Fourth, and most importantly, there is emerging evidence that urban land markets are a crucial element in the economic development of cities. Policies that hinder industrial, commercial, and residential development of urban land can prevent such economic development. At the present time, the supply of land for urban development is largely controlled by the public sector, and it seems unlikely that the public sector channels can provide land in sufficient amounts to support the growing demand for urban land. In this setting, it is essential that private sector be encouraged to acquire agricultural, vacant, or underutilized land, and to use this land for economic development. However, private sector acquisition is stalled by a wide range of public policies, including the Urban Land Ceiling Act, rent control, planning requirements, zoning regulations, property taxes, and stamp duties. The combined effect of such policies is high land prices, sluggish market responses, and high levels of informality in urban land markets.<sup>26</sup> However, it is virtually impossible to capture these types of distortions in any “simple” model of urban land markets. When one considers the full range of all distortions, it is hard to avoid the conclusion that stamp duties are an especially distorting tax whose use on efficiency grounds should be discouraged. On this basis, the estimates presented in Tables 5 and 6 should be considered lower bounds – and very much lower bounds – on the true distorting effects of stamp duties.

# **V. The Revenue Performance of Stamp Duties**

Stamp duties and registration fees amount to a significant source of revenues for most of the Indian State governments. According to 2002-2003 budget estimates from the Reserve Bank of India (2003), stamp duties and registration fees generate for all States Rs. 132,588 million in revenues, or 6.2 percent of total tax revenue of the States, behind only State sales taxes (43.3 percent) and State excise duties (9.4 percent) in relative importance.<sup>27</sup> This section examines the revenue performance of stamp duties. This performance has several dimensions. First, what are the levels of stamp duty collections in the States, and how have stamp duty revenues varied over time for the various States? Second, what are the estimated revenue losses due to the widespread undervaluation of transactions? Third, how are stamp duties linked to other taxes in the Indian public finance system? In particular, how does undervaluation in stamp duties affect revenues from other taxes that are linked either directly or indirectly to the duties? Fourth, how are stamp duty revenues, as well as revenues of the other linked taxes, likely to be affected by a change in stamp duty rates?

# **A. Stamp Duty Collections and Trends**

Table 7 gives revenues from non-judicial stamp duties for selected States for 2000-2001, and also shows the total revenues from stamp duties and registration fees for all States for the same year.<sup>28</sup> Tables 8 and 9 give some additional information on the tax structures of selected

> 26  For a detailed discussion of these distortions, with a special focus on Tamil Nadu, see David Dowall (2003), “Tamil Nadu Urban Land Management and Urban Planning Assessment”.

> 27  See Reserve Bank of India (2003), _State Finances – A Study of Budgets 2002-03_ (New Delhi, India).

> 28  These data come from different sources, and so are not strictly comparable.  Researchers at the National Institute of Public Finance and Policy collected the information on non-judicial stamp duties; the information on stamp duties

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