THE DRAFT NATIONAL Housing and Habitat Policy 2005 has rightly called for a drastic reduction in the stamp duty levied by State governments on residential property from the present 10-13 per cent to a more modest 2-3 per cent. There is a strong economic rationale for such an approach. It is a fundamental tenet of fiscal policy that the taxation structure be so designed as to promote capital formation in the economy. It is in recognition of this principle that taxes on capital goods are set at more modest levels than on consumption goods. And where they subserve a larger public purpose, such as export promotion, the goods have been spared Customs duty too. While the organised industrial sector has managed to secure a favourable duty regime, the diffused private housing interests have never been able to band together effectively to secure a better deal in matters of taxation policy.

This is unfortunate as a moderate tax regime would also promote an active secondary market in housing assets as a high taxation structure distorts the latent demand for second-hand property. A vibrant secondary market for automobiles is well-recognised as a driver of demand for new vehicles. Similarly, a robust market for securities paper is seen as vital for growth of the credit market in the financial services industry. Indeed, across all sectors a secondary market performs two vital functions: It provides an opportunity for one set of owners to move up the value chain even as their existing asset becomes just that bit more affordable for those next on the ladder. The existence of a secondary market also operates as a risk mitigating measure as the owner is assured of realising some value on the second sale of the asset should things go wrong.

Recommending a rational tax policy is perhaps the easier part. Getting the State governments to accept it is not going to be easy. With States raising close to Rs 18,000 crore in stamps and registration fees, the bulk of it from property-related transactions, it is going to be difficult to get them to fall in line with a rational policy on duty that, in the short run at least, threatens to enfeeble further their already weak fiscal condition. But the losses, such as there are, would most certainly be made up in due course as the local economy acquires a fiscal stimulus leading to buoyancy in tax collections. In any case, the Centre can and should step in to underwrite any adverse fiscal consequences for the reforming States just as it has promised to do for those implementing the Value Added Tax regime. Tax incentives for home loans coupled with a soft interest rate regime have combined to give a boost to housing construction quite unlike anything that the country has witnessed in the past. The latest initiative could carry the process forward.

(This article was published in the Business Line print edition dated September 17, 2005)
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