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A Case Study on

Property Tax ReformsS.K. Singh, I.A.S.

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Rural Population - 742 MUrban Population - 285 M

1971 -20%

1981- 23%1991- 26%

Status as in 2001

URBAN

2001- 28%

TOTAL - 1027 M

22%

46%

38%

19%

36%

20% 18%

31%

10%

20%

30%

40%

50%

Urban Rural

1961-711971-811981-911991-01

Decadal Population Growth

INDIA:URBANISATION SCENARIO INDIA:URBANISATION SCENARIO

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INDIA:URBANISATION SCENARIO Distribution of Urban Centres by Size (1991)

INDIA:URBANISATION SCENARIO Distribution of Urban Centres by Size (1991)

Population in Thousands

198

740

1170

944

345

300

0 200 400 600 800 1000 1200 1400

<5

5-10

10-20

20-50

50-100

> 100

Total No. of Urban Agglomerations/Towns = 3697

2 Million plus Cities - 9 4 Million plus cities - 6

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5 9

23

35

0

10

20

30

40

1951 1971 1991 2001(Projected)

No. of Cities/Agglomerations with more than

1 Million Population

2001No.of Metropolitan Cities(> 1 Million) - 35

INDIA:URBANISATION SCENARIO Metropolitan Cities/Agglomerations

INDIA:URBANISATION SCENARIO Metropolitan Cities/Agglomerations

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ROLE OF URBAN AREAS Cities and Towns are :

Reservoirs of Skills Centres for Hope for Millions of

Migrants Engines of Productivity & Economic

Growth

Need to Sustain and Augment High Urban Productivity for the Country’s Economic Growth.

ROLE & CONTRIBUTION OF URBAN AREAS

ROLE & CONTRIBUTION OF URBAN AREAS

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60%

Percentage of Urban Population1980-81 23%1990-91 26%2000-01 27.8%

Estimated contribution to National Income1980-81 47%1990-91 55%2000-01 60%

CONTRIBUTION TO NATIONAL INCOME

ROLE & CONTRIBUTION OF URBAN AREAS

ROLE & CONTRIBUTION OF URBAN AREAS

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(As on 31.3.99)WATER SUPPLY Covered DeficitPopulation Coverage

SANITATION Population CoverageWASTE MANAGEMENT LIQUID WASTES (MLD) SOLID WASTES(MT/DAY) GENERATED TREATED

GENERATED (Primary/Secondary)

Mumbai 2156 1109**6000

Delhi 2179 12715500

Chennai 352 3522550

Calcutta 690 690**2500

Hyderabad 350 1151500

Bangalore 496 2862500

* Indicate accessibility only. Adequacy and equitable distribution of water is not as per the norms of Govt. of India

** Primary Treatment only

STATUS OF URBAN INFRASTRUCTURE STATUS OF URBAN INFRASTRUCTURE

90%*

50%50%

10%

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Consequences of Urban Infrastructure deficienciesConsequences of Urban

Infrastructure deficiencies

Wide spread Water borne and other diseases (Diarrhoea, Hepatitis, Jaundice)

Contamination of ground water Densification of existing Urban Habitats

creates Slum like conditions Choked drains and sewer lines High air and water pollution Direct impact on poor

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Investment RequirementInvestment Requirement (Rs. in million)(Rs. in million)SectorSector 1996-20011996-2001 2001-20062001-2006

1996-20061996-2006

Water SupplyWater Supply 597670597670 58893058893011866001186600

SanitationSanitation 513620513620 60488060488010185001018500

TOTALTOTAL 11112901111290 1093810109381022051002205100

Per Annum RequirementPer Annum Requirement220510220510

Flow of Plan Funds per annumFlow of Plan Funds per annum5000050000

Shortfall per annumShortfall per annum170510170510

Investment Requirement and Shortfall(As per Rakesh Mohan Committee Report – 1996)

Investment Requirement and Shortfall(As per Rakesh Mohan Committee Report – 1996)

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Structure of Municipal Structure of Municipal FinancesFinances

Structure of Municipal Structure of Municipal FinancesFinances

- Mix of Taxes

- User Charges and Fees

- Transfers

- Loans

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Broad Pattern of Municipal Finances

Broad Pattern of Municipal Finances

Vertical imbalance –

Most of the ULBs suffer from the inadequate “own” resources.

Horizontal imbalance –

Municipalities often suffer from uneven access to resources which gives rise to imbalances between Municipalities of various population sizes.

Control by higher governments –

Higher levels of government control the municipal authority to levy taxes and user charges, fix rates, grant exemptions, etc.

High-yielding and buoyant sources of revenue are seldom assigned to ULBs.

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Cont..Cont..

Municipal revenue -Municipal revenue -Taxes and transfers constitute the predominant Taxes and transfers constitute the predominant

sources of municipal revenues. sources of municipal revenues.

Property tax is the most common and the single Property tax is the most common and the single most important municipal tax..most important municipal tax..

Systematic inefficiencySystematic inefficiency – – ULBs generally suffer from under-exploitation of ULBs generally suffer from under-exploitation of “own” revenues sources, and high administrative “own” revenues sources, and high administrative

and revenue collection costs.and revenue collection costs.

Cont..Cont..

Municipal revenue -Municipal revenue -Taxes and transfers constitute the predominant Taxes and transfers constitute the predominant

sources of municipal revenues. sources of municipal revenues.

Property tax is the most common and the single Property tax is the most common and the single most important municipal tax..most important municipal tax..

Systematic inefficiencySystematic inefficiency – – ULBs generally suffer from under-exploitation of ULBs generally suffer from under-exploitation of “own” revenues sources, and high administrative “own” revenues sources, and high administrative

and revenue collection costs.and revenue collection costs.

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Property TaxProperty TaxProperty TaxProperty Tax

Property Tax is the most important component of Municipal finance.

This generally consists of Holding tax, Water tax, Scavenging tax, lighting tax, fire tax, street tax and general tax.

This tax is a indirect user charge whose benefits are collective and not confined to identifiable individuals.

Property tax suffers from lack of adequacy, buoyancy and acceptability.

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Property Tax and Urban IndiaProperty Tax and Urban India

The share of property tax varies in the range of 40-80% of municipal income.

Wherever octroi is levied, the share of property tax is just next to octroi.

The 74th Amendment Act added a series of functions in the municipal functional domain which require additional funds.

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Property Tax in Major Indian CitiesProperty Tax in Major Indian CitiesProperty Tax in Major Indian CitiesProperty Tax in Major Indian Cities- According to 2001 census, the urban population is 285 million which account for 27.8% of the total population.

- As per 1991 census, more than 65% of the urban population live in cities with more than1,00,000 population and about 1/3rd living in the 23 metropolitan cities.

- This has resulted in serious problems relating to provision of infrastructure and civic amenities.

- Urban Local Bodies are not in a position to provide these amenities and infrastructure in view of their poor financial health.

cont.

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Cont..

- Full potential of property tax is not utilised anywhere in the country.

- Its base is considerably eroded by administrative and procedural inadequacies

- The property tax structure has not been free from certain flaws.

- The problem relate to the fixation of tax base and tax rate, tax assessment, tax collection, tax exemptions, disputes, resolutions etc.

- No scientific and simple basis is followed for the determination of the tax.

- People are harassed by the Inspectors due to discretionary powers.

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Attempt for Property Tax Reforms

Attempt for Property Tax Reforms

- In the recent year some State Governments and ULBs have tried property tax reforms.

- Patna Municipal Corporation in Bihar have attempted drastic simplification in tax assessment procedure.

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Characteristic of a good property tax structure

Characteristic of a good property tax structure

- Make the process of assessment, levy and collection, transparent and simple.

- Minimize the discretion on the part of the assessors in tax levy.

- Low rate of property tax to make it acceptable by the public at large.

- Ensure equity between classes of tax payers/ property owners.

- Facilitate self-assessment of property tax by property owners/occupiers.

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Annual Rental ValueAnnual Rental Value- Annual Rental Value of a building is the rental

which a building is likely to fetch.

- It delinks the concept from rental approach to Area Based Approach.

- Conventional administration of rental based valuation is loose and defective and property tax based on it becomes in-elastic in long run.

- This also resulted in a purely adhoc and

discretionary assessment.

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Unit Area MethodUnit Area Method

- Unit Area Method (UAM) has emerged as alternative to rental value.

- This tends to remove the disparity in assessment of similar properties.

- Under this, basic tax is related to plinth area/carpet area.

- UAM is based on the principal of classification.

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Key elements of UAMKey elements of UAM

1. Location of buildings- Building on Principal main road

- Building on Main road

- Building on Other roads

2. Type of buildings- Pucca Building with RCC Roof

- Pucca Building with Asbestos or Corrugated Sheets

- Other Buildings which do not fall in the above two

cont..

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cont..cont..

33.. Use of buildingUse of building

- Commercial or Industrial- Commercial or Industrial

- Residential- Residential

- Other which do not fall - Other which do not fall in the above in the above two two

cont..cont..

33.. Use of buildingUse of building

- Commercial or Industrial- Commercial or Industrial

- Residential- Residential

- Other which do not fall - Other which do not fall in the above in the above two two

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Property Tax Assessment – Patna Model

Property Tax Assessment – Patna Model

- The definition of Annual Rental Value has been defined as “The Rent that a holding is capable of fetching over a period of one year”.

- The rate of tax has been reduced to 9%

from 47.5%.

Cont..-

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Earlier Tax Rates Earlier Tax Rates • Holding Tax 12.5% of the Annual

Rental Value (ARV)

• Latrine Tax 10% of the ARV

(Scavenging Tax)

• Water Tax 10% of the ARV

• Education Tax 50% of the holding Tax

i.e. 6.25% of the ARV

• Health Cess 40% of the Holding Tax

. i.e.5% of the ARV

Total 43.75% of ARV

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New Tax Rates New Tax Rates • Holding Tax 2.5% of the Annual

Rental Value (ARV)

• Latrine Tax 2% of the ARV

(Scavenging Tax)

• Water Tax 2% of the ARV

• Education Tax 50% of the holding Tax

i.e. 1.25% of the ARV

• Health Cess 50% of the Holding Tax

. i.e. 1.25% of the ARV Total 9% of ARV

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Cont..

- The UAM has reduced the scope for subjectivity and discretion.

- In the new rules, no exemption has been provided to any type of building.

- For specifying the type of construction, the buildings have been classified into three categories which makes a matrix of 3x3x3, as follows:-

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Patna Tax Assessment Scheme (Rs. Per square feet)

Other Buildings

Pucca Buil-ding with Asbestos or Corrugated Sheets

Pucca Building with RCC Roof

Fully Resi- dential

OthersFully Comm- rcial or Indust-rial

Fully Resi- dential

OthersFully Comm- rcial or Indust-rial

Fully Resi- dential

OthersFully Comm- rcial or Indust-rial

TYPE OF CONSTRU-CTION

Holding on other Roads

Holding on the Main Road

Holding on the Principal Main Road

54.0 36.0 18.0 36.0 24.0 12.0 18.0 12.0 6.0

36.0 24.0 12.0 24.0 16.0 8.0 12.0 8.0 4.0

18.0 12.0 6.0 12.0 8.0 4.0 6.0 4.0 2.0

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Comparison between New and Old Method to Assess Properties

Under new Rules ARV is redefined as the rend that a holding is capable of fetching over a period of one year

Rate of Taxation reduced to 9% of

ARV

Lower rates coupled with simpler rules:

-has eliminated any scope of discretion

of tax inspectors

-have been acceptable to people at large

Property Tax Demand : Rs. 17 crore

Estimated to grow to Rs.40 crore if estimated properly.

Earlier Definition of Annual Rental Value: The gross annual rent at which the holding may resonably be expected to let

Earlier Rate of Taxation:43.75% of ARV

Higher rate gave rise to:

- arbitrary and unreasonable assessment by inspector

-corruption and unscrupulousness

Property Tax Demand : Rs.4 crore

After revisionsBefore revisions

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• Government of India issued guidelines on property tax reforms.

• Many States such as Gujarat, Madhya Pradesh, Karnataka, Bihar, Uttar Pradesh, Tamil Nadu and many other Municipal Corporations are adopting this new model

• State of World Cities Report acknowledge best practices for governance / municipal finance.

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THANKS.THANKS.