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Desperately seeking Aristides

Urban local bodies need to boost property tax collections, and for that, they need efficient updating of property data. Only then can they have fair and just taxation, which had been championed in ancient Athens by Aristides

Desperately seeking Aristides
Nevertheless, the property tax collections are much higher (3% of the GDP) for countries like the US, Canada and the UK.

By Bibek Debroy & Aditya Sinha

The Athenian general Aristides (530 BC–468 BC) was given the honorific title of ‘Aristides the Just’. Herodotus described him as “the best and most just man among the Athenians”. His prominence became so great that it overshadowed all others on the political scene. Unfortunately, since this threatened the so-called “egalitarian principles of Athenian democracy”, he was ostracised. One of the primary reasons for his prominence was the reforms he brought to the property tax system in Athens. These reforms were hailed as fair and efficient.

Like Athens, Indian urban local bodies (ULBs) are waiting for their Aristideses to bring in the next generation of property tax reforms. Tax revenue mobilisation by the ULBs is necessary to provide fiscal room to drive municipal infrastructure development. A buoyant source of revenue, property tax is a potent instrument to create a regular stream of revenue for ULBs. Adam Smith saw ground-rents and ordinary rent as species of rent that the owner “enjoys without any care or attention of his own”. He was in favour of imposing the tax on this revenue “in order to defray the expenses of the state”.

Municipal finances across the country are in stress. The predominant share of the revenue for the ULBs, i.e., around 40%, comes from transfers by the state government and union finance commission. Transfers come with high budgetary constraints. True decentralisation is incomplete without fiscal decentralisation. An empowered municipal administration should have higher own tax and non-tax revenues, and is equipped legislatively to tweak the tax, user charges and fines.

The own tax revenue of municipal corporations is merely 30% of overall revenue. Of this, property tax accounts for around 50%, according to the recently-released ‘Report on Municipal Finances’ by RBI (bit.ly/3E2GsE7). Despite being one of the leading revenue sources, property tax receipts were budgeted to be 0.11% of the GDP in FY20 for 201 municipal corporations across the country. Awasthi et al, in their study ‘Property taxation in India’ ,for the XVth Finance Commission, suggest that property taxes contribute merely 0.2% to the GDP. Stated simply, 3,700 ULBs in the country collect merely 0.2% of GDP as property tax. King John of England would have laughed at such collection rates. While excesses of King John through extortionary tax policies led to the signing of the Magna Carta in 1215, he is also acknowledged for a transition from deep-rooted feudal systems to a national taxation system.

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Nevertheless, the property tax collections are much higher (3% of the GDP) for countries like the US, Canada and the UK. Thus, there is an avenue for making property tax systems of ULBs more efficient so that they become more independent and empowered. But, why is the property tax system in India marred with low revenue productivity and inefficiencies? Primarily, there are three reasons. (1) As things stand today, it is difficult for most ULBs to determine the value of the immovable property. Owing to the high property valuation costs, ULBs simply let go of higher property tax revenues. (2) The tax base is not revised regularly. (3) One of the major reasons cited against higher property taxes in areas with higher circle rates is the inability of senior citizens to bear the burden. But this does not entail a blanket exemption to the entire population. There can always be differential tax rates for different sets.

While these are daunting challenges for creating an efficient property tax system, they are not intractable. The tax base will have to be appropriately gauged. Awasthi et al suggest that satellite-based data be used to create digital property maps. This has to be followed with the herculean task of updating cadastral maps through door-to-door surveys by the ULBs. There were media report Municipal Corporation of Delhi will use drones to verify property details in self-assessment forms. Alternatively, the government can also think about an urban variant of SWAMITVA for select ULBs to establish clear ownership of properties through extensive drone surveys.

Since the 49th entry on the state list of the Seventh Schedule is taxes on lands and buildings, states can have different formulas for calculating property tax. However, a property tax formula which uses the market value of the property is always better. For it to be efficient, the ULBs should have a mechanism in place to regularly update the market value of properties. There is no dearth of examples across the world where artificial neural networks and geographic information systems have been used for property valuations. Shouldn’t such systems be used by some of our ULBs, at least by the ones that have resources?

The XVth FC recommended tying grants to ULBs to the “notification of minimum floor rates of property taxes by the relevant State followed by consistent improvement in the collection of property taxes in tandem with the growth rate of State’s own gross state domestic product”. It is a welcome step. This won’t be enough until ULBs in India take the initiative to find new ways to increase property tax mobilisation. ULBs, too need Aristideses. Surely, these Aristideses will not be ostracised.

The authors are respectively, chairman, and additional private secretary (research), EAC-PM

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First published on: 26-11-2022 at 04:15:00 am