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1IRW
PROPERTY TAX REFORMSPROPERTY TAX REFORMS
New Property Tax SystemNew Property Tax System
Changing from a Rent-based system to a Capital Value-based System of
assessment
4IRW
The Current SystemThe Current SystemTax calculated as a percentage of Rateable Value
Rateable value is derived from Rent (Gross Annual Rent – 10%)
Assessment of tax requires estimation of reasonable rent or rent earning capability of properties
Rent earning capability is estimated as follows: Rented properties: on actual rent earned Owner occupied properties: expected rent derived by
applying Residential Letting Rates prescribed for the locality Purpose built properties, such as cinema houses, race
course or stadiums etc: income of these entities taken as basis for deriving reasonable rent
5IRW
Methods of determining rent earning Methods of determining rent earning capacitycapacity
RLR Method
Rent fetching capacity of properties in a locality identified 128 such locality ‘Pockets’ identified on ‘rent influencing factor’ basis
Contractor Test Method
Rent derived as a certain percentage of land cost and construction cost
Full House Capacity Method Assess cinema/drama theatres at the time of first
assessment.
Receipt Basis Method
Average Receipts of three preceding years excluding Entertainment Tax in case of old cinema/drama theatres
Income Basis Method Profit of the tenant is taken as the base for determining the
reasonable rent
6IRW
Components and Rates of Property Components and Rates of Property TaxesTaxes
Percentages of Rateable Value
7IRW
Demerits of Rent based systemDemerits of Rent based systemLack of buoyancy
Infringement of rent due to Rent Control Act Adverse effects of Legal pronouncements
Lack of transparency Ratepayers are ignorant of the methods of calculations Calculations are complex
Lack of equitability Old buildings have lower incidence of tax as compared
to new buildings in the same area
As the rents are not periodically updated, this asymmetry gets aggravated over the years
Arbitrary nature Only court can change measure of tax determined by
the Investigating Officer(R.V.)
Catalysts to reform processCatalysts to reform process
<“The property tax can be efficient, equitable means of financing municipal services in developing countries, but in most countries it needs reform.”
- WORLD DEVELOPMENT REPORT<GOI issued “Guidelines for Property TaxReforms”, Min. of Urban Affairs and Employment, 1997.
9IRW
PROPERTY TAX REFORMS PROPERTY TAX REFORMS IN OTHER STATES/CITIESIN OTHER STATES/CITIES
STATE CITY LEGALREFORMS
EFFECTS REMARKS
AndhraPradesh
All Municipal Corporations Hyderabad
٠From ’reasonable rent’ to area based system.’
Self assessment introduced.’
Property Tax Collection1998-99–Rs.569 m.2000-01–Rs.1008 m.
٠upper cap.of 100%increase only.٠Non residential properties on actual rent basis
Gujarat Ahmedabad BPMC Act amended in 1999 - area based method.” Delinked from RCA
Karnataka Bangalore Capital value as basis of assessment.Self assessment was introduced.
Collection increased from Rs.1180 m to Rs.1570 m. About 60% of tax payers opted for SAS.
Cap.of 250% of existing ٠tax rate 0.3% to 0.6% of capital value.
Bihar Patna Assessment Rules, 1993.’area based method’.-Not completely delinked from RCA
Revenue increased by 2.5 times as against expected 4-5 times.
- SC upheld these rules on the basis of being reasonable, simple and transparent.
10IRW
Percentage of Property Tax to the total Percentage of Property Tax to the total Revenue IncomeRevenue Income
Year Revenue Income (Budget A,B and E)
(Rs.in crores)
Property
Taxes Collection
(Rs.in crores)
% of Property Taxes to Revenue Income
1998-1999
1836.66 337.74 18.39%
1999-2000
2057.89 381.62 18.54%
2000-2001
2599.41 454.37 17.48%
2001-2002
2705.85 514.60 19.02%
2002-2003
3237.10 597.35 18.45%
11IRW
Capital Value System -Capital Value System -Advantages Advantages
Formula based valuation possible; with simplification, self assessment is possible
Greater flexibility in tax administration; provides better control over revenue
Discretion of assessor can be reduced to a minimum; the basis of taxation is transparent to all
Re-assessment in keeping with the market trends is possible
12IRW
Merits of the Proposed SystemMerits of the Proposed SystemBuoyancy
Linked with market value
Equitability Similar structures will have similar tax liability
Transparency Figures can be cross-checked easily
Simplicity Tax payer can calculate his own liability
Minimize litigation
Greater control over revenue for Corporation
13IRW
Highlights of the Proposed SystemHighlights of the Proposed System
Move over from the rent based system to capital value based system for determining tax base
Carpet area in use and Stamp Duty rates derived from the ready reckoner will be the primary basis for computing the capital value. Thus, Capital Value will be determined by location and type of construction.
Tax liability calculated by multiplying capital value with the tax rate applicable for the current user.
14IRW
Advantages of the new systemAdvantages of the new system
Property value given by independent agency-IGRTax liability is determined by verifiable physical attributesTax system need not depend on honesty of the tax-payer and is not vulnerable to discretion of the assessors
15IRW
Developing the Capital Value ModelDeveloping the Capital Value Model
97,593 properties out of 2,51,212 analyzed to identify characteristics that determine tax
Weights of property characteristics deduced from current system
Individual tax liabilities derived by applying the formula
Th
e T
ISS
Exerc
ise
Th
e T
ISS
Exerc
ise
17IRW
The Proposed ModelThe Proposed Model
Tax Base Market value (as per Stamp Duty ready reckoner)
Carpet Area in Square Feet Construction type segregated into 3
categories Age type segregated into 3 categories
Rate of Tax Determined by the Corporation for each
type of user,(segregated into 4 categories).
1
Com
pone
nts
of P
rope
rty
Tax
Com
pone
nts
of P
rope
rty
Tax
18IRW
Construction categoryConstruction categoryConstructio
nCategory
ConstructionType
Weight
C1 Vacant land/land under construction
0.5
C2 Semi permanent structure/chawls
0.6
C3 RCC structures with or without lift
and bungalows
1.0
19IRW
User CategoryUser CategoryUser
CategoryBroad user type Weight
U1 Residential/Charitable 1
U2 Industrial/Factories
2
U3 Shops/Offices 3
U4 Hotels (4 star or lower) and
offices/Hotels (5 star plus)
4
21IRW
Age CategoryAge CategoryAge
categoryDescription Weight
A1 Properties constructed before 1940
0.8
A2 Properties constructed between 1941 to 1985
0.9
A3 Properties constructed after 1985 1.0
22IRW
Formula for Determining TaxFormula for Determining TaxFormula: T = [(MV * Area * C * A) * (r * U)]Where
T = Tax liability
MV = Market Value per Square Foot of property (derived from Stamp Duty ready reckoner for taxation purposes only)
Area = Carpet Area of property
C = Construction category Weight
A = Age factor Weight
U = User category Weight
r = Rate of Tax (To be decided by the MCGM)
23IRW
Zonewise incidence of taxZonewise incidence of tax Rs. In crores Rs. In crores
Zones Current Demand
as on Oct.200
0
% of total
demand
New demand without
cap
New demand
with cap
% increas
e without
cap
% increase with
cap
City 219 29.40 963 328 340 49.77
W.Sub. 399 53.55 449 433 12.54 8.52
E.Sub. 127 17.05 158 135 24.40 6.30
Total 745 100.00
1570 896 110.71
20.27
Issues for ConsiderationIssues for ConsiderationImplementation Issues
▪ Capping for increase and floor for decrease
▪ Amendments to MMC Act, 1888 ▪ Amendments to related Acts eg.
- Mah.Tax on Buildings (with largerresidential premises) (re-
enacted Act, 1979.- Mah. Education and Employment
Guarantee (Cess) Act, 1962- MHADA Act
26IRW
Results of data analysisResults of data analysis
Sample size: 97,593 out of 2,50,000 properties
Revenue neutral tax rate of 0.1875% of capital value
The focus is on bringing out redistribution of tax liability
27IRW
Distribution of sample Distribution of sample propertiesproperties
User category
Number of properties
Percent of total
Total carpet area (in sq. meter)
Percent of total
Annual property
tax (in Rs. Crores)
Percent of total
U2 64,247 65.8% 2,39,70,912 69.2% 132.92 67%
U3 11,738 12% 70,46,827 20.3% 36.52 18.6%
U4 19,410 19.9% 16,50,524 4.8% 8.58 4.4%
U5 1,704 1.8% 6,56,422 1.9% 5.71 2.9%
U6 426 0.4% 8,80,007 2.5% 8.05 4.1%
U7 68 0.1% 4,35,204 1.3% 4.73 2.4%
TOTAL 97,593 100% 3,46,39,896 100% 196.51 (100%
28IRW
Changes in tax paid by user Changes in tax paid by user categoriescategories
User Category
Number of Properties
Avg. Tax Paid under Old
System
Avg. Tax to be paid under New
System
Increase / Decrease in
Tax
Percent Change
U2 64,247 Rs. 20,689.77 Rs. 20,759.56 Rs. 69.79 0.34%
U3 11,738 Rs. 31,113.20 Rs. 22,216.31 -Rs. 8,896.89 -28.60%
U4 19,410 Rs. 4,418.84 Rs. 4,559.48 Rs. 140.64 3.18%
U5 1,704 Rs. 33,489.67 Rs. 37,664.08 Rs. 4,174.41 12.46%
U6 426 Rs. 188,989.50 Rs. 321,528.80 Rs. 132,539.30 70.13%
U7 68 Rs. 695,061.50 Rs. 1,186,489.00 Rs. 491,427.50 70.70%
Total 97,593 Rs. 20,135.38 Rs. 20,133.07 -Rs. 2.31 -0.01%
Figures in Column 3 are weighted mean of tax paid in that category
29IRW
Change in tax paid by ChawlsChange in tax paid by Chawls
User Cate gory
No. of
users
Tax paid under Old
system
Tax to be paid under
New system
+/- in Tax to be paid
after change to
New system
(+ / -) %
U2 6060 7556.756 7832.502 275.746 3.649
U3 362 25678.757 21069.125 -4609.632 -17.951
U4 1055 9755.898 9423.761 -332.137 -3.404
U5 140 17342.686 18118.491 775.805 4.473
U6 10 15464.000 19210.398 3746.398 24.227
U7 4 25899.000 49044.101 23145.101 89.367
TOTAL 7631 8919.796 8905.638 -14.338 -0.161
30IRW
Change in tax paid by age categoryChange in tax paid by age category
Age Category
Number of Properties
Avg. Tax Paid under Old
System
Avg. Tax to be paid under New
System
Increase / Decrease in
Tax
Percent Change
A1 3,072 Rs. 13,951.97 Rs. 26,506.38 Rs. 12,554.41 89.98%
A2 8,842 Rs. 17,583.80 Rs. 24,358.98 Rs. 6,775.18 38.53%
A3 23,941 Rs. 15,216.10 Rs. 26,178.76 Rs. 10,962.66 72.05%
A4 32,287 Rs. 18,268.99 Rs. 18,185.01 -Rs. 83.98 -0.46%
A5 29,451 Rs. 27,591.47 Rs. 15,420.59 -Rs. 12,170.88 -44.11%
Total 97,593 Rs. 20,135.38 Rs. 20,133.07 -Rs. 2.31 -0.01%
Figures in Column 3 are weighted mean of tax paid in that category
31IRW
Ward wise change in taxWard wise change in taxWard Increase/Decrease Ward Increase/Decrease
A +181.53% K/W -5.59%
B +15.78% L -64.71%
C +48.28% M/E -51.85%
D +329.71% M/W -49.72%
E +14.05% N -49.83%
F/N +84.88% P/N -51.71%
F/S +0.79% P/S -36.41%
G/N +36.23% R/N -59.17%
G/S +14.95% R/S -53.90%
H/E +9.78% S -68.16%
H/W +11763% T -47.48%
K/E -7.71% Total -0.01%
32IRW
Issues for ConsiderationIssues for Consideration
Implementation Issues Phasing of increase/decrease Quality/Accuracy of Data Computerization Treatment of special categories Self Assessment system Occupier to pay
33IRW
PROPERTY TAX REFORMSPROPERTY TAX REFORMS