For the government, the duty hike will most likely boomerang with tax collection falling further

The Maharashtra government has reportedly decided to increase the stamp duty on property deals, a move that is likely to push the slowdown-hit Mumbai real estate market deeper into distress.

The state cabinet has decided to increase the stamp duty on property transactions by 1 percentage point in a bid to increase the government's tax revenue and fund infrastructure projects for Mumbai, according to a report in The Indian Express today.

According to the report, after the hike the duty will be 6 percent, a move that will increase the cost of buying homes in Mumbai and elsewhere in the state. The new rate will become effective once the government notifies it.

The proceeds from the new duty rate will be used to fund Mumbai's infrastructure projects. The state government has plans to set up two new Metro lines, from Andheri to Dahisar and from Dahisar to DN Nagar as part of larger Metro projects.

The duty hike has been affected to offset the fall in tax collection due to near stagnant sales of residential property in the state.

A PTI report yesterday said the state's urban development (UDD) and the housing departments have been under-achievers with a mere 3 percent tax collection in the first two quarters of the financial year.

UDD collected Rs 173 crore against Rs 5,000 crore assigned in the Budget, while housing department collected mere Rs 19.86 crore in last six months against Rs 1,067 crore annual target, the report said.

Maharashtra Finance Minister Sudhir Mungantiwar termed the departments' performance "disappointing".

However, the government's hopes to make good these losses with the new stamp duty rate are misplaced because the move is likely to hit the real estate sector where it hurts the most.

Consider this: The Mumbai property market is already in doldrums due to a crippling demand slowdown as high prices are keeping the potential buyers away.

The city, by far the costliest real estate market in the country, had nearly 80,000 unsold flats as of June 2015. Property consultant JLL in a recent report said that as much as 70 percent of the unsold flats in the city are priced Rs 1 crore each.

According to the report, only 3.21 percent of houses launched in the second quarter of 2015 fell in the affordable Rs 31-65 lakh ticket size and there were none below Rs 30 lakh ticket size in the city limits.

It will take 13 years for an average Mumbaikar, whose household income is Rs 7.5 lakh per annum, to become a Rs 1 crore house affordable, the report further said.

Seen in this back drop, the government's move that increases the cost of purchasing a flat in the city will only put off potential buyers. It is plain regressive from both the consumers and developers' view. And for the government, it will most likely boomerang with tax collection falling further.