Bootstrapping ---- Why repeal Excise, sales tax, etc
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Proposed administrative procedure - TX.06
To replace stamp duty with wealth tax

  1. Problem
  2. Solution
  3. Draft of replace stam duty by wealth tax


The stamp duty or transfer tax is the tax that State Givt levies in India when a person sales land/building to another person. It is typically 12% of the property value. IOW, if a person sells a land/flat of say rupees Rs 500,000, the stam duty will be about Rs 60,000.

This is indeed a very steep and high tax. To lessen the tax, the buyers/sellers reduce the amount to be stated on the transfer deed, and exchange remaining amount by cash. eg If a person is to buy a house for Rs 500,000, he would make a deed of only Rs 300,000 and pay remaining Rs 200,000 by cash. In general, it is quite common that value shown on deed is only about 60% of the actual sale value.

To get away with this problemn, many state govt decided what is called as "standard rates" i.e. the state govt using market surveys decides the market rate in that area. And then, if the sale price is below the standard rate, the officer is required to assume that actual sale price was same as standard price, and 12% of that is charges as the stamp duty. Now in many cases, the standard rate is much higher that actual market price, and so in such areas the stamp duty may well be much above 12% as high as 15%.

This steeply high stamp duty has created extremely high illiquidity in the land/building market.Liquidity in land/building market is essential for new industries to start and old ones to close down. Due to illiquidity of land/building, the growth has been stiffled.

In addition to illiquidity, the high transfer tax has created confusion in ownership records. A large number of buyers delay the registration of sale, and in between the seller may sell the property to someone else. eg
  1. Say A owns a land/building worth Rs 1cr, and state govt's ownership records show A as name.

  2. Say B purchases that land/building and pays Rs 1cr to A, and B intends to sell it in the near future. Now if B wants to change the ownership name to B. This will cost him Rs 12 lakhs. But B delays it, as he intends to sell it to some else in near future.

  3. So the ownership record will continue to show A as the owner, and so A may take advantage and sell the land to C.

  4. This will create a litigation, and would further reduce liquidity of land.


The solution is trivial --- reduce transfer tax to 1% of higher of the two -- the standard value and the disclosed value. This will reduce the motivation to understate the value of transactions, and will also prompt the buyers to register the sale as soon as possible.

But this will decrease the income of state govt. The state govts badly need money to cover the expenses of police/courts, and as of today, the police/courts are so under-funded, that expenditure in police needs to be raised by FIVE TIMES and that in courts needs to be raised by TEN TIMES. So any proposal, that under cut tax collection needs to be trashed as of today (Oct-2004). So my proposal is as follows :

Proposal in short

I propose stamp duty of 1% on sale of land and 1% of market value per year wealth tax, on sales registered AFTER a perticular date.

So those who have already paid a high stamp duty of 12% will NOT need to pay this 1% wealth annual tax.

In many ways, 12% stamp duty and 0% wealth tax is "equivalent" to 1% stamp duty and 1% per annum wealth tax. If not, wealth tax may be raised to say 1.2% or 1.4% to ensure that money recieved from wealth tax is equivalent to stamp duty after a period of say 5-8 years.

The switching from stamp duty of 12% to equivalent per annum wealth tax will have following advantages
  1. it will improve liquidity in land/building market -- this will increase industrial growth and have a long term positive impact on economy
  2. it will improve record keeping in land/building market as buyers have no reason to delay the registration of purchase
  3. it will make population more mobile, and decrease crowding

Draft of the act to replace stampt duty by equivalent wealth tax

I have NOT drafted the proposal, but the reader may see that it is easy to draft it. The question is NOT to draft, but how to get the draft passed in Assembly, after the proposal has been drafted. Thats where, the proposal LM.02 comes into the picture --- this procedure enables the citizen to register YES/No directly into the Assembly. IMO, the citizens should force the MLAs to pass LM.02 draft in Assembly, and then only focus on TX.06.

If you have any other question, please mail it to Thousand thanks in advance.