How much does guidance value matter? How sensible is the process that is a reality in India? A look by Vinaya Chandran

Stamp duty and property tax are important sources of revenue for the city and state administrations. Ideally, such revenues should be ploughed back towards civic services and improvements for the city. Even more ideally, the tax rate should be reverse worked from the actual cost of civic works, with some surplus for emergencies. But ideal methods have shorter lives than anti-matter.

The city, with its high tax generation potential, funds less fortunate parts of the state and makes them more liveable. What the payer coughs up when buying the property would seem high in comparison to the value he derives. The guidance value plays a role in this feeling of imbalance.

Population

The state has every reason to zealously guard its sources of revenue. And drive it higher mostly to keep providing quality civic services through these inflationary times. The population and income growth in a city drives the run rate of property purchases. From this perspective the prevalence of property guidance value may seem to insulate the state's revenue volatility. But it disincentivises registration of property transactions.

Purchase is the most visible form of transaction. Even here the native incentive to register is not strong enough, because the legitimacy to the title changes through such recordation is at best implied and indirect. For less visible forms of transactions like partition, inheritance or gift, the pressure to register is weaker.

The value gained through the substantial payment of the stamp duty is more illusory.

The desirable locations in India seemingly have never seen absolute property price drops in recorded history. In some sense the guidance value mirrors this sense of perpetual euphoria. This has an in-built tendency to be divorced from market value, which is a creature subservient to factors ranging from FDI flows to the self-belief of the Indian cricket team.

As market values approximate events quickly, a dogged reliance on guidance values maybe to the detriment of both the individual and the state. During bad times the state will lack the gumption to tinker with anything that reduces revenue and the individual will simply look for short cuts to evade tax.

Another potential undesirable side effect of guidance value is the impact it has on proper valuation of property. There is a tendency to ball-park property value based on the state guidance, especially for financing.

An indifferent valuer may be tempted to give a higher value opinion as suggested by guidance because it is in a posh area without taking into consideration extenuating circumstances like environmental degradation and litigation.

For long-term development

Having a predictable visibility to tax streams is vital to plan for long-term development. The world over a sense of equity, transparency and a citizen-friendly approach has caused many governments to steeply reduce the stamp duty on property transactions.

The actual sale price is used as the base but in effect the tax amount stands reduced. The state provides additional incentive to be compliant by giving the registrant, state-backed legitimacy to the title change recorded.

The market value used rather than a guidance value does not lower reporting of transactions but provides the state rich data about its tax base which it uses to set policy closer to the ground. The state makes up in tax through increased voluntary disclosures what it apparently loses through a higher tax rate.

When we buy a car there is no confusion about the value on which the lifetime tax is applied. But in property, there is more than one opinion on whether it should be registered at market or guidance value. In both cases the taxing entities are arms of the state.

The only guide for the car's value is the transparent price at which it is sold. It is time we applied the same yardstick and make it mandatory to apply much reduced stamp duty on the market value. And drive up compliance by creating conditions that encourage more registrations.

The author is VP-Strategic Markets, CoreLogic Global Services Pvt. Ltd.

(Views expressed in this article are personal)

Keywords: property tax