Investment in real estate and realty stocks are very common these days. However, under the current law, a striking difference in tax rates may be observed in taxation of property and stocks. Bringing parity in the taxation principles of the two is a policy matter which may have unintended side effects, such as perverse incentives, excess burden/deadweight loss etc that need to be addressed. Therefore the question whether capital gains on properties should be treated at par with gains on the sale of stocks requires balancing of various aspects.
It needs to be kept in mind that the features of the two investments - i.e. property and stocks are not entirely the same. Property transaction carries a higher value, is illiquid in nature and is not price sensitive compared to stocks, which could show high volatility and may fluctuate due to various external and internal factors. The frequency of stock transactions is normally high as compared to property transactions. Therefore, an introduction of lower tax on property at par with equity may be a dampener for collection of tax revenue for the government.
However, to simplify tax laws, improve compliance and increase realisations of taxes on sale of properties, a mechanism similar to that of taxes on Security Transaction Taxes (STT) paid listed stocks may be introduced. The government may consider levying a minimal tax at the time of registration of the property itself. In 2004, the STT was introduced on capital gains whereby a tax at a marginal rate was imposed on listed stock transactions. The mechanism for collection of STT through stock exchanges regulated by Securities and Exchange Board of India (SEBI) prevented any revenue leakage.
Simultaneously, a tax exemption was given on sale of stocks to encourage capital market transactions. Thus, the government was in a position to offset the revenue loss to some extent due to tax benefits on equity sale. However, this kind of platform is not available for property transactions; hence a lower rate may not be justified.
At the same time, it may be mentioned that the government has provided exemption on reinvestment of gains arising from the sale of property. The tax equalisation on the sale of property is available but for a limited purpose of self occupation by the buyer and with a lock-in period on the subsequent sale of that property.
There are serious tax recovery challenges in property transactions. The withholding tax mechanism is not available in property transaction and the market is largely unorganised. Very often properties are sold by the mere issue of a Power of Attorney. This is entirely and unlike what we have in stock market where the tax recovery system is organised and tax leakages are minimal. Hence to bring taxation of property at par with stocks will remain an issue in India.
The above deliberation highlights that the subject has several facets and widespread implications, and hence needs to be carefully explored by policy makers.
Poorva Prakash is director and Priyambada Sen is senior manager, Deloitte Haskins & Sells. The views expressed here are personal.