Addressing Underreported Property Values in India: Understanding Stamp Duty, Impacts, and Solutions

Introduction

Underreporting property values during registration is a pervasive issue in India, causing significant revenue losses for the government. This illegal practice is widespread, well-known to government officials, and deeply entrenched in the property market. Understanding the nuances of this practice, its impacts, and potential solutions is essential for addressing the issue effectively.

Understanding Stamp Duty

Stamp duty is a crucial source of revenue for state governments in India. It is a tax levied on property transactions, including both commercial and residential properties. The rate of stamp duty varies from state to state and is calculated based on the higher of the declared transaction value or the circle rate. Circle rates are the minimum values set by the government for property transactions in specific areas to ensure properties are not undervalued during registration.

Basics of Stamp Duty

• Commercial vs. Residential Property: Stamp duty rates can differ between commercial and residential properties, with commercial properties often attracting higher rates due to their higher market value.
• Payment and Documentation: The payment of stamp duty is mandatory for the legal recognition of the property transfer. Proper documentation and timely payment are essential for avoiding legal complications.
• Revenue Utilization: The revenue from stamp duty is used for various public services and infrastructure projects, making it a vital component of state finances.

Why People Underreport Property Values

1. High Transaction Costs: Stamp duty and registration fees can constitute a significant percentage of the property’s transaction value. For instance, in some states, the combined cost of stamp duty and registration can be as high as 10-12% of the property’s value, prompting buyers and sellers to underreport to save money.
2. Tax Evasion: By underreporting the sale price, sellers can avoid paying capital gains tax on the full transaction amount. This practice is particularly prevalent among those looking to quickly liquidate assets without incurring heavy tax burdens.
3. Cultural Norms: This practice has been prevalent for many years, and people continue to follow it without fully considering the legal consequences. The normalization of such behavior creates a societal expectation that underreporting is an acceptable part of property transactions.
4. Lack of Enforcement: Inconsistent enforcement of property registration laws allows this practice to continue with minimal risk of penalties. Corruption and collusion between property registrars and individuals further exacerbate the issue.
5. Cash-Based Economy: A significant portion of India’s economy operates on cash transactions, facilitating under-the-table payments that are difficult to track. This parallel economy thrives on the anonymity and untraceability of cash deals.

Impacts of Underreporting Property Values

1. Revenue Loss to the Government: State governments lose substantial revenue due to underreported property values, affecting public finances and development projects. This loss of revenue can impact funding for essential services such as healthcare, education, and infrastructure development.
2. Distorted Market Prices: Underreporting can lead to a distorted real estate market where the official property prices do not reflect the actual market value. This discrepancy can create confusion and mistrust among potential buyers and sellers, ultimately affecting market stability.
3. Legal Risks: Both buyers and sellers engage in illegal activity by underreporting, exposing themselves to potential legal actions and penalties. Legal proceedings can be lengthy and costly, adding to the financial burden of those involved.
4. Higher Capital Gains Tax: When the property is eventually sold at its actual market value, the difference between the undervalued purchase price and the higher sale price results in a higher capital gains tax liability for the seller. This unexpected tax burden can negate the initial savings from underreporting.
5. Impact on Loan Financing: Financial institutions may face challenges in accurately assessing the value of properties, affecting loan disbursements and increasing the risk of non-performing assets (NPAs). Accurate property valuations are crucial for maintaining the health of the banking sector and ensuring fair lending practices.
6. Trust Issues: Widespread underreporting erodes trust in the real estate market and the government. When such practices are normalized, it can deter honest buyers and sellers from participating in the market, fearing unfair competition and legal repercussions.

Solutions to Address Under-reporting

1. Revising Stamp Duty Rates: Lowering stamp duty rates to a more reasonable level can reduce the incentive to underreport property values. A balanced approach where the rates are low enough to encourage compliance but sufficient to generate revenue is crucial.
2. Increasing Transparency: Mandating digital transactions for property purchases can help ensure all parts of the transaction are recorded and monitored. Digital payments create a clear audit trail, reducing opportunities for under-the-table cash transactions.
3. Improved Enforcement and Penalties: Stricter enforcement of existing laws and higher penalties for non-compliance can act as a strong deterrent. Regular audits and random checks can help identify and penalize underreporting cases effectively.
4. Public Awareness Campaigns: Educating the public about the legal and financial risks associated with underreporting property values can encourage better practices. Campaigns can highlight the benefits of compliance and the long-term disadvantages of tax evasion.
5. Regular Updates to Circle Rates: Ensuring that circle rates reflect market realities can help reduce the discrepancy between reported and actual values. Regular updates based on market trends and transactions can make circle rates more realistic and acceptable to the public.
6. Stronger Audit Trails: Establishing robust audit and monitoring mechanisms can help track discrepancies in property transactions. Integrating property registration databases with tax authorities can improve oversight and reduce opportunities for underreporting.
7. Leveraging Technology: Implementing blockchain technology for property records can ensure transparency and immutability, making it harder to underreport property values. Blockchain can provide a secure and tamper-proof system for recording property transactions.
8. Collaboration with Financial Institutions: Working with banks and other financial institutions to ensure that property valuations for loans are accurate and reflect the true market value. Collaboration can include sharing data and standardizing valuation practices to ensure consistency and fairness.
9. Incentivizing Compliance: Offering incentives for honest reporting, such as lower processing fees or faster approvals for transactions that are fully compliant, can encourage more people to adhere to the law.
10. Strengthening Legal Framework: Revising and strengthening the legal framework to close loopholes and make it harder for individuals to evade taxes through underreporting.

Conclusion

The practice of underreporting property values is a widespread issue in India, leading to significant revenue losses for the government and potential legal and financial risks for individuals. Addressing this problem requires comprehensive policy reforms, better enforcement, increased transparency, and public education. By implementing these solutions, India can bridge the gap between law and practice, ensuring fairer and more transparent property transactions.

This comprehensive approach will not only help in increasing government revenues but also create a more equitable real estate market, benefiting all stakeholders involved. Effective solutions will require the cooperation of government authorities, financial institutions, and the public to foster a culture of compliance and transparency in property transactions.