What impact does increasing the Guidance Values have on the government?
Since the government charges Stamp Duty and Registration Fees based on the value of the land being registered, a higher Guidance Value for the land means that the buyer must pay a larger amount of money through Stamp Duty (8% of registration value) and Registration Fee (1% of registration value) to the government while registering the land. Thus, a revision in Guidance Values means more revenue for the government once the new values are in effect.
What impact does increasing Guidance Values have for the buyers and sellers in the market?
The impact an increase in Guidance Values has on buyers and sellers is different based on the time-frames.
Short-Term Impact of Guidance Value Increase
In the Short-Term, as soon as there is talk of an increase in guidance values and before the new values are in effect there is generally a lot of activity where buyers rush to complete deals and have their properties registered. This is understandable since no buyer is interested in paying more money to the government for the same piece of land.
Long-Term Impact of Guidance Value Increase
However, the Long-term impact on the real-estate market is quite interesting. Before we can understand the impact, it helps to have a sense of how typical real-estate transactions are conducted in India.
It is very likely for a real-estate transaction in India to involve a sale price on paper and a sale price that is off the books. The sale price on paper closely reflects the guidance values of the land since that is the minimum at which the land can be registered and the value on which the buyer pays fees to the government. However, money above and beyond what is shown on paper generally changes hands between the buyer and the seller.
Since not all buyers are comfortable with such transactions, at any given point there could be considerably less demand for real-estate when there is a very large gap between the price on paper and the real asking price. Thus, an upward revision of guidance values in has the long-term impact of bringing more buyers into the market since the proportion of the transaction that is off the books is now smaller.
However, as more buyers come into the market, the demand for real-estate goes up and over a period of time and takes the prices of real-estate higher as well. Thus, the upward revision of guidance values ultimately means higher real-estate prices across the city in the long-term.