Given the Aam Aadmi Party’s (AAP) previous decisions to waive off water and electricity charges for those whose consumption was below a certain level, chances are Delhi chief minister Arvind Kejriwal will make good on his promise to waive off property taxes on residential properties if his party wins the upcoming municipal elections. Apart from the fact that such promises set off a host of me-too proposals in other states, the move makes little sense—the party’s proposals on electricity resulted in other parties making similar promises in other states, and the impact of the BJP’s promise to write off farm loans in the UP elections has set off similar demands in BJP-ruled states like Maharashtra. It is true, as the AAP has said before, the municipal corporations are not doing a good job in collecting property taxes from commercial and industrial users. The Delhi government had pointed out, last year, that while there were 2.8 lakh commercial electricity connections in the south Delhi municipal corporation area, there were only 60,000 commercial properties that paid taxes; in the northern area, the tax compliance was under 35%.
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While ensuring commercial properties that do not pay tax are caught in the tax net, eliminating residential properties makes little sense. For one, doing so increases arbitrage with smaller commercial properties trying to disguise themselves as residential ones. More important, there is huge tax evasion by residential properties as well. Though there is no separate break-up for residential and commercial tax evasion, given the greater number of residential properties, the amount of evasion would be considerable. Right now, while OECD countries manage to average property tax collections of around 1.9% of GDP, India’s is a much lower 0.2%. The Economic Survey quotes a study for Bengaluru and Jaipur that estimates how much more taxes could be collected—it found Bengaluru could collect four to seven times its current property taxes, and collection levels in Jaipur could rise by between 10 and 20 times. Based on a similar assessment of 36 cities, the Thirteenth Finance Commission had found increasing property tax compliance to even 80-85% would raise the property tax revenues from R4,400 crore to as much as R22,000 crore—it is difficult to see how this can be achieved by scrapping taxes from residential properties that make up the bulk of property in any state. While AAP may or may not be right in its criticism of how the municipal corporations are run and spending their money, there can be no doubt they need a lot more funds than they have right now to do justice to Delhi’s needs—with property taxes comprising nearly 70% of Kanpur’s ‘own-revenue’ but a mere 40% for Delhi, no responsible government should be making the kind of promises Delhi’s chief minister is.