Rise in Stamp Duty-Good or Bad for Real estate Sector

Covid 19 has had devastating effects on the world economy. Every industry was struggling to get back to pre-Covid levels as soon as possible. Every industry has adopted ways to get back as close to pre-Covid times as possible. Real estate investment had taken a back step given the precarious situation. Property sales had been hurt immensely. However, to give a push to the ailing sector, the Maharashtra Govt. made stamp duty cuts for a brief period. But with a substantial rise in property sales in Maharashtra, the Govt. has withdrawn the stamp duty cut. The government’s two-year concession from stamp duty hike ended in March 2022 and the duty has risen by 1 percent to an effective rate of 6 percent of the agreement value from the current 5 percent.

There is a lot of debate as to how it will cripple the real estate sector in the state and make it the costliest place to own a house. Let us dig deeper and understand the concerns.

Stamp Duty Rise: Background and Current Status

To boost the real estate sector, in March 2020, the Maharashtra Govt. granted a two-year stamp-duty concession effective from April 2020 for houses registered within the Mumbai Metropolitan Region, Pune, Pimpri Chinchwad, and Nagpur Municipal Corporations. Earlier, the stamp duty on a gift of a residential flat to a husband, wife, son, daughter, grandson, granddaughter, wife of the deceased son was merely ₹200 but now onwards, the same transaction attracts a 1 percent stamp duty on an ad valorem basis, considering the flat’s market value. Reduction in stamp duty in Maharashtra was a welcome move, especially reduction in stamp duty in Mumbai and stamp duty in Pune, where the property costs are already high. Following this announcement on stamp duty and registration charges, Pune & Mumbai saw a significant spike in property registrations.

This waiver ended on March 31, 2022. Stamp duty and registration charges in Pune, Mumbai, Thane, Navi Mumbai, Nagpur, and Nashik on sale, mortgage, and gift deed details will attract a 1% metro cess from April 1, 2022. These are places in Maharashtra with the metro projects operational or work under progress and the Maharashtra Govt will use this cess collection for metro rail work and other transport projects.

Disadvantages of Stamp-Duty Rise

• Sector Recovery will Slow-Down

Residential sales were adversely affected between April and June 2020 due to the uncertainty resulting from the COVID-19 virus outbreak; they bounced back strongly between October 2020 and March 2021. The market showed a commendable recovery by recording huge sales in Q3 and Q4 of 2020/21. The demand momentum had just started building up but with this increase, the purchasers in the affordable and mid-segment will feel additional cost burdens. In the current market recovery, the Metro cess will be detrimental.

• Timing of this decision

It has only been 2-3 quarters since residential sales volumes have seen an increase. Buyers seem to be shaking off the COVID-19 uncertainty and returning to making purchase decisions. The Govt. could have waited for some more time and let the real estate sector stabilize.

• Why is Metro Cess to be taken from homebuyers?

The Maharashtra Govt plans to use this cess for funding the Metro rail projects and transport-related projects in the state. While one can understand that Metro works need to be properly funded by the State Government to de-clutter the cities and ease traffic, we need to rationalize why the burden of such costs has to be borne solely by Homebuyers.

• Increased Costs, Global Factors

At a global level, we are dealing with a war that has further affected already high input costs for developers. Both Steel and cement prices are trading at all-time highs and other input costs are also on the rise. Keeping this in mind, a reduction in sale volumes and/or sale values could provide very detrimental to the real estate industry.

• Buyer-Developer Interests

This will hurt developers since most of them had sold houses promising to pay the stamp duty on behalf of the buyers under schemes. Taking on increased costs may not work out for many developers. Besides, the homebuyers will find it tough to crack steal deals from developers now. Earlier they were sitting on large housing inventories and offered good deals & offers. Now with less inventory, negotiation would be tricky.

Also check - 5 Unexpected Hidden Costs in Buying a New Home – All You Need to Know

Advantages

While these pointers do not augur well for the real estate sector, home buying would remain the best investment bet. With a volatile stock market, exorbitant Gold rates, and low rates in FDs, real estate seems to be the only option for investors. The greatest factor is the availability of cheaper EMIs. Banks are offering home loans at discounted rates.

High stamp duty in Pune, Mumbai, and other cities in Maharashtra have made it extremely expensive to own a property here and these increasing transaction costs are bound to affect volumes. Placing the burden of funding metro works on new homebuyers was probably not the best way to raise money for metro construction work. Pune flat registration charges would increase now however, lower home loan lending rates may be a reason compelling enough to buy a home. Take your pick!

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