January 19, 2006
With Abdul Karim Telgi’s conviction, a question forgotten in the wake of many other scams should be asked again: how did such a fraud involving heavy duty government paper happen? At first blush, it seems the answer lies in better quality stamp paper using special paper with special inks and secure printing that cannot be faked. That paper should be sold only by the government in special kiosks run by the government.
It could be argued, for instance, that the Indian Stamp Act was passed in 1899. Though some states such as Maharashtra, Kerala and Karnataka passed their separate Stamp Acts much later, the design of the scheme is out of date. And so one should find the answer to the problems of stamp duty fraud in improving administrative procedures.
It could also be argued that all that needs to be done is to lower the stamp duty. And that this will reduce the incentive to produce fake stamp paper.
Both arguments are wrong. There are much deeper problems with the stamp duty regime. Consider the procedure when you purchase land. The most important question is when one citizen buys an asset from another citizen, what is the role of the government?
The role of the government lies in enforcing property rights. It lies in clearly defining who is the owner of a given piece of land. The buyer and seller need to register the sale with the government. After the buyer has registered his property with the government, he gets the ability to ask the government to prevent anyone else from encroaching on that property.
The job of the government in a transaction, then, is to serve as a database of who owns what asset. This task is fundamental and it needs to be well executed. In every part of India, there are legal battles clogging up the courts. An enormous number of these are linked up to clarity of title of land. While these are partly caused by the complications of the joint family, they are equally caused by bad systems run by the government on this core task of maintaining a database of who owns which piece of land.
If a charge has to be applied, it should be a small user charge, to pay for the computer services rendered. This should be a user fee for the registration. So, for example, for every registration the government could charge Rs 100. But the stamp duty requires the buyer to pay a percentage of the value of the transaction. It is in this that the biggest problem lies.
The stamp duty has, as a direct consequence of being a percentage of the value of the transaction, induced huge distortions for Indian public finance and the real estate market. A study on stamp duties in Indian states by Arbind Modi, Patricia Annex and James Alm found that rates in India are exceptionally high, often above 10 per cent of total transaction value. Most countries, including middle and low income countries, have rates less than five per cent. High duties impose high compliance costs on tax payers.
Most important, high stamp duties create incentives for people to understate the market value of land and property transactions. As a consequence, the reported land values are very low. Property taxes, which are important in financing local governments all over the world, are much lower in India. If the stamp duty were abolished, white money property transactions would increase, and property tax receipts could work out to as much as 1 per cent of GDP. The under-declaration of values also leads to an under-declaration of income and increases black money in the system. In addition to generating revenue losses for different levels of government, the stamp duty puts “sand in the wheels” of land market transactions. It reduces the vibrancy of real estate markets and discourages transactions essential to the efficient growth of cities.
The best public policy response to the stamp scandal is not to improve the quality and authenticity of stamp paper. It is not to improve the administration of stamp duties. It is not even to reduce stamp duties. It is to abolish stamp duty altogether. The best response is to set up computerised and transparent systems which keep track of land transactions, make these available to citizens for free or for a tiny per-transaction charge.
Voters all over the country face horrendous problems with land title and land disputes. Were stamp duties abolished, the only people facing problems would be the future Abdul Karim Telgis.
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