revenues on similar analogy. In this context, it is worthwhile to mention about the World Bank, Draft Report of 2000, which cites the example of the State of Rajasthan, which achieved a 36% increase in revenue between 1996-97 and 1998-99 by reducing stamp duty rates

Depicted in Table A Depicted in Table B 7 Planning Commission of India, 10th Five Year Plan (2002-2007), Volume II at Page No. 834
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from 12% to 7% in 1996-97 8 . In the State of Maharashtra, reducing stamp duty on property transactions from 10% to 5% had a very positive impact both in terms of increased compliance and realization of stamp duty and the State achieved a growth of 20% in revenue between 2003-2004 and 2004-2005 9 . In case of Delhi, when the stamp duty on immovable properties was reduced from 13% to 8%, there was an increase of 48% in the revenue between 2003-2004 and 2004-2005 10 . The Delhi Government excited by the progressive revenue on reducing the stamp duty have further lowered the stamp duty to 6% for conveyance deeds registered in favour of male members and 4% for female members and are looking to doubling its collection of revenue from stamp duty to Rs. 1200 Crores this year. The State revenue would increase in the long run on lowering of stamp duty rates due to the following effects of reduction of stamp duty rates: 1) Promoting Registration of Properties The unreasonably high stamp duty rates deter prospective purchasers from legalizing their transactions by stamping and registering the final transfer documents. A large proportion of property transactions use escape routes/ short cuts from stamp duty through clandestine deals by non-registration, sufficient to protect their possession and investment. The number of shortcuts for avoidance of stamp duty include: 1) General Power of Attorney, which allows an individual to transfer effective ownership to another without becoming liable for stamp duties. 2) The use of an instrument of lease for a long term (not exceeding 30 years) for a one- time premium/ rent. 3) The use of an instrument of dissolution of a partnership in which property is taken as payment for the ending of a partnership. 4) Unregistered/ Registered Will of the owner bequeathing the property in favour of the transferee. Reduction in rates makes buying and selling of property cheaper and hence brings an increase in the number of property registrations. Once the stamp duty is reduced people evading stamp duty would find that the difference is not substantial and will pay the stamp duty to avoid legal hassles arising later on. Developers would be encouraged by lower stamp duty to register their purchase of properties since they would be in a position to provide the properties as collateral security for securing construction finance/ loans.
8

World Bank (2000), " Rajasthan: Averting Fiscal Crisis and Accelerating Growth ", Draft Report, Poverty Reduction and Economic Management Unit, South Asia Region (Washington, D.C.). 9 Budget Speech, Government of Maharashtra, Budget 2005-2006 10 Budget Speed, Delhi Government, Budget 2006-2007

2) Preventing Under- Valuation of property The high stamp duty rates create a strong incentive for individuals to illegally evade the tax burden by understating the valuation of property. Observers claim that under-valuation may be up to 50 percent for many kinds of transactions. A recent World Bank Policy Research Working Paper 11 , has calculated the potential impact of under-valuation (assuming to be 25% for all transactions) on stamp duties in selected States in India. An extract of the table is reproduced below:

Lost Stamp Duty Revenues, 2000-2001 (in Rs. millions) State Actual Stamp Duties Stamp Duty Revenue Loss from 25 Percent Under Valuation 2554.3 89.4 455.6 51.8 1592.8 1263.7 2359.4 1107.9 1364.7 6339.5 286.9 1166.1 900.4 3323.2 3087.0 1115.6 33,594.1

Andhra Pradesh Assam Bihar Goa Gujarat Haryana Karnataka Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamil Nadu Uttar Pradesh West Bengal Total- All States

7663.0 268.2 1366.9 155.5 4778.3 3791.2 7078.1 3323.6 4094.2 19,018.6 860.6 3498.2 2701.2 9969.7 9261.1 3346.8 100,782.3

As stamp duty on various land documents are a certain percentage of consideration amount, reduction of stamp duty rates lowers the burden of landowners and hence lowers the incentive for under valuation of property giving rise to loss of revenue and a number of illegal practices. Hence Reduction of stamp duty rates reduces under valuation of property during property transactions.

11

World Bank Policy Research Working Paper 3413, September 2004 titled Stamp Duties in Indian States: A Case for Reform by James Alm, Patricia Annez, and Arbind Modi

3) Reducing the black/ unaccounted money in property transactions It is widely believed that given the high levels of stamp duties, transaction of many immovable properties are deferred, others are not recorded, and even those formally registered are under valued. This under valuation creates black money and promotes thriving parallel economy in the real estate, as individuals involved must pay a part of the deal in cash such that it is not recorded in transaction 12 . The undeclared money in possession of seller continues to circulate and gives rise to a number of other unaccounted transactions and escapes the tax net. Recent estimates show that about 23% of GDP is in the black economy of India 13 . It is submitted that the lower rate of stamp duty would reduce use and generation of black money in property transactions, facilitate bona fide transactions and hence increase potential for larger revenue collection not only to the State Government but also to the Central Government in the form of higher tax yield on Income Tax etc. 4) Reducing Fraudulent production and use of stamp paper The high stamp duty rates substantially raise the rewards of engaging in the fraudulent production and use of stamp papers. The notoriously famous Telgi Scam hints at the perverse incentives embodied in high stamp tax rates coupled with weak controls. A reduction in stamp duty would definitely prove as a disadvantage to those engaged in such fraudulent activities in order to evade stamp duties. 5) Encouraging Investments in Real Estate A reduction in stamp duty would provide a considerable monetary incentive for Real Estate Developer firms to cater to other states and contribute towards their infrastructural and housing development. Moreover the revenue base of State/Central Government will increase on account of various taxes like Work Contract Tax/Trade Tax, Service Tax, Income Tax applicable on these Real Estate Developers. Similar demands to reduce stamp duty on conveyance have been raised time and again by various Chambers/ Confederations/ Association of Industries and Commerce including The Associated Chambers of Industry and Commerce of India (ASSOCHAM) 14 , Confederation of Indian Industries (CII) 15 , Federation of
12

Planning Commission of India, 10th Five-Year Plan (2002-2007), Volume II at Page No. 13 Friedrich Schneider (2002), Size and Measurement of the Informal Economy in 110 Countries Around the World, paper presented at the Workshop of the Australian Tax Centre, ANU, Canberra, Australia, July 17, 2002. 14 Paper titled Real Estate Issues and Solutions released by ASSOCHAM on May 12, 2006.

Indian Chambers of Commerce and Industry (FICCI) 16 for boosting the real estate investment. 6) Encouraging FDI/ NRI Investment Bringing down the stamp duty rates at par with the international levels will encourage Foreign Direct Investments and investments by Non-Resident Indians (NRIs) thereby bringing valuable Foreign Exchange for the country. 7) Boosting Development of Industrial, IT and Tourism Sector The stamp duty reduction will boost industrial growth, attract more IT & IT Enabled Service companies to set up centers in these States and give the right impetus to tourism industry leading to improved fiscal and economic health of these States in the long run. 8) Revenue Gains through Links to other Taxes Reduction of rates and consequent prevention of under valuation of transaction for state governments stamp duties and registration fees has a positive effect directly/ indirectly on other taxes imposed by other levels of governments. a) Individual Income Tax, Capital Gains Tax and Wealth Tax imposed by Central Government: The value of the transaction affects the individual income tax via the inclusion of short and long-term capital gains in the income tax and reduced rates of stamp duty would have a positive impact on revenue generation. Similarly, valuation affects an individuals tax liability under the wealth tax. b) Property tax imposed by local governments: The property tax in most urban areas is based on the Annual Rental Value of a property. Many urban local bodies use, the value declared for the transaction directly relevant to the tax base used for calculation the property taxes. c) Sales tax imposed by the state government and Central Excise Taxes:
15

Stamp Duty in Northern Region States: A Case for Reforms published by CII Northern Region in December 2003 16 FICCI Seminar on Housing titled Infrastructure for Development of Housing Sector Policy & Planning Issues organized in August, 2003.; Real Estate International Development Summit 2005 organized by FICCI on November 11, 2005, New Delhi, India.

Black money generated through under valuation at the time of registration, is spent such that it is not officially recorded, causing considerably loss of sales tax revenue. Hence by reduction of stamp duties, the black money generation would be curtailed and the sales tax revenue would increase.

History Of Reforms Proposed By Various Committees/ Commissions. As early as 1925, Indian Taxation Enquiry Committee (1924-1925), after comparing the stamp duty rates in England and United States of America, had recommended the reduction of Stamp Duty Rates as soon as circumstances permitted. However no postive action was taken in this direction by the States. The National Housing and Habitat Policy, 1998, recommended stamp duty rates on conveyance in India to be reduced to 2-3 per cent to be a par with rates levied in developed markets whether in Singapore or Europe, which are in the range of 1-2 percent. More recently, the Planning Commission of India in its 10th Five Year Plan (20022007), Volume II has stressed upon the legislative reforms for rationalisation and reduction of stamp duty rates in various states in India to 3-5 per cent

Jawahar Lal Nehru National Urban Renewal Mission. The Government of India has proposed substantial assistance through the Jawahar Lal National Nehru Urban Renewal Mission 17 over the seven-year period starting from 2005-2006. During this period, Funds/ Grants equaling 100% Central Grant, shall be provided to the Urban Local Bodies (ULBs) and Parastatal agencies for implementing proposals that would meet the Missions requirements of planned integrated development of infrastructural services/ facilities of urban cities and Provision of basic services to the urban poor including security of tenure at affordable prices, improved housing, water supply and sanitation, and ensuring delivery of other existing universal services of the government for education, health and social security. The JNNURM prescribes mandatory reforms at the Level of ULBs and Parastatal agencies & Level of State Government which include, inter-alia Rationalisation of Stamp Duty to bring it down to no more than 5 per cent within next seven years with the objective of establishing an efficient real estate market with minimum barriers on transfer of property so as to be put in more productive use. 63 cities, encompassing various States of India, are amongst those eligible for JNNURM. A number of States have signed a MoU with the Central Government for availing grants from the Urban Reforms Incentive Fund under the JNNURM and have agreed to reduce the stamp duty. It is high time that in accordance with the
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Here-in-after referred to as JNNURM

commitment, the States implement the reduction of stamp duty in a phased manner to a level of 5%. CONCLUSION Hon'ble Apex Court in Union of India Vs. M/s Playworld Electronics Pvt. Ltd.18 had stressed upon rationalisation of tax and the Honble Sabyasachi J. observed "It is also true that in order to create the atmosphere of tax compliance, taxes must be reasonably collected. In order to promote honest compliance of stamp duty, the State Governments should reduce the present exorbitantly high rates of 8-10 % to reasonable level of 2-3%, at par with other Asian countries. It is high time that the State Governments shun the fear that the lowering of stamp duty rates would lower the revenue. Most of the Asian countries have realized that lower rates of stamp duties translate into increased revenues for the Government in the long run not only from Stamp duty and Registration but from other taxes and have planned and acted accordingly, paving the way for India to follow. TABLE A S.N o 1. Name of State/ U.T (In Alphabetical Order) Andhra Pradesh Stamp Duty (%) 1. Municipal Corporations; Special Grade/ Stamp Selection Grade Municipalities - 7% Stamp Duty + 2% Transfer Duty + 0.5% Registration Fee 2. Other Local areas (Municipalities and Panchayats) - 6% Stamp Duty + 3% Transfer Duty + 0.5% Registration Fee 3. Flats and Apartments - 5% Stamp Duty + 2% Transfer + 0.5% Registration Fee Upto Rs. 1,00,000 - 8% Above Rs. 1,00,000 - 12% + 2% Extra for property under Municipal Corporation Limit (Registration fees is charged extra based on the cost of property) 5% 7.5% +

Assam

3 4

Chandigarh Chattisgarh

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[1989] (3) SCC 181

Delhi

1% Duty Panchayat Area 1% Duty Corporation Area 6% Purchase in name of Male 4% Purchase in name of Female 4.9% + 1% Registration Fees 6%- Purchase in name of Male 4% - Purchase in name of Female 5% 7.5% 5% 7.5% No Stamp Duty on Flats Valuing Less than Rs. 5,00,000/10% - Flats in Corporation Area 9% - Municipal Area 6.5% - Panchayat Area 8% - Purchase in name of Male 6% - Purchase in name of Female + 2% surcharge urban properties 1% surcharge rural properties + 0.4% surcharge on vacant land 5% 7% + 1% Transfer Duty Municipal Area + 1% Registration Fee (Whole State) 5% to 10% 8% 5% - Rural Areas 8% - Urban Areas (Reduction of 1% for women) Urban Land 6.5% Agricultural Land (Female) 5% First Transfer of Apartment by Owner/ Developer of Multistoried Building 8%

Gujarat

Haryana

8 9 10 11 12

Himachal Jammu & Kashmir Jharkhand Karnataka Kerala

13

Madhya Pradesh

14 15

Maharashtra Manipur

16 17 18

Nagaland Orissa Punjab

19

Rajasthan

Within 10 years from such transfer First subsequent transfer 5% Second subsequent transfer 4% Third subsequent transfer 3% 20 Tamil Nadu 8% 21 Tripura 5% 22 Uttaranchal 8% + 2% surcharge - Inside Development Area 8% - Outside Development Area 23 Uttar Pradesh 5% + 2% surcharge - Inside Development Area 5% - Outside Development Area (1% Rebate for women if market value/ consideration is till Rs. 10,00,000/-) + Registration Fee of 2% maximum Rs. 5000 24 West Bengal 6%-Municipal Areas 5% - Rural Areas + (1% Stamp Duty where consideration/ market value more than Rs.25,00,000/-) While due research and study has been made by the author to mention the stamp duty rates of various States, there is a possibility that some of the stamp duty rates mentioned above have been recently modified/ lowered by the States. TABLE B 19 Country Malaysia Thailand Philippines Stamp duty/ Registration tax 1 % on first RM 4,00,000; 3 % on the remaining market value 0.5 % except in cases where the seller is subject to a specific Business Tax + 2 % Transfer Fee and 0.5 % Stamp Duty 1.5 % on the consideration paid or the fair mkt. value (whichever is higher) + 0.75 % of gross selling price as Transfer Tax 1 % on first S $ 1,80,000; 2 % on next S $ 1,80,000; thereafter 3 % 3.75 % on the market value of the property; 0.2 % on stock transactions

Singapore Hong Kong

19

The Data for Table B have been taken from Stamp Duty in Northern Region States: A Case for Reforms published by Confederation of Indian Industry Northern Region (December 2003).