Terra Economics & Analytics Lab White Paper 2 September, 2020

Stamp Duties for Property Transactions in India

A Stamp Duty is a direct tax paid to the registrar1 when registering a financial agreement or transaction paper between two or more parties.2 A property transaction must be registered with the relevant government authority for it to acquire legal sanction, and stamp duty constitutes a fee for that registration process. In case of a legal dispute over the transacted property, a stamped document has evidentiary value in Court under the provisions of the Indian Stamp Act, 1889. While purchasing a property, the buyer is legally liable to pay stamp duty to the State government; and it can be a sizable sum– in some states, more than ten percent of the value of the property. This duty is to be paid by the buyer over and above the transaction value. Consequently, it is an important source of revenue for State governments.

Legal Framework

Historical context

In India, stamp duties on certain financial documents were first imposed in Calcutta in 1797, then extended in the Bengal Presidency and the Bombay and Madras Presidencies by the East India Company.3 The objective of imposing stamp duties was to abolish tax levied earlier on traders for the maintenance of police establishments.4

1 A Registrar is the concerned registering officer appointed at the district level under the Indian Registration Act, 1908. The Sub-Registrar is the registering officer appointed at the sub-district level. Stamp duties and registration fees may be paid to either the Registrar or the Sub-Registrar. 2 Livemint- What is stamp duty and what is it charged for? 3 National Institute of Public Finance and Policy (NIPFP)- Economic Reforms and The Stamp Act 4 Ibid

The Stamp Act of 1860 replaced the prevailing stamp duty-related regulations of the three Presidency states. The new Act covered all the provinces5 directly administered by the British, including the three Presidencies. Thus, it covered all of British India except the princely states.6

In December 1870, a resolution was passed by the then Governor-General Lord Mayo, which devolved certain taxation powers to all the provincial governments. The aim was to give more fiscal autonomy to the provinces. The power to levy stamp duties, however, was not devolved in 1870.

In 1877, when Lord Lytton became the Governor General of British India, the British government fixed stamp duty rates and collected stamp duties, before allocating a share to the provinces.7 The princely states, however, had imposed their own stamp duties within their territories.8

The Stamp Act of 1860 was ultimately replaced by the Stamp Act of 1899. The Indian Stamp Act of 1899 is still in force today.

Taxation of property transactions in Commonwealth countries

All the Commonwealth member states share a British colonial legacy and most of these countries tax property transfers, except the Maldives and Nauru. In some instances, it is levied as a transaction tax on the deed of alienation (such as for a contract of sale), whereas in other cases it is imposed as a transfer tax for the acquisition of property.9 And all the member states which tax property transfers, with the exceptions of Cameroon and Dominica, have ad valorem10 property transfer taxation systems. However, an ad valorem system requires the presence of skilled valuers who carry out valuations which reflect the market value of the property. Property transfer taxes such as stamp duty, are levied on the assessed value of a property. However, in most of the Commonwealth countries in Africa, Asia and the Pacific region, the lack of skilled valuers is a bottleneck to accurately administering taxes on property transfers.11

5 Burma, Bengal, Madras, Bombay, United Provinces, Central Provinces, Punjab and Assam are the eight provinces which were directly administered by the British. 6 FIP Revenue Commission- Candidate Work For Revenue Philately on Revenue Stamps of the Princely States of India 7 Federal Governance- Historical Evolution of Federal Finances in India 8 Columbia University Libraries: Archival Collections- Indian Princely State Records 1890-1960 9 Lincoln Institute of land Policy- An Exploratory Overview of Property Taxation in the Commonwealth of Nations 10 An ad valorem tax is a tax based on the assessed value of a property. 11 Ibid

Constitutional powers to levy stamp duties

The Union Government has the power to legislate on and six the rates of stamp duties levied on those transaction documents that are listed in Entry 91 of the Union List in the seventh schedule under Article 246 of the Constitution.12 These documents do not include those related to conveyance.13 ‘Conveyance’ is the act of transferring property from one party to another and is used interchangeably with property transactions.

According to Entry 63 in the State List, State Governments are empowered to legislate on and fix stamp duty rates of other transaction documents such as adoption deeds and memorandums of marriage, along with conveyance deeds.

12 Entry 91 of the Union List includes documents such as promissory notes, bills of exchange, credit letters and insurance policies. 13 Bcasonline.org- Maharashtra Stamp Act

Though the rates of stamp duties in the Union List are fixed by the central government, their ‘collection is the responsibility of the state government in which the transaction occurs, and the state government retains all revenues collected by the state’.14 Different states have their own legislation governing stamp duties on property transactions. For example, the Maharashtra Stamp Act of 1958, lays down the procedure for fixing stamp duties for registering properties in Maharashtra.

Indian Stamp Act, 1899

Section 3 of the Indian Stamp Act, 1899 mandates the collection of stamp duties on the instruments enumerated in Schedule I of the same Act. The rates of the stamp duties for every instrument are also listed in Schedule I. However, the Union and state governments have the power to fix new rates depending on their jurisdiction. For property transactions, stamp duties are imposed on the documents/instruments listed below as per Schedule I of the Indian Stamp Act, 1899.

Instrument Purpose of the instrument

Mortgage deed

The instrument by which a mortgage is created, with the relevant terms and conditions.15 The mortgage deed is held by the lender until the loan is paid off by the buyer.

Gift deed

The instrument which records the property transaction between the donor (who gives the gift) and the “donee” (who accepts the gift). Upon registration of the gift deed, the title passes on to the donee.16

Exchange deed The instrument which records the exchange of ownership of properties between parties.

Power of Attorney The instrument by which authority is conferred on a person to make decisions in specified or all legal and financial matters.

14 Ibid 15 mondaq- Immovable Properties and the Creation of Mortgage 16 The Economic TImes- What You Must Know When Making A Gift Deed

Lease deed

The instrument which records the transfer of the right to enjoy the property of the lessor (the person who leases her property) to the lessee (the person who accepts the transfer by paying the consideration) for a certain period.17

Agreement for sale

The instrument is a promise of a future transfer of property ownership. The buyer purchases the property if the terms and conditions enumerated in it are satisfied. The signing of the sale agreement precedes the signing and execution of the sale deed.18

Sale deed The instrument which records the transfer of property between parties.

Sale, gift, exchange, mortgage and lease deeds are all referred to as ‘conveyance deeds.’19

When Are Stamp Duties Paid?

While stamp duties and property registration fees vary across states, the land registration process remains more or less the same.20 After the sale agreement is signed by the buyer, she gets the requisite conveyance deed and pays the stamp duty on it. The transacting parties approach the Sub-Registrar’s Office (SRO) accompanied by two witnesses, and pay the registration fees to get the sale deed registered.21 The buyer gets a receipt, and collects the sale deed from the SRO after 2-7 days.22 The stamp duty is typically paid on or before the day of e

What Happens If You Default on Stamp Duty Payment?

The laws related to penalties in case of default in the payment of stamp duties vary across states. While the Indian Stamp Act, 1899, imposes a penalty on defaulters, the law in some

17 LawyersclubIndia- What is a Lease Deed? 18 Housing.com- Agreement for sale versus sale deed: Main differences 19 Housing.com- Real Estate Basics: What Is a Conveyance Deed? 20 99acres- Know All About Land Registration Process 21 The Indian Registration Act, 1908, provides for the registration of conveyance deeds. Under it, all the property documents listed above, except Power of Attorney require compulsory registration. 22 Makaaniq- A Step-By-Step Guide To Register Your Property

states can attract imprisonment up to one year as well as a penalty.23 If the defaulter chooses not to go ahead with the transaction, the documents are declared invalid.

How are Stamp Duty Rates Calculated?

Stamp duty for conveyance deeds is calculated based on either (a) the market value or (b) the guidance value of the property, whichever is higher.24 The guidance value or circle rate or Ready Reckoner Rate is the minimum rate at which the property should be registered. The guidance value is fixed by the competent authority in the state, such as the Collector.

The guidance value depends upon a few factors: the age of the property, its location, whether the property is residential or commercial, the type of the property (apartment, villa, etc.), whether the buyer is a senior citizen, and the sex of the buyer.25

The criteria used by the competent authorities to fix the guidance value of properties show some variations across states. For example, in Bihar, stamp duties based on guidance values vary according to the sex of the buyer, while in Sikkim, if the buyer is of Sikkimese origin, she gets a discount in the stamp duty.26

Table 1: Stamp duty rates in Indian states27

23 Makaaniq- This Is What Happens When You Evade Stamp Duty 24 Shriram Properties- What Is It and How to Calculate It 25 99acres- State-wise Stamp Duty In India 26 Ibid 27 Bankbazaar- Stamp Duty

State Stamp Duty Rate28,29

Assam 8.25% of consideration

Goa, Daman and Diu 8% of consideration

Haryana 12.5% of consideration

Madhya Pradesh 7.5% of market value

Chhattisgarh 7.5% of market value

Nagaland 7.5% of consideration

Punjab 6% of consideration

Tamil Nadu 8% of market value

Rajasthan 11% of market value

Uttar Pradesh 8% of market value or consideration, (whichever is greater)

Tripura 5% of consideration

Delhi 3% stamp duty + 5% surcharge as per Delhi Municipal Corporation Act,1957

Kerala 8.5% (transfer of immovable property within the Municipal Corporation)

Meghalaya

4.6 % (up to Rs.50,000) of consideration

6 % (Rs.50,000 to Rs.90,000) of consideration

8% (Rs.90,000 to Rs.1,50,000) of consideration

9.9% (above Rs.1,50,000) of consideration

Bihar 7% + 2% duty on transfer (within municipal limits)

Jharkhand 7% + 2% duty on consideration

Karnataka 10% of market value (within Bangalore Metropolitan Regional Development Authority); 9% (Corporation or Town Panchayat) of market value

Maharashtra

10 % of market value (Municipal Corporation of Pune, Navi Mumbai) till 1st September, 2020. However, the stamp duty rates will be reduced to 2 percent between September 1 and December 31, 2020. Then from January 1 to March 31 in 2021, they will be 3 percent of the market value.30

Payment of Stamp Duties

There are three modes of stamp duty payment-

1. Buying of physical stamp paper from a licensed vendor and either writing or printing the terms of the agreement on it, before signing it. The price of the stamp paper is equivalent to the stamp duty.

2. ‘Franking’, in which terms of the agreement are written on a blank piece of paper and the paper is signed and submitted to a bank which is authorized to carry out a franking transaction. The stamp duty amount is submitted to the bank along with the paper. The bank fixes an adhesive stamp having a value equivalent to the stamp duty, on the paper with the help of a franking machine. Sometimes, banks charge a small fee for carrying out a franking transaction.

3. E-stamping by logging in and paying online through the Stock Holding Corporation of India Limited (SHCIL) website. This facility, however, is available in only a few states.31

Stamp Duties as a Revenue Source

Stamp duties and registration charges amount to a significant source of the revenues of the states, often the third or fourth-largest source of their own tax revenues.32

The own tax revenue of a state is the sum of its revenue from both indirect and direct taxes. Indirect taxes constitute the bulk of own tax revenues. Between 2010 and 2020, the average share of indirect taxes was 87.3% of the own tax revenue of all the states while that of direct taxes was 12.7%. Stamp duties and registration fees are a part of direct taxes. Registration fees and stamp duties have constituted the largest share of direct taxes collected by State Governments since 2009-10. In the National Capital Territory (NCT) of Delhi, stamp duties constituted 100% of its direct taxes between 2001 and 2010. Their share then fell to 99.7% between 2011 and 2019. In Haryana, the share of stamp duty revenue in direct taxes rose from 98.2% between 2001 and 2010 to 99.6% between 2011 and 2019.

28 ‘Consideration’ is the actual value at which a property is sold. ‘Market value’ is the price at which the capital asset would ordinarily sell in the open market. They are used interchangeably. 29 TEAL has uploaded the latest stamp duty rates for all the states. However, since these rates keep changing frequently in different states, they may not be up-to-date on the day the viewer is reading this white paper. 30 Financial Express- Maharashtra Cuts Stamp Duty On Property: Will Homebuyers Get Benefited 31 switchme.in- Know about Stamp Duty and Registration While Buying a House 32 Ibid

The median share of stamp duty revenue in the own tax revenues of all the state governments was 8.2% from 2011 to 2019. In Maharashtra, Uttar Pradesh and Bihar, stamp duty revenues account for 16.4%, 14.4% and 12.8% of their own tax revenues, respectively.

Between 2000 and 2010, the share of stamp duties and registration fees together on property transactions was 0.6% of the GSDP. It rose to 0.7% of the GSDP between 2011 and 2020. The own tax revenue of states accounted for 5.8% of the Gross State Domestic Product (GSDP), and that share increased to 6.3% of the GSDP between 2011 and 2020.33 States which are able to generate more revenue on their own are less dependent on the devolution of finances and grants by the Centre.34

33 RBI (2019)- Debt: States’ Medium-Term Fiscal Challenge 34 Factly- Data: What is the status of State’s Own Tax Revenue (SOTR) of various states?

Source: Data from Reserve Bank of India publication- Debt: States’ Medium-Term Fiscal Challenge

Source: Data from Reserve Bank of India publication- Debt: States’ Medium-Term Fiscal Challenge

How Does India Compare with Other Countries on Property Transaction Registration Taxes?

According to data collected from the World Bank’s Doing Business dataset for property registrations in 2020- India, and the cities of Mumbai and Delhi independently, are among the 70 out of the 213 economies which have property registration taxation rates exceeding 7% of the property value. India has the 51st highest property registration taxation rate out of the 213 economies in the World Bank dataset and the 9th highest in Asia from the same dataset. And within India, the stamp duty rates in some cities in Karnataka and Maharashtra have gone up to 10%. In Rajasthan and Haryana, the stamp duty rates are 11% and 12.5% of the property value, respectively.

Source: World Bank’s Doing Business dataset The issue with imposing high rates of taxation on property registration High stamp duty rates impose high compliance costs on taxpayers, leading to evasion and fraud. A World Bank study argued that high rates of stamp duty in India lead to the under-declaration of property values during transactions by buyers so that they can evade stamp duty. For instance, in Maharashtra, it is estimated that 70 percent of stamp duty documents are

undervalued by 20 percent or more.35,36 Although the World Bank study found that reducing stamp duty rates would lead to a reduction in under-reporting, it also noted that this reduction could not be explained by declining stamp duty rates alone.37 In fact, a study conducted in Bengaluru between 2007 and 2014 found that rationalising circle rates is twice as effective in curbing under-reporting than reducing stamp duty rates.38

35 World Bank Policy Research Working Paper (2004)- Stamp Duties in Indian States: A Case for Reform 36 In order to boost property transactions, the Government of Maharashtra has announced that it will reduce the stamp duty rates to 3% from 10% of the market value of a property from 1st September, 2020, to 31st December, 2020. They will then be increased to 3% between 1st January, 2021 and 31st March 2021.

37 Ibid 38 Indian Institute of Management Bangalore working paper (2019)- Can Governments Increase Revenues By Lowering Taxes? A Study of Competing Policies To Reduce Tax Evasion During House Purchase in India