India's housing market has been sluggish since 2015. Prices have been under pressure and the current ready and under construction housing inventory adds up to more than 8 lakh units across India's top 44 cities, according to Propequity data.
There is an urgent need to accelerate sales and there could not be a better time than now, when economic confidence is returning, and home loan interest rates are at a multi-decade low. A cut in stamp duty could bring the fence-sitters and new buyers to the market, just as they did for the state of Maharashtra which saw record property registrations in the last two months of 2020, by slashing stamp duty from 5% to 2% between September 2020 to December 2020.
Below mentioned is the rationale and reason for all Indian states to follow in Maharashtra's footsteps and bring down stamp duty on property transactions.
India's stamp duty is amongst the highest in the world.
A review of stamp duties internationally indicates that Indian rates are high, at rates often above 7% if one adds registration charges. Most countries' rates are less than 5%, including several emerging and developing countries. With these high rates, we find that while the stamp duty levy is the third-largest revenue source for many Indian states, it imposes high compliance costs on taxpayers, encourages under-declaration of property value, and most importantly, reduces the responsiveness of real estate markets in Indian cities by discouraging transactions. In states like Goa, Tamil Nadu, Delhi (South-SDMC), stamp duty along with registration and transfer charges add up to 8% and more.
Revenues rise, not fall with tax rationalisation
Any fear that the state may lose revenues by cutting stamp duty on property registrations has been proven otherwise by Maharashtra. The state followed the recommendations of the Deepak Parikh Committee and reduced stamp duty in September 2020, from 5% to 2% till December 31, 2020.
The results were astonishing. The financial capital of Mumbai witnessed record home sale registrations in the last week of December 2020. Sales registrations in the city rose by almost 200% from a year ago, according to data published on the Maharashtra government's website.
What is remarkable is that the velocity and volumes of sales and property registrations more than made up for the cut in rates. Maharashtra's revenues from registrations rose by Rs 367 crore in 2020 as announced by the revenue minister of state, Balasaheb Thorat.
Despite a more severe COVID -19 induced lockdown in Mumbai and Pune, the two most important housing markets, the stamp duty waiver helped revenue collections to rise 4% from a year ago. Maharashtra's reduced stamp duty of 3% on registrations will apply between January 1 and March 31.
Enthused by the positive response and revenue collections from stamp duty reduction, the Maharashtra government has also announced a 50% cut in development premiums, which is again a very commendable step. Madhya Pradesh has been the other state to follow suit and announced a stamp duty reduction to 1% in urban areas to restart the real estate sector.
Industry bodies CREDAI and NAREDCO have been sending formal requests to individual state governments and Chief Ministers to consider a stamp duty cut or holiday, confident that it will boost sales across India.
Maharashtra isn't the only one. There are global examples.
There are global examples of property markets remaining buoyant in 2020 because of a timely decision on stamp duty. A stamp duty holiday was introduced in July 2020 by Chancellor Rishi Sunak in a bid to boost the housing market in England and Northern Ireland during the coronavirus pandemic. The stamp duty holiday will remain in effect until March 31, 2021.
Under normal circumstances, buyers pay stamp duty land tax when buying a property worth 125,000 pounds or more, although first-time buyers must only pay it on homes above 300,000 pounds. The introduction of the stamp duty holiday has raised the threshold at which the tax kicks in to 500,000 pounds for all buyers, amounting to a potential saving of up to 15,000 pounds.
UK property markets have responded with a hearty thumbs up to the tax break. Not only have property sales risen sharply, but house prices in the UK also rose to a six-year high at the end of 2020 according to Nationwide building society, rising 7.3% in the year.
The government in the UK has demonstrated its commitment to supporting homeownership and helping people get on and move up the housing ladder, and the central government in India recognises the need for similar action from state governments. The Minister for Urban Affairs and Housing, Hardeep Singh Puri, had urged states in November 2020, to follow suit on stamp duty cuts.
Under - construction inventory needs buyers
Real estate prices have remained quite flat in the last 5 years, while salaries and incomes have risen, making residential real estate in India one of the most affordable. Mortgage rates have fallen to a multi-decade low of 7%. Yet, the sales velocity is well below its peak.
According to Propequity Data, there are 8 lakh plus units (ready and under-construction) across 44 cities in India that need to be sold. The ready to move in apartments and independent homes could witness a huge upsurge with a stamp duty waiver. In some markets, with property prices coming down, circle rates have become out of sync with the ground reality, discouraging property transactions.
Various state governments will do well to consider a rationalisation of circle rates in micro-markets, where market prices are no longer as high as the circle rates. Combined, these two moves could boost sales and purchase velocity substantially, and with them, revenues for the state government.
Financial stability and economic growth
RBI, in its latest Financial Stability Report, has also cautioned against the banking sector's rising NPAs and deteriorating asset quality. NBFCs are the largest net borrowers from the financial system, with gross payables of Rs. 9.37 lakh crore at the end of September 2020.
Real estate has borrowed heavily from NBFCs and unlocking inventory is critical to prevent this debt from becoming a non-performing asset. Failure of any NBFC or housing finance company (HFC) can trigger a solvency shock to their lenders and become a contagion.
Developers are struggling with low sales and thin cash flows. They need volumes to return. Since selling 500,000 units 5 years ago, the industry today sells 200,000 units annually. A simple act like reducing stand duty could be a strong enabler for home buyers returning to the market and keeping the cash inflows of the real estate sector intact.
The real estate sector makes up for 8% of India's GDP. Reviving it would help lift overall economic growth, employment, and 250 plus ancillary industries. This one crucial step of rationalising stamp duties can put the housing sector on a substantial path of revival.
(The author is Managing Partner, India Sotheby's International Realty.)