Urban development minister Venkaiah Naidu has his heart in the right place when he says, as he did at a recent meeting of the Confederation of Real Estate Developers’ Association of India (CREDAI), that he had written to state governments asking them to exempt low-cost housing from stamp duty, that varies from 4% to 8% in different states, in order to keep prices affordable. Anything that lowers costs of low-cost housing is a good thing, but the minister has to keep in mind that, if low-cost housing is to be kept out of the ambit of stamp duties—assuming, of course, that the state governments will be convinced of his point—the loss in revenues will have to be made up by levying a higher stamp duty on other houses. Apart from being unfair, a higher stamp duty encourages duty evasion—indeed, the attempt over the past few decades, has been to get states to lower stamp duties to encourage more buyers to register their purchases instead of relying upon unregistered powers of attorney documents. If anything, the minister should have pleaded with the states to lower stamp duties across the board, and showed them how they could benefit more by way of increased compliance—few states collect anywhere near the potential of stamp duty. As the Economic Survey showed in the case of property taxes, if Bengaluru for instance, were to collect taxes correctly, this would increase its collections anywhere between four and seven times.
Indeed, exempting low-cost housing from service tax—Naidu told CREDAI his ministry had petitioned the finance ministry to continue with the exemption under GST—has the same problem. In this case, too, the loss in tax collections will have to be made up by raising it for other housing segments and it also encourages tax arbitrage by developers who will try to pass off their housing units as low-cost ones. Indeed, as chief economic advisor Arvind Subramanian has argued in a recent column in this newspaper (goo.gl/kc6A9U), including land and real estate in GST actually benefits the sector. While clarifying that bringing the sector under the ambit of GST doesn’t do anything to stamp duties—states have opposed this in the belief their ability to levy stamp duties will be impacted—Subramaniam points out that the 4.5% service tax on works contracts in real estate translates into an effective rate of 12% in the absence of GST since no input credits are available on the taxes paid on inputs used in construction such as iron and steel and cement. Hopefully, the GST Council will keep in mind the point made by Subramanian and bring land and real estate into the ambit of GST in order to lower effective taxation.