Journalism of Courage
Premium

Property Tax Surge: 70% of municipal bodies in India report increase in collection over last 3 years

Out of the 4,771 ULBs that report to the MoHUA, 3,417 ULBs registered an increase in property tax collection in 2022-2023 over the previous year as on December 20.

Property tax, Property tax delhi, delhi real estate, Property tax hike, Property taxMCD, cicv bodies Property tax hike, delhi residential areas, residential areas property tax, Indian expressThis is for the first time that the Ministry, along with the non-profit group Jaanagraha, is collecting the annual audited accounts of all ULBs, standardising them to enable comparison, and digitising the records to make them public.
Advertisement

OVER THE PAST three years, a silent grassroots finance reform has been taking shape with at least 70 per cent of the total 4,900 urban local bodies in the country reporting an increase in property tax collection, The Indian Express has learnt.

With over Rs 1 lakh crore in Central funding tied to property tax reform in the coming years, 3,086 ULBs across 22 states reported an increase in property tax collection in 2022-23 commensurate with their state’s five-year GSDP (Gross State Domestic Product) growth rate, sources in the Union Ministry of Housing and Urban Affairs (MoHUA) said.

In fact, this is a criterion for municipalities to be eligible for funds. In total, the 15th Finance Commission had recommended Rs 1,21,055 crore for urban local bodies over five years ending 2025-26. So far, out of Rs 21,791 crore allocated for ULBs under the 15th Finance Commission for this financial year, Rs 5,705 crore has been given, MoHUA officials said.

Out of the 4,771 ULBs that report to the MoHUA, 3,417 ULBs registered an increase in property tax collection in 2022-2023 over the previous year as on December 20.

This is for the first time that the Ministry, along with the non-profit group Jaanagraha, is collecting the annual audited accounts of all ULBs, standardising them to enable comparison, and digitising the records to make them public. This practice has evolved after the 15th Finance Commission’s recommendations in 2020 for devolutions to ULBs from 2021-2026.

Explained

Reforms via carrot and stick

Urban local bodies had many revenue sources, but once these merged with the GST, it was the states which benefited, not municipalities. For local bodies, property tax is a big revenue source, but politics stalled any hike in tax rates. A carrot and stick approach, incentivising increase in tax rates with more funds, advocated by the Finance Commission three years ago, seems to be slowly bearing fruit.

The conditions for accessing the funds get more stringent every year – starting with the requirement that states notify the floor rates of property tax, then submit their annual audit accounts showing property tax collection and finally, have an increase in collections.

Among the cities which have reported an increase in collection are 40 out of the 50 cities that have a population over 1 million, including Mumbai, Chennai and Hyderabad. Delhi, Srinagar and Chandigarh are not part of the million-plus cities under MoHUA as they are in Union Territories.

Story continues below this ad

According to 15th Finance Commission Chairman NK Singh, property tax was one obvious way to make ULBs sustainable. “You cannot really have a viable third tier without, in the long run, financial sustainability on their own. You cannot genuinely have the devolution of the three Fs – functions, finance and functionaries, embedded in the Constitutional amendment, without their becoming financial entities,” he told The Indian Express.

Before the Goods and Services Tax (GST) was implemented in 2017, the ULBs had multiple sources of revenue, many of which were merged with the GST. While states benefited from this, the ULBs did not, Singh pointed out. He said the commission held meetings with the ULBs in every state and recognised that there was “huge reluctance” on their part to increase property tax collection.

“In many cases, the state governments also found that this would be, politically, a difficult pill to swallow. We decided ‘let’s take the bull by the horns’. Let us make this a performance criteria…This is a classic case where penalties and incentives work. Penalty was that you lose out on the grants-in-aid and the incentive is that those who comply with it are able to fully avail of it. We induced change, far-reaching reforms in the governance architecture through very well-calibrated penalties and incentives,” Singh said.

He said the ULBs were yet to reach their potential in terms of financial sustainability and hoped that the conditions would not be relaxed by successive Finance Commissions.

Story continues below this ad

As a result of the Finance Commission recommendations, for the first time, the financial data of all ULBs is being put in the public domain through cityfinance.in, which was launched in June 2020.

On the impact of the exercise, Jannagraha CEO Srikanth Viswanathan said: “There has been a tremendous change in property tax reforms since 2020 as the amount of money at stake has never been this high – there is over Rs 1 lakh crore under the 15th Finance Commission, Rs 5,000 crore in the form of the credit worthiness grant under Special Assistance Scheme, Rs 50,000 crore of additional borrowing for states that was linked to property tax reform, and further incentives available under AMRUT.”

According to him, state governments have played an important role. “There is leadership from the state governments as in many cases the state governments have to set the base rates. Individual mayors and municipal commissioners are also taking initiative to increase collections.”

With a sample of 201 municipal corporations, an RBI report in November 2022 found that municipal corporations’ own revenue, including property tax, was 31-34 per cent of the total revenue from 2017-2018 to 2019-2020.

Story continues below this ad

“Property tax, which accounts for around half of the total tax collections of MCs, amounts to less than 0.5 per cent of GDP with significant inter-state variations. Many of the larger cities, however, were able to increase property tax collections over 2017-20. Poor enforcement mechanisms, coupled with multiple outdated exemptions, dated property rolls and databases, sub-optimal tax rates, property undervaluation and weak tax administration have resulted in significant under-recoveries in the majority of the Indian cities,” the RBI report said.

A 2021 toolkit released by MoHUA and Jaanagraha found that while property tax was one of the major sources of municipal corporations’ own revenue, the collections were far below the potential. “The aspiration for property tax collections should be to reach Rs. 40,000 crores in 2024 from the current estimate of approximately Rs. 20,000 crores,” the toolkit said.

Damini Nath is an Assistant Editor with the national bureau of The Indian Express. She covers the housing and urban affairs and Election Commission beats. She has 11 years of experience as a reporter and sub-editor. Before joining The Indian Express in 2022, she was a reporter with The Hindu’s national bureau covering culture, social justice, housing and urban affairs and the Election Commission. ... Read More

Stay updated with the latest - Click here to follow us on Instagram

Tags:
  • property tax
Edition
Install the Express App for
a better experience
Featured
Trending Topics
News
Multimedia
Follow Us
C Raja Mohan writesOn its 80th birthday, and after Trump, a question: Whose UN is it anyway?
X