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Stamp Duty Reduction Is Welcome, But There Is A Case For Circle Rate Reduction
While reduction in stamp duty is certain to help the cause of the buyers, they would only be able to reap entire benefits of the lower prices only if circle rates too are revised downwards, especially in areas where the divide between actual prices and the circle rate is higher.
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Real estate is currently going through the lower-end of its cyclical phase as evidenced by the events over the last few years. Sales and new supply were under pressure through a large part of 2019 and this trend continued through the initial months of 2020 with the pandemic exacerbating the situation.
According to the PropTiger.com "Real Insight" report, residential sales declined 79% during the first three months of the current financial year over the same period last year, with only 19,038 units sold during this period. New launches were also muted during this period with launches declining by 81% from 65, 238 to 12,564 over the same period.
The demand for waiver of duties
These trends need to be looked against an industry backdrop with liquidity crunches, and persistent request from developers and other stakeholders to lower duties and taxes. There is a fervent demand to lower stamp duty that is a tax that needs to be paid by the buyers on all property purchases. A reduction in stamp duty is expected to reduce the effective cost for buyers and hence, may stimulate demand.
The Maharashtra Government was the first to announce a reduction in stamp duty from the current 5% to 2% from September 1 to December 31, and to 3% from January 1, 2021 to March 31, 2021. Madhya Pradesh followed suit with a reduction of the cess on stamp duty charged for registration of property to 1% from 3% in urban areas. Karnataka also reduced stamp duty recently; it is reduced from five per cent to two per cent for land costing up to Rs 20 lakh for setting up industries, and cut from five per cent to three per cent on properties costing above Rs 21 lakh. In fact, the Ministry of Housing and Urban Affairs has encouraged other cities to follow suit to drive increased purchase and registration of properties.
There may be a tandem to reduce circle duty in tandem with a lowering stamp duty,
The rationale for Circle Duty reduction
According to PropTiger.com, over the last four years, property values in a majority of India’s prime residential markets have seen little or no price appreciation as a prolonged slowdown has kept prices in a narrow-bound range. Except for Hyderabad and Ahmedabad, most of the cities have either seen flat to low price appreciation in property prices. Some cities such as NOIDA and Gurgaon have seen prices decline over this period.
Over the last few years, there have been several instances of customers buying properties at prices lower than the circle rates but having to pay higher stamp duty. Sellers have to also bear an impact as the circle rate and not the actual property price is taken as the sales realization rate though the property is sold at prices lower than the circle rate. As stamp duty is levied as a percentage of circle rate, a higher circle rate implies that buyers would have to pay higher taxes to the exchequer. In fact, some of the states like Maharashtra have revised circle rate upwards on average by 1.74%, which increases the cost for the buyers. More importantly, it will adversely impact sentiments especially ahead of the festive season.
Last month, union finance minister Nirmala Sitharaman announced Atmanirbhar Bharat 3.0 under which the Government announced to increase the differential rate between the circle rate and the agreement value from 10% to 20% for residential units of value up to Rs 2 crore. However, this the cap on flat value to Rs 2 crore is not going to help most projects in metro cities. It would have been better if the relaxation was applicable to commercial transactions, as well. Amid widespread urbanisation, while people have been buying properties in urban areas, higher circle rates, dissuades buyers from buying properties and hence, the revenue target of various Governments are also adversely impacted.
While reduction in stamp duty is certain to help the cause of the buyers, they would only be able to reap entire benefits of the lower prices only if circle rates too are revised downwards, especially in areas where the divide between actual prices and the circle rate is higher. It needs to be in line with existing market dynamics.