Property taxation: Both untapped and unrealised

March 24, 2021 5:45 AM

Property tax collection as a proportion of GDP is 1.1% in the OECD, but only 0.2% in India

At the same time, state governments need to play an active role to adopt such practices and adapt them suitably to realise this untapped and unrealised revenue source.

By Aditi Pathak & Shikha Dahiya
The year 1992 marked an epoch in the history of India, as the 74th Constitutional Amendment Act formalised the institution of third-tier in the governance system. It introduced essential features for municipalities that imparted them with certainty, continuity and strength. A 12th schedule was added to delineate 18 functions to be entrusted to municipalities.

Taxes on lands and buildings fall under entry number 49 in the State List of the Seventh Schedule of the Constitution—which empowers the legislature of a state to authorise a municipality to levy, collect and appropriate such taxes, duties, tolls and fees in accordance with such procedure and subject to such limits. Municipal governments have no original powers of taxation. Neither do they have the power to fix the rates of levy.

Three decades have passed since the amendment but India still compares unfavourably with the OECD as well as BRICS countries in terms of revenues from urban immovable property tax. Based on a 2016 study, while the average collection from property taxes as a proportion of GDP was 1.1% in the OECD, it was only 0.2% in India. In countries such as Canada, the UK and the US, property tax collections form the bedrock of local bodies’ revenues and are about 3% of their GDP.

Several factors have led to low property tax revenue in India: undervaluation, incomplete registers, policy inadequacy and ineffective administration. Another big challenge is the lack of accurate property tax rolls in the jurisdiction of urban local bodies (ULBs). Though setting up Property Tax Boards was advocated by the 13th Finance Commission, so far only a few have come up.

 

Towards a way out

The GST has taken away some tax instruments traditionally available to local bodies. These include entertainment tax, entry tax, stamp duty, royalty on minerals, land revenue and cess on land revenue, etc. So there is all the more reason to focus on realising and increasing the potential for property tax growth in India.

States need to integrate computerised property records with registration of transactions. Research shows that computerised registration systems have reduced transaction costs for owners. State governments should streamline their methodology of property valuation to yield regular and realistic updates of values that are closer to market value. This may help realise greater revenues from property registrations for the third-tier of the government. But greater effort is needed in improving local administrative capacity.

Sparks of change

Some states have started working in this direction. For example, Karnataka has taken up the AASTHI project—a GIS-based property tax information system with unique IDs. A similar project was taken up by the Pune Municipal Corporation, which adopted a capital value-based system where increasing market value of properties was considered for tax assessment. In 2014, the Ranchi Nagar Nigam entered into an agreement with a private agency for providing managed services for collection of tax and other property charges within its jurisdiction through a competitive bid process. Online helpline, chat, SMS and telephonic services were set up for grievance redressal. These initiatives led to substantial increase in collection of property tax revenues.

There are many ways states can cross-check the wedge between market prices of properties and their fair values. One useful source can be the Residex of the National Housing Bank—an urban housing price index computed for housing properties in 50 cities across India that makes use of valuation data collected from primary lending institutions and data collected through market survey for under-construction properties, apart from registration data collected from official agencies. Another cross-check can be data from private real estate portals present in states with buoyant property transactions. These portals give differentiated price quotations for different kinds of properties at different locations.

The recommendation of the Finance Commission for states to notify minimum floor rates of property taxes followed by improvement in collection of property taxes in tandem with the growth rate of a state’s own GSDP is encouraging. The Ministry of Housing and Urban Affairs is reviewing the municipal legislations of all states and identifying best practices and making a toolkit consisting of such laws, procedures and on-ground activities. At the same time, state governments need to play an active role to adopt such practices and adapt them suitably to realise this untapped and unrealised revenue source.

Authors worked as joint directors, Fifteenth Finance Commission. Views are personal

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