Heartburn for real estate, stamp duty hike of 1% proposed for Mumbai

Last Updated: Wed, Nov 28, 2018 23:02 hrs
Real Estate (Reuters image)

The Maharashtra State Legislative Assembly on Tuesday cleared a bill to hike stamp duty rates for property transactions in Mumbai by 1%. The proposal for a 1% addition is referred to as surcharge.

In the event the bill receives further approval, the stamp duty in Mumbai will be hiked to 6% (previously 5%). The state government cleared the proposal in order to increase revenue to fund infrastructure projects such as freeway, sea links, and bus rapid transport systems (BRTS). The bill awaits the approval of the Legislative Council and the Governor in order to become a law.

The bill's statement of reasons says, "it is considered expedient to levy a surcharge by way of the stamp duty leviable on the instruments of sale, gift and usufructuary mortgage of immovable property within BMC". Usufructuary mortgage is a type of transaction where the mortgagor offers possession of a mortgaged property to a mortgagee.

According to the ToI, a total of nine bills were cleared on Tuesday, a day that saw deliberation around the issue of reservation for the Maratha community.

Targeted Revenues

A report published in DNA says that Maharashtra government was looking to achieve a target of Rs 24,000 crores for the fiscal year 2018-19. In the last financial year, the target was Rs 21,000 crores, while the government collected Rs 26,500 crores. Annually some 2.50 lakh property transactions are registered every year in Mumbai. A majority of these are for conveyance and sale deeds.

Understanding Stamp Duty?

A stamp duty is paid during a real estate transaction- renting, sale, or leasing. It is calculated based on a percentage derived from the highest value- either agreement value or state's ready reckoner rates. For example if the ready reckoner rate for a flat is Rs 40 lakhs and the agreement value is Rs 50 lakhs, the stamp duty will be calculated on the highest value, that is agreement value of Rs 50 lakhs.

Various states have different stamp duty rates. For instance, the stamp duty charged in cities like Kolkata and Chennai is between 5-7%. Stamp duty charged in the national capital is 4-6%. In Pune and Mumbai, stamp duty is between 3-5%. Municipal corporations may study various factors such as location, status of property, age or gender of owner, usage- commercial or residential for finalizing a stamp duty rate.

Besides the stamp duty, the government also collects a registration value. This usually works to around 1% of the value of property, but is usually capped at a certain amount. Until two years ago, the ceiling hovered around Rs 30,000- 50,000 (could differ from state-to-state).

Will property prices head north?

There is a speculation that an increase in stamp duty could increase property rates and also deter new buyers. A 1% hike appears negligible, however, it can turn into a major outgo. For example, a 1% increase in property tax on sale of property valued at Rs 50 lakhs, corresponds to an outgo of Rs 50,000.

Anuj Puri, Chairman of Anarock Property Consultants thinks that this proposal is a "sentiment dampener". Replying to an email, he explained, "The Maharashtra government’s proposal to levy a surcharge of 1% on stamp duty, increasing it to 6% from the existing 5% comes at a time when the market has just begun to pick up from its slumber. As per ANAROCK data, MMR has been the most vibrant among the top 7 cities in 2018 as far as new supply and housing sales are concerned. To hike the stamp duty at such a sensitive time is definitely a sentiment dampener."

"The impact of this hike will be more felt in the affordable segment as it will not only increase the overall cost of realty transactions for buyers of such properties but also their buying decisions. Other segments such as upper-mid range, luxury and ultra-luxury may not really feel the pinch."

"In fact, it would be advisable to the Government to keep affordable housing away from this surcharge. It is a paradox that on one side the Government is offering multiple sops to boost affordable housing in line with its mission of Housing for All by 2022, and on the other is adding to the burden of the very price-sensitive buyers of such homes."

A similar observation was made by Parth Mehta, Managing Director of Paradigm Realty. Mehta concurred that houses in Mumbai were already expensive from other metros owing to population density and limited supply of open land. "The move to levy additional surcharge on the land and property value has left both developers and buyers in a fix again post GST implementation with only 30% abatement in rates as posed to 70% abatement during service tax regime."

"Due to the 1% hike in stamp duty from 5% to 6%, this will again have a direct impact on sales velocity as it will induce a delay in the buyers decision as it will affect their overall affordability. Again the buyers will prefer ready to move in properties over under construction in order to save at least GST .Hence, the hike will definitely have an effect on the real estate sector."

Is the rate revision justified?

The real estate sector has recently witnessed some up-tick after disruptions such as demonetisation, GST and implementation of RERA (Real Estate Regulation Act). Although RERA benefitted the consumers in immense ways, many realtors were quoted saying that it was a cumbersome process. Anarock's latest report found Mumbai Metropolitan Region (MMR) was the largest contributor of fresh supply in the real estate sector- 13,600 units in Mumbai out of a total of 50,100 units that were added in second quarter of 2018.

This was the first report in as many as two years that highlighted an uptick in real estate sector. Keping this in mind,

Sify.com asked Puri if the hike for an additional 1% surcharge on real estate projects was justified.

Puri answered, "As far as the stakeholders’ claim - that the money collected will be used for funding urban infra projects including metro, monorail etc. – stands true, the proposal is justified. After all, the city’s real estate market is largely spearheaded by physical infrastructure facilities and to this effect, it will be a boon for the market here in the long-term."

"However, if the funds collected are not deployed appropriately then the move is not really justified. Taxes have been increased in the past as well on such pretexts but not much work has been visible."

Mehta explained that the real estate sector was still not over the impact of GST. "This hike will further slower the already decelerated sales of flats vis-a-vis service tax regime. Also, this proposal is not justified as the customers who have already bought their flats taking into consideration their budget & affordability may back out due to additional hike in stamp duty especially for under construction projects."

Shishir Baijal, CMD of Knight Frank India too espoused similar sentiments. "The Maharashtra government’s decision allowing BMC to increase stamp duty on property by 1% universally to fund infrastructure projects is timed to coincide with the large scale development projects being undertaken in the city. We expect this to impact buyers’ sentiments especially in the affordable homes and mid segment category, since a 1% increase will be seen as a significant outflow, thereby putting many in a wait-and-watch mode. For developers, a forced escalation of total outflow towards home purchase by end-users can mean some more heartburn. This escalation will hamper the purchase decisions of fence sitters who were warming up to the idea of buying a home on the back of stable capital values that have remained unchanged in the past 4- 6 quarters."

Can Realtors offer sops?

There are prominent cues that real estate prices in Mumbai could head north-wards. Mehta while answering a question on whether realtors could discount the 1% surcharge from the value of flats said, "Realtors are already facing problems in sales velocity of the residential units because of the GST implementation followed by NBFC crisis which has also impacted recoveries of sold stock."

"It is very difficult for developers to accommodate such dynamic changes in real estate sector onback overall liquidity crunch where developers can’t slow their construction as they have deadline to meet under RERA and at the same time Receivable cycles have elongated due to unwarranted changes in BFSI sector," he added.

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