The Development Land Tax (DLT) and subsequent real estate developments

From the point of view of an economic analyst a high rate of Development Land Tax (DLT) should have no effect on the supply of land for development since the tax mainly falls on economic rent. This is the return over and above the ‘transfer price’, which accrues, to a factor through fixity of supply. Thus for a developer of apartments Cochin City and its suburbs offers enough opportunities and also additional expenses due to the different forms of taxes in vogue. Transfer price covers what the factor can earn in its best alternative use plus any return (often termed ‘normal profit’) required by the owner to overcome his inertia or inconvenience in effecting such a transfer. This can be illustrated both arithmetically and diagrammatically.

 

Suppose undeveloped farmland surrounding a town is required for housing. The current-use price is, say around rupees 60,000 rupees per an acre of land; this is the transfer price, i.e., what another farmer would be prepared to pay for the land for agricultural use. Planning permission is now given for a housing development on twelve acres of a particular farm. As a result the price of these twelve acres rises to 1,20,000 rupees per acre of land. Thus development value for the purposes of DLT would equal current market price minus current-use value, plus 10 percent, i.e. 1,44,00,000 – (7,20,000 + 72,000) = 1,36,08,000. DLT payable would be 60 percent on all realized development value above 30,00,000 in any one year, i.e., 60 percent of 1,06,08,000, or 63,64,800. The farmer is thus left with 80,35,200, and by taking his gain he can obtain almost 134 acres to replace the twelve sold.

 

Thus if no planning permission were required and all the agricultural land surrounding the town were suitable for housing, we can assume that any price above the agricultural price will secure that land for housing. In other words, the supply (Sa) of land is perfectly elastic at 60,000 rupees per acre. Any increase in demand for land for housing, could have been supplied without any rise in price. In other words, because supply is perfectly elastic, the increase in demand would have had no effect on price.

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