The Hindu Business Line : The burden of stamp duty

Stamp duty is a tax, more or less similar to sales tax and income-tax, collected by the government. An instrument/document on which stamp duty is paid has evidentiary value in the court of law. Stamp duty is paid on the instrument and not on the transaction. Therefore, stamp duty is charged on the basis of the contents of the instrument.

In general, stamp duty is a tax imposed on a variety of legal and other documents, and is a source of national revenue. It is a cheap and convenient mode of certifying that the revenue regulations have been complied with.

Looking back

Historically, stamp duty was thought up by the Dutch in 1624 and first levied in the UK in 1694 by William and Mary as: `Several duties on Vellum, Parchment and Paper for four years, towards carrying on the war against France'.

As stamp duty proved a revenue earner for the government it was never repealed. It was so successful that it remained even when its imposition led to riots in the American colonies in 1765. Stamp law spread to other countries and many of the legislation in the developing countries are based on the English Act of 1891.

Since its inception in 1899 in India, it has been a significant source of revenue for most State governments. With the expansion of business transactions and fast growing technology, new kinds of instruments are being introduced. As the present system is not fully equipped to tackle such instruments, efforts are being made to reform and restructure the stamp law.

There are many problems with the stamp law, and some of them are:

Fixing a benchmark for guidance value requires urgent attention;

Unsatisfactory basis of valuation, which results in abuse of discretionary powers;

A strong disincentive for the seller/buyer in securing various approvals before an instrument is registered;

High rates result in low compliance ; and

Reluctance of small States to reduce the stamp duty rates;

The stamp duty may be a significant deterrent to property deals, especially when the duty rates are high. It can reduce the volume of transaction, and hinder transfer of property to more productive uses and diminish the efficiency of resource allocation. A smoothly functioning market in property serves a useful economic purpose.

High stamp duty rates lead to under-valuation of the transaction and this results in revenue loss. It is believed that when the stamp duty is high many immovable property transactions are either deferred or not recorded at all. Even when transactions do take place, these are recorded at values less than the full consideration paid for.

This under-declaration of property value results in the generation of black-money. As a part of the consideration is not recorded, the parties pay that amount in `black'. (See `Stamp Duties in Indian States: A Case for Reform,' World Bank Policy Research Working Paper 3413, September 2004)

A comparative study

Unlike in India, stamp duty is hardly considered a burden in the UK, and there is no attempt to evade the duty by under-valuation. An important feature of the British stamp law is the frequent changes in the structure of duties and constant efforts at rationalisation in response to public demand and market forces.

In Australia, stamp duty rates on instruments are either very low or have been exempted

In India, some States levy very high rates of stamp duty. Under the JNNURM (Jawaharlal Nehru National Urban Renewal Mission) scheme, one of the mandatory reforms is to gradually reduce the stamp duty to 5 per cent. It is a positive effort to reduce stamp duty and to increase the flow of property transactions in the market.

The NIPFP (National Institute of Public Finance and Policy) is working on the aforementioned issues. A Standing Committee of State Secretaries of Stamp and Registration was set up in 1999 to look into stamp law reform. The Standing Committee meets twice every year to discuss the problems under the stamp regime.

(The author is Consultant (Lawyer), National Institute of Public Finance and Policy, New Delhi.)

More Stories on : Taxation | Real Estate & Construction

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Replacing the bulb

Global warming: Speed the car's exit

No taxation by circulars

Streamlining the appeal process

The burden of stamp duty

Democratisation vs dilution

Labour squeeze hurts India Inc

Reason to believe

Binding the employee