Property tax is the largest potential source of own revenue for municipal corporations and municipalities in India today, but its contribution to their revenues is small and inelastic. The property tax reform initiated by the Bangalore Mahanagar Palika (BMP) in 2000 and taken forward by Bruhat Bangalore Mahanagar Palika (BBMP) in 2008 has shown that property tax buoyancy can be gained by moving towards a system that allows revaluation of properties at specified time intervals. Revaluation enhances the base on which property tax is levied and yields rising tax revenues.
Prior to these reforms, the provisions of the Rent Control Act often came in conflict with the then prevailing system of assessment of property values under Annual Rateable Value (ARV). Tax officials inspected the premises when a property was assessed for the first time and issued a notice determining the tax payable, based on reasonable expectation of rent. The scope for discretion was immense and it created an environment for corruption and litigation. The ARV system neither benefited the taxpayer nor the Corporation.
In April 2000, the Bangalore Municipal Corporation introduced a self-assessment scheme (SAS) that was effectively a self-declaration scheme based on simple and transparent guidelines for assessment, using a formula that included the location of property, built-up area, type of construction, usage (residential or commercial), occupancy (rebate for own use), and age (for depreciation). The tax rate was 20% for residential property and 25% for non-residential. Owner-occupied property received 50% rebate. Bangalore, with an area of 200 sq km, was divided into 6 land value zones for assessment purposes, based on the published guidance value from the Department of Stamps and Registration. Guidance value was to be revised every 4 years, thus ensuring buoyancy of the tax. The approach resembled an assessment under capital value system.
The scheme was made optional to avoid any legal disputes arising from the fact that the Karnataka Municipal Act 1976 had not been amended. The tax assessed under the scheme would be in force for the next 5 years, thereby creating an environment of certainty for the taxpayer. Apart from the option of filing the return at any branch of the 8 selected public sector banks, 50 payment clinics were opened to assist taxpayers in filing returns.
Mr K Jairaj, Commissioner, Bangalore Municipal Corporation, showed tremendous leadership in pushing SAS with considerable sensitivity. For example, the increase in property tax liability was capped at two and a half times the original liability, but any calculated decrease over the previous period was also restricted to 25%. The government set up the Bangalore Agenda Task Force (BATF) as a private sector group of technocrats and eminent citizens to understand citizen concerns by reaching out and suggesting solutions. BATF made a difference in pushing SAS as a significant measure of good governance. A campaign was carried out for 45 days in newspapers through listing frequently asked questions on SAS and providing answers so as to build taxpayer confidence. Support of resident welfare associations was procured through extensive interactions with them.
The results were dramatic. Property tax collection shot up by 33% in 2000-2001, revealing that taxpayers were keen to get the middlemen out. There was an increase in the collection rate, an increase in the number of properties on the tax roll, and an increase in tax per property. The one time sharp increase was to be expected. But growth in collections dropped sharply to 3.8% and 2.5% in the subsequent two years. Since SAS was voluntary, most owners of new properties did not join in. The system needed to be supplemented by strong enforcement, random checks and stringent recovery provisions. Such efforts in 2003-04 and 2005-06 yielded revenue growth of 15-16% per annum. But it was clear that buoyancy in revenue collection from property tax could only be ensured if property valuation was revised at regular intervals.
It was time for reform again. By 2007, with the expansion and merger of a number of jurisdictions with BMP, BBMP had emerged as a much larger municipal corporation covering 800 sq km area and a population of 75 lakh with 198 wards and 8 zones. Taxpayers in greater Bangalore had got so comfortable with SAS that they strongly resisted the attempt to move to a capital value system that was legislated in the year 2002. As UA Vasanth Rao, the then Deputy Commissioner (Resources), BBMP, who drafted the legislation, put it, The success of SAS and its endorsement by hundreds of taxpayers including eminent citizens in the media made it possible to respond by improving on SAS to achieve an effect similar to a capital value system.
A bold step was taken to pass an amendment to the KMC Act to adopt an area-based system (known as the Unit Area Value system) for assessment of properties in BBMP area with effect from the assessment year 2008-09. This reform was carried out again, with active support from civil society and print media, and with the endorsement of taxpayers. The revised guidance value published in 2007 was taken as the basis for revaluation. Though a conscious decision was taken not to raise the rental rates for each of the 3 zones of erstwhile BMP areas, many properties in the lower zone in 2000 moved to two higher places in zoning in 2008. In order to ease the burden, the zone classification of property to higher zones was restricted to the next higher zone. There was also a rebate of 5% for early payment and over 70% of taxpayers availed the rebate. An option to file returns online was also made available to the taxpayers.
The new legislation stipulates a mandatory random check of 15% of the returns filed each year and provides for penalty for false declaration. The tax paid by all taxpayers is uploaded on the BBMP Website. Taxpayers can see how they have paid compared with their neighbours and this has a positive reinforcing effect on payments. Collection registers, which are currently maintained at each zone, are being computerised.
The results have been phenomenal. The number of properties covered have increased from 7 lakh in 2007-08 (prior to reform) to 8 lakh in 2008-09, 9 lakh in 2009-10 and 12 lakh in 2010-11 (the total number of properties as per GIS is 15 lakh). The amount of tax collected has increased from R430 cr in 2007-08 to R780 cr in 2008-09, R880 cr in 2009-10, and R1,120 cr in 2010-11.
If Bangalore can improve its finances through property tax reform with the active support of taxpayers, why not other Indian cities
The author is Chairperson, ICRIER, and also former Chairperson of the High Powered Expert Committee on Urban Infrastructure Services, which submitted its report to MoUD in March 2011