After introducing a uniform GST rate across all the states last year, the government is now moving towards introducing a uniform stamp duty rate across the country. Stamp duties are levied on all financial transactions that are not included in the GST. According to estimates, there are 65 different kinds of such charges imposed by the states. The rate of stamp duty varies across the states currently, hence the value of making transactions is different across states. This gives rise to a situation which permits arbitrage to take place between states and leads to tax evasion. The SEBI had previously advised the government to change the current stamp duty law which dates back to 1899 and add new reforms to it. The power to levy stamp duty was present with the states which could decide the amount of stamp duty to collect on each financial instrument, thereby leading to different stamp duties. However, the states have now unanimously agreed to have uniform stamp duty nationwide.
There were several problems with different stamp duty rates across states. The high rates of stamp duty gave individuals incentive to understate the value of their goods, hence evade taxes. Studies show that in Maharashtra around 70 percent of the stamp duty documents are undervalued by 20 percent or more. Because of the archaicness of the law, people had also found legal loopholes to avoid paying stamp duty altogether. They did so by registering properties in the states with lower tax rates, or by splitting up large properties into smaller properties to avoid high tax rates, or by dissolution of a partnership in which the property is taken as payment for ending a partnership. Various individuals also evaded stamp duty by not registering the transaction in any official books thereby leading to an increase in the creation of black market transactions. Studies show that relative to the revenues collected by stamp duties, the collection costs and administrative costs may be very high. The government had also attempted to start online payment of stamp duties as a part of the “e-governance” project but only limited states implemented this.
In the year 2003, a stamp duty scam called the “Telgi scam” surfaced indicating the problems associated with stamp duty. Abdul Karim Telgi was heading an organization which perpetrated deep into the government including government officials and various politicians. They were printing fake stamps and giving them to people pretending like the stamps were legitimate. The loss of government revenue by this is estimated to be a staggering $17 billion. This indicated the problems with having a high stamp duty rate complied with weak controls. Further, this figure is also indicative of the ease of countering high taxes while simultaneously creating black markets in the economy. However, even after this incident, little was done by the governments to change the stamp duty laws. Hence, the change to bring out a uniform stamp duty in India was long pending and is a good move by the government.
International stamp duty laws are a lot more efficient because they are levied uniformly nationwide and the rates of stamp duty are also low creating lesser incentive for evasion. The rates of stamp duties in countries like Vietnam and the Philippines are as low as 1-2%. New Zealand is a country which does not levy stamp duties at all. New Zealand ranks in the top countries for the ease of doing business indices. High stamp duties have a negative effect on the business environment because the transaction of financial instruments is costlier. A move to bring down the stamp duty will lead to a positive change in the business environment and will make India more business-friendly.
Stamp duties generally have to be paid by the buyer. However, this does not imply that the buyer takes 100% of the tax incidence. The buyer and the seller both divide the tax incidence between them based on the elasticities of demand and supply. The one with an inelastic demand or supply ends up paying a higher amount of the stamp duty. However, it can be said that stamp duties are greater for the rich than the poor because they are levied heavily on expensive transactions. Hence, much like the income tax, the stamp duty is also a progressive tax where the rich pay more, making the tax accommodative of one’s ability to pay.
Overall, the tax reform will help to bring India’s stamp duty laws closer to international standards and will reduce leakages to the black economy. This reform will be raised in the Indian parliament’s winter session. Though this reform will take some time to be effective, it will have various other positive domino effects on the economy.