the other. Unfortunately, the administrative links between the two taxes are virtually nonexistent, so that the widespread undervaluation of transactions subject to stamp duties is likely to have significant effects on capital gains revenues.

There is little information on the magnitude of capital gains collections or the individuals who pay the tax. Nevertheless, it is possible to make some approximate estimates of the capital gains revenue loss due to undervaluation of stamp duty transactions, using the same basic approach as earlier. Consider again a “representative” transaction, in which a property with true value of Rs. 1 million is exchanged. Suppose that the property has been held longer than 3 years, so that it is subject to the long-term capital gains tax rate in the individual income tax of 20 percent. Suppose also that the individual understates the true value by various percentages: 10 percent, 25 percent, and 50 percent. The stamp duty revenue loss is indicated in Table 11; the capital gains revenue loss can be similarly estimated because, other things equal, it is only the extent of undervaluation of the final transaction that affects the capital gains collections. The simple calculations in Table 13 indicate the magnitude of the capital gains revenue loss for this representative transaction.

|**Table 13. Capital Gains R**|**evenue Loss for“Represent**|**ative” Rs. 1 Million Transaction**|
|---|---|---|
|**10% Undervaluation**|**25% Undervaluation**|**50% Undervaluation**|
|Rs.20,000|Rs. 50,000|Rs.100,000|

The potential impact on total capital gains collections can also be calculated under various assumptions. Recall that for all States (non-judicial) stamp duties collections in 20002001 totaled Rs. 100,782.3 million. Assume that the average tax rate applied to these transactions in the different States was 15 percent, so that the total declared value is Rs. 671,882.0 million. Assume also that the fraction of these transactions subject to the capital gains tax ranges from 25 percent to 100 percent. Then, under different assumptions about the extent of undervaluation, the lost capital gains revenues can be calculated. These losses are shown in Table 14.<sup>33</sup> As before, these losses are only suggestive, but they indicate that undervaluation of transaction value has a major impact that cascades beyond its effect on stamp duty collections. They are also likely to considerably underestimate the true revenue loss. An implicit assumption in the calculations is that capital gains taxes are paid on the reported value of the transaction; however, it is unlikely that these transactions are actually declared for capital gains taxation. If these transactions are not in fact reported for capital gains taxes, then the revenue loss is even greater.

|**Table 14. Forego**<br>|**ne Capital Gai**<br>|**ns Revenues, 2000**<br>|**-01 **(in Rs.millions)<br>||
|---|---|---|---|---|
|**Percent**<br>|**Percent of B**<br>|**ase Subject to Capi**<br>|**tal Gains Tax**<br>||
|**Undervaluation**|**25%**|**50%**|**75%**|**100%**|
|10%|3732.7|7465.4|11,198.0|14930.7|
|25%|11,198.0|22,396.1|33,594.1|44,792.1|
|50%|33594.1|67,188.2|100,782.3|134,376.4|

33 Recall that the reported value of the transactions VR and the true value VT are related by VR = (1-s)VT or VT = VR/(1-s), where s is the fraction underreported. Capital gains revenues equal the tax rate (20 percent) times the amount of this base subject to the tax.

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