Wednesday, December 17, 2014

Stamp Duty; Whose Pocket It's Pinching?

Government can wreck a business by confiscating its money by taxation…Owen Paterson

Paterson is a British Conservative Party politician who has been the Secretary of State for Environment, Food and Rural Affairs since 2012 and the Member of Parliament (MP) & I am sure his this statement will be appreciated as well acknowledged by every businessman, whatever country’s citizen he may be! Obviously common man & media wouldn’t like it as doesn’t all the business men are against any tax always? Yes they are & equally true that taxes too are important as or else from where the money required to build the infrastructure for the very same businesses is going to come? So a wise or sane businessman will never oppose taxes, provided it’s on logic. The reason for taking up the topic is New Year is on door step & like every year there are news making headlines about stamp duty’s ready-reckoner rates, as expected are going to be increased & said to be nearly by 20%! Well as usual there have been statements or appeal by developers all over the State to reduce the ready-reckoner rates but like every budget there is hike in taxes on Alcohol & Tobacco; real estate too is soft target for the Govt for revenue!

Many people don’t even understand what ready-reckoner rate & stamp duty is; leave apart its impact on real estate. Though we all use these terms regularly but rarely know what it mean. Many of us have paid these charges for our own home deals yet very few understand its relevance as well its role in the real estate industry. Frankly even after my 24 years in real estate yet I am unclear about how exactly ready-reckoner rates are worked out. For those who have even poor knowledge than me, let me clear I am no expert on ready-reckoner though with the exposure of some friends on both sides of table I can throw some light on the same. Ready-reckoner is a document or index which decides the value of immovable properties. In more detailed or simpler words, we all are familiar with per sq ft rate of properties & ready-reckoner is a guide book by Govt which decides what should be the market rate per sq ft of vacant land or built up area of a building, in a particular city or town in the State. As per these rates the stamp duty is charged on ever deal of land or property as registration of such deal is mandatory by the law. Unless any document which we call as agreement is duly registered by paying stamp duty & registration charges to the Govt, no such agreement is considered as valid by the court anywhere in the country! You can’t become legal owner of your property unless & until you have paid stamp duty as per ready-reckoner rates; no bank of financial institute will give you loan for any such property of which agreement hasn’t been registered by paying the stamp duty as per ready-reckoner rates. Your name can’t come on the ownership documents of the property such as 7/12 extract or property card unless it’s duly registered by paying stamp duty & registration charges. Now you will understand importance of stamp duty regarding any property deal. 

Usually stamp duty is 5-6% of the deal i.e. agreement cost or as per the ready-reckoner rates whichever is higher & registration charges are 1% or maximum Rs 30,000.00! This is why ready-reckoner rates are important as they are directly related to the stamp duty factor which amounts to thousands of crores of rupees & is important factor for yearly revenue of State Govt. For e.g. if you have purchased a flat in Baner of say 2bhk & of built up area 1000 sq ft at say Rs 5000/sq ft rate making it Rs fifty lacs, then by 6% your stamp duty to get this document registered which you will have to pay will be  Rs Three lacs.  But if as per the ready-reckoner rate of this flat is say Rs is Rs 6000/sq ft, then the costing of your flat as per Govt will be Rs Sixty lacs & the stamp duty which you will have to pay for registering the agreement will be      Rs three lacs sixty thousand, which will be nearly Rs. sixty thousand more than what your deal has been done! Because even if you have purchased the flat at Rs fifty lacs but as per ready-reckoner its cost comes as Rs sixty lacs & the registrar at registration office considers higher value for charging stamp duty so you will end up paying higher stamp duty! This is just an example to explain how the stamp duty calculation works; though it depends up on individual cases to work out exact calculations.  

Every year a team of thousands of revenue dept’s officers are gathering data about this information of property rates which are constantly changing & every year ready-reckoner rates are updated by IGR i.e. Inspector General of Registrations who is chief of this department. The usual process is gather data of agreement cost of all the properties of which sale has been registered in the past financial year & analyze the same to arrive the property prices in respective area, a system which is logically correct but can’t be considered as hundred percent accurate. The simple reason is it considers highest rates for deciding property rates. For e.g. in Baner area if one thousand flats has been sold then it will mostly consider highest rate of sale which actually depends on many factors such as land cost of a particular proposal, then amenities , project size, type of the buildings i.e. multi storied etc.  This year the present IGR was very proactive with collecting data not only from the department people but has taken in consideration suggestions from all the concerned persons such as cooperative societies, associations of developers, advocates & many such.   The IGR also has come up with “Sarthi”, an online suggestion/ complaint receiving portal, where any person can post about any suggestion regarding stamp duty & ready-reckoner. Yet a fact can’t be neglected that Hon IGR represents Govt & his task is to increase revenue, so the policies will be oriented on this aspect only!

The impact of stamp duty isn’t just that it’s an added burden on the flat sale i.e. the buyer has to pay more stamp duty in amount wise but most of the municipal corporations various premiums which the developer has to pay for getting plans sanctioned are related to ready-reckoner rates; so all these charges are also going to be increased by this increase in readyreckoner rates! For e.g. staircase & balcony premiums for getting them FSI free needed to pay some premium per sq ft of their area & these are charged as per readyreckoner rates of built up properties in that particular area, so if the there is any increase in ready-reckoner rates then it will directly affect these premiums & they will also get increased! Here one will say what’s big deal, isn’t the developer gets benefit of these areas in terms of free FSI? Well, the builder does get but it’s indirectly increase in expenses making the end product i.e. home, costlier! It’s like any increase in rates of petrol, resulting the auto rickshaws are going to increase their fare & at the end it’s the common man whose transport is going to get costlier! Another aspect is entire taxation depends on ready-reckoner value, so property taxes will also go high for the citizens as they too are linked with ready-reckoner rates. Main impact will be on income tax calculations as even if the deal rate is lower than ready-reckoner rates, the tax will be calculated on ready-reckoner rates only, which will be again a big dent to the pockets of the developers as well property buyers! On the very same lines even the public service projects also will get costlier as if the land rates get increased naturally the compensation for the land required for the roads & various other reservations purposes like play grounds, gardens & many such will increase. This will make local bodies’ budget collapse as well cost of services will be higher!

Here one may again say, isn’t it logical as if the property prices are getting higher then why one should complaint to pay the tax or give compensations? Again it’s not question of not paying taxes or compensation, it’s about realistic scene on the horizon of growth. Are the rates really increasing? A quick glance at the real estate & even a ten year kid will tell you that’s rates have been steady over last year & leave increase but at many places its being observed that rates have gone down for properties in compare with last year. On other hand land costs haven’t come down & simple reason is land owners have nothing to do with rates of finished products i.e. homes on these lands! All they are interested is in getting more value for their piece of land!

So the cry from real estate industry isn’t against increase in rates but for rationality in the approach. Every year there has been increase in ready-reckoner rates all over the State but then is it true with prices of the flats i.e. ready homes?  Also the criteria should be minimum value of the deals happened in last year & not higher or average as because of this the smaller or mid segment homes unnecessarily gets in to league of high end homes & end up paying more stamp duty than required. Here an option of keeping a band width of ready-reckoner rate can be thought of instead fixing some particular figure of rate per sq ft. So only if the agreement price of any deal is below this band width then only average rate per sq ft should be applied for as the prevailing ready-reckoner rate for that locality! Also why the premiums of local bodies are linked with the built up rates of the property & not as per land rates which never gets increased like the built up rates! As in present system the local governing bodies are getting higher revenue from premiums without doing anything on infrastructural fronts is a bitter truth & for which the common citizen is being forced to pay higher for his home!  Rather taxes like property tax should be based on the quality of service the citizen gets & not as per the ready-reckoner rates.

I have already cleared that I am no expert on taxes or finance but as a common man what I feel that no one is against paying what is legitimate; but for that a transparent system to decide what is legitimate rather moral is correct term, has to be in place! If I am buying my home at a particular rate then it has to be charged as per the deal I have entered in & not with some fictitious figure, is my basic expectation from the Govt! Already the real estate industry has enough fronts to fight with & I know there is & will be never sympathy for the developers neither in Govt’s mind nor in common man’s heart, yet this is the industry where there are still few good men work to deliver homes to the society only. And a home is very basic need of a man, may it be rural area or urban, so its Govt's duty to see that this home will be affordable to the common man & any policy should be worked out keeping this aspect in mind! Somewhere an increase by 20% in ready-reckoner is going to make that small dream of the common man’s home more costly. And as I repeatedly say when we try to help common man’s dream fulfilled there are no sides to the table; as for him, the developers, the govt officers, the politicians, the Media all are same. And keeping this at center, work out the solution about ready-reckoner rates, is what need of the time or else it’s not just the common man’s dream of a home is in doldrums but his entire belief on the system that a common man can have his home, is at stake, mind it!

Sanjay Deshpande

Sanjeevani Dev.

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