Can governments increase revenues by lowering taxes? A study of competing policies to reduce tax evasion during house purchase in India

Abstract

The dominant public policy prescription to reduce under-reporting in land and encourage registration of land transactions is rooted in the research undertaken by the WorldBank by Alm et al(2004) who estimate that reduced stamp duty regimes would likely reduce under-reporting, leading to better pricing and unlocking of wealth in real estate. Very little research, however, has validated the fundamental premise that reduction in stamp duties naturally reduces under-reporting, especially in the absence of other independent monitoring or enforcement mechanisms. In this study, we investigate, firstly, whether reduction in stamp duty leads to reduction in under-reporting. We use a quasi-natural experiment where stamp duty for registration of immovable property transactions was reduced in successive waves in the thriving metropolis of Bengaluru, Karnataka, India. By evaluating the truthtelling before and after the successive reductions in stamp-duty rates, we ascertain the extent to which stamp-duty reduction incentivises truth telling. We find that change in stamp duty values does not incentivise truth-telling and governments are better-off in providing robust minimum alternate values for assessment (or “guidance values”). This research has huge policy implications for tax collection and reduction of black money.