It is a no-brainer that all state governments should consider reducing stamp duty levied on the purchase of properties, especially when the results are for everyone to see. There has been a sharp recovery in sales in Maharashtra following the stamp duty cut to 2 percent from 5 percent for the period October-December 2020 and to 3 percent for the period January-March 2021.
Propstack data shows the number of sale registrations in Mumbai for the month of December 2020 surged to 19,581 transactions from an average of 6,000 transactions a month pre-COVID. The stamp duty cut clearly made the fence-sitters jump in and buy properties. This was followed by price cuts by some developers and lower interest rates by banks.
Last week too, Maharashtra chose the occasion of Women’s Day to announce a 1 percent cut on stamp duty charges if the transfer of house property or registration of sale deed is in the name of a woman.
Then why are other states unable to reduce stamp duty just the way Maharashtra has done? This is primarily on account of structural issues.
In Maharashtra, property registration is mostly done at the time of sale (after paying the booking amount which is generally 10 percent of the total cost of property). In my view, almost 80 percent of the sales/bookings in cities like Mumbai and Pune would account for end-user demand and would be registered after paying 10-20 percent of the total amount. There may be some investor sales where the registration may not take place and some may want to exit mid-way and not pay stamp duty. Such properties get registered only when the end-user buyer purchases the property.
However, when it comes to other states, property registration takes place after the project is completed or possession is given, irrespective of whether the buyer is an end-user or investor. Some buyers also prefer delaying the registration exercise from a cashflow perspective. Even lenders provide home loans on the basis of unregistered sale agreements.
Hence, if other states were to offer a stamp duty cut (which has to be paid on registration), then even the buyers who purchased the house 3-4 years back will stand to benefit as all of them would want to register their properties to take advantage of the lower stamp duty.
In such a scenario if states start offering a blanket stamp duty cut like the one offered by Maharashtra it may not be possible to differentiate a new sale from an old sale and this is likely to lead to unintended revenue loss for the state governments.
This, in my view, is the single biggest reason that prevents some of the states from slashing stamp duty across all properties and across budget segments.
This is prevalent despite RERA making it mandatory under clause 13, for a buyer who has paid more than 10 percent of the flat cost, to register the property.
This compliance is high in Mumbai/Pune and hence the stamp duty cuts have been effective in stimulating new/incremental demand.
A lot of states may realise now that if this clause 13 of RERA is implemented more strictly, it may provide them with the flexibility to utilise stamp duty as a lever to control demand in the future. But how can this be achieved?
One way is to learn from Maharashtra and make mortgage registration compulsory which means even home loans will have to be registered as Deposit of title deeds/Notice of Intimation (NOI). This one step may go a long way in compelling homebuyers/developers to register the sale agreement so that a lender can then provide a home loan and register it.
It is not surprising that the government of Maharashtra made Rs 30 crore in December 2020 from 33,651 home loan registrations which means that the average registration fee is around Rs 9,000. This does increase the cost a bit for the home buyer but it still accounts for a small portion of the home value. This step will not only bring in additional revenue to the states but go a long way in improving compliance related to property registration.
It must be remembered that while Karnataka government too has proposed reduction of stamp duty charges to 3 percent for homes valued between Rs 35 lakh and Rs 45 lakh last week and had slashed the stamp duty on houses costing less than Rs 20 lakh to 3 percent from 5 percent last year, it has not gone the whole hog like Maharashtra.