1 A Case Study on Property Tax Reforms S.K. Singh, I.A.S.

2 slide number2 INDIA:URBANISATION SCENARIO

3 slide number3 INDIA:URBANISATION SCENARIO Distribution of Urban Centres by Size (1991)

4 slide number No.of Metropolitan Cities(> 1 Million) - 35 INDIA:URBANISATION SCENARIO Metropolitan Cities/Agglomerations

5 slide number5 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

6 slide number6 Percentage of Urban Population % % % Estimated contribution to National Income % % % CONTRIBUTION TO NATIONAL INCOME ROLE & CONTRIBUTION OF URBAN AREAS

7 slide number7 (As on ) WATER SUPPLY Covered Deficit Population Coverage SANITATION Population Coverage WASTE MANAGEMENT LIQUID WASTES (MLD) SOLID WASTES(MT/DAY) GENERATED TREATED GENERATED (Primary/Secondary) Mumbai **6000 Delhi Chennai Calcutta **2500 Hyderabad Bangalore * 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 90%* 50% 10%

8 slide number8 Consequences 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

9 slide number9 Investment Requirement Investment Requirement (Rs. in million) (Rs. in million) Sector Water Supply Water Supply Sanitation Sanitation TOTAL TOTAL Per Annum Requirement Per Annum Requirement Flow of Plan Funds per annum50000 Flow of Plan Funds per annum50000 Shortfall per annum Shortfall per annum Investment Requirement and Shortfall (As per Rakesh Mohan Committee Report – 1996)

10 Structure of Municipal Finances -Mix of Taxes -User Charges and Fees -Transfers -Loans

11 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.

12 slide number12 Cont.. Municipal revenue - Taxes and transfers constitute the predominant sources of municipal revenues. Property tax is the most common and the single most important municipal tax.. Systematic inefficiency – ULBs generally suffer from under-exploitation of “own” revenues sources, and high administrative and revenue collection costs.

13 Property 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.

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

15 Property 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 1/3 rd 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.

16 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.

17 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.

18 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.

19 Annual 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.

20 Unit 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.

21 Key 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..

22 cont.. 3. Use of building - Commercial or Industrial - Residential - Other which do not fall in the above two

23 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..-

24 slide number24 Earlier Tax Rates Holding Tax 12.5% of the Annual Rental Value (ARV) Latrine Tax10% of the ARV (Scavenging Tax) Water Tax10% of the ARV Education Tax50% of the holding Tax i.e. 6.25% of the ARV Health Cess40% of the Holding Tax. i.e.5% of the ARV Total43.75% of ARV

25 slide number25 New Tax Rates Holding Tax 2.5% of the Annual Rental Value (ARV) Latrine Tax2% of the ARV (Scavenging Tax) Water Tax2% of the ARV Education Tax50% of the holding Tax i.e. 1.25% of the ARV Health Cess50% of the Holding Tax. i.e. 1.25% of the ARV Total9% of ARV

26 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:-

27 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

28 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

29 slide number29 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.

30 THANKS.