but not all, of these variables. Revenues are non-judicial stamp tax revenues as before, and the tax rate changes are computed from the information in Annex II. We do not have detailed State by State data for the number of immovable property transactions recorded in the Registrar’s office and hence subject to stamp tax. Instead of actual declared values for the immovable property transactions, we use real estate price changes based on data provided by the Housing Development Finance Corporation (HDFC) for commercial and residential real estate prices in Mumbai, Calcutta, Bangalore, and Chennai. These price data are based on the sales price of new developments checked against a buildup of developer costs, and are not based on values declared to the registrar for payment of stamp duty. As such, we would not expect them to be directly affected by underdeclaration. From the price data per square foot for a variety of different properties, we create an average index price and observed percentage changes in the index for each city. There are no data recording the number of real estate transactions and subsequent registrations, and there are no state level data on GDP in the construction sector. We use real GDP growth as a very rough proxy, in order to capture changes in transaction levels.

Figures 13 to 16 suggest that run ups in property values drive stamp tax revenues, just as expected. Analyzing those time periods in which tax rates decline, we also note that predicted revenues tend to decline much more than actual revenues, even when property values shifts are taken into account. Likewise, in the case of duty rate increases, we find that the predicted growth in revenues is consistently higher than the actual. While the available data are not detailed enough to provide conclusive hypothesis testing, the evidence is broadly consistent with the commonly held view that underdeclaration responds to shifts in the stamp duty rate. This pattern reinforces our earlier finding on the relationship between shifts in tax rates and the resulting growth in revenues. Together this evidence strongly suggests that underdeclaration responds to duty rates.

# **F. The Impacts of Tax Reform**

A likely reform scenario is one in which the stamp tax is lowered to a level closer to international practice. The evidence that we have indicates that this would reduce underdeclaration and hence black economy effects. Depending on the rate selected, actual stamp tax revenues could also increase; even if revenues declined, this analysis shows that overall tax revenues are likely to go up by more than the stamp duty revenues lost. For example, if reducing the stamp duty rate from 10 percent to 5 percent were to lead to a decline in underdeclaration from 25 percent of value to 10 percent of value, then total tax take would increase by over 60 percent, assuming a black money velocity of 5. This occurs even though there is a 37 percent reduction in the stamp tax revenues. These results could only be expected to improve as tax reform expands the ratio of tax to GDP, thereby enhancing the rewards of reducing leakage into the black economy, and as better tax administration reduces the scope for underdeclaration. Consequently, the main message arising from these results is that overall tax collections are quite likely to improve if stamp duty rates decline. State governments may or may not lose some revenues from stamp taxes, but government as a whole is likely to gain from collection of other taxes.

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