Friday, January 20, 2006

Another tax on transactions

Stamp duty has been on the burner of late. The `Telgi Scam' involved embezzlement of government tax revenues in the context of the "stamp duty". And the Maharashtra government tried to pull off some disastrous taxation of financial transactions, since most of the securities exchange infrastructure is located in Maharashtra.

Today there is news that the Maharashtra government has backed away from taxing bond market transactions. I don't know if that puts an end to this chapter, or if they will persist in trying to tax other markets such as equity, corporate bonds and commodity futures. There is also news about amending the relevant legislation.

Stamp duty is a tax on transactions. From first principles of public finance, we know that taxing transactions is wrong. Ila Patnaik has an excellent piece in Indian Express, where she says that it is the task of the State to maintain databases of land title, but this is a public good which should be delivered with atmost a user charge such as Rs.5 per transaction, which is roughly NSDL's price for one transaction. To tax this, or to have an ad-valorem charge, is wrong. Imagine how you would feel if when you went up to NSDL, asking him to change the ownership of some shares from Mr. X to Mr. Y, he asked for a fee -- not reflecting the cost of his work of maintaining the database of title -- but a 5% tax.

In the big picture, I see a role for bringing the entire real estate sector into the Goods and Services Tax, as had been proposed by the Kelkar FRBM Task Force, simultaneously with abolishing all taxes on real estate transactions.

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