Budget 2018: Stamp duty on immovable properties should also be on value addition alone
Value added tax (VAT) principle should apply to stamp duty on immovable properties
The goods and services tax (GST) has been rolled out. It is nothing but a value added tax (VAT) across a wide spectrum of goods and services except on petroleum products, real estate and liquor for human consumption. A property broker rang me up. He was almost breathless. He asked me how come stamp duty is collected again and again on the same property each time on the current value. What he meant was full stamp duty on successive sales whereas it ought to be only on the value addition in keeping with the principle of VAT. In this article I am articulating his views for Finance Minister Arun Jaitley’s urgent consideration in the upcoming Budget 2018 on 1 February 2018.
Let us say a DDA (Delhi Development Authority) flat was allotted to Mr A in 1971 for Rs 5 lakh. He would have paid a stamp duty of say 8 percent i.e. Rs 40,000. Let us say for the sake of easy understanding of the issue involved that the stamp duty in Delhi has stayed constant till date. In 1981 he sells the property to Mr B for Rs 20 lakh. The Delhi government collects stamp duty on Rs 20 lakh at 8 percent translating into Rs 1.60 lakh.
In 2001 the property is sold to C for Rs 60 lakh begetting the Delhi government Rs 4.80 lakh and let us say the same property is sold in 2017 for Rs 1 crore begetting the Delhi government Rs 8 lakh. The total stamp duty collected from the four transfers is Rs 14.80 lakh. Had the principle of VAT which underpins GST been adopted, the Delhi government would have got only Rs 8 lakh from all the four transfers put together --- 0.40 + (1.60—0.40) i.e. 1.20 + (4.8 — 1.60) i.e. 3.20+ (8 — 4.8) i.e. 3.2 aggregating to Rs 8 lakh which in fact corresponds to the stamp duty on the last transaction.
GST, a variant of VAT, embodies the destination tax principle --- the government collects tax gradually at each destination on the amount added during the journey, as it were, from the previous destination to the present. This is what makes the property costs so prohibitive, wailed the knowledgeable broker. He was right even though there was a bit of exaggeration in that scarcity of the land is the major factor in propelling real estate prices skyward. The truth nevertheless is taxing the entire transaction all over again is what produces the tax cascade which GST has mercifully ended for most of the goods and services. But real estate is yet to be roped into the GST net.
Sooner it is done the better. And when it is implemented the destination tax principle should not cease after the builder sells to a buyer which would be the case if the entire GST paid on building materials and services abate against the GST on the completed flat, period. This should not be the be all and end all of GST on real estate.
It should go beyond the builder-buyer stage and continue till the property exists and changes hands. In other words, the VAT principle should apply to stamp duty also. That there was a lag of one full decade between the first and the second transaction and a lag of two decades between the second and third should not come in the way of giving the well-merited rebate for tax (stamp duty) already paid on the same property.
The audit trail thus generated by the sub-registrar office’s records makes for transparency in an otherwise opaque real estate market. Successive buyers would know transparently upfront what the previous buyers had paid. Of course this itself is no guarantee that cash will not lubricate real estate transactions. For that solution lies in revising periodically the guideline value as is already the norm.
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