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Property tax reform can fund our cities

If Bangalore has expanded its tax base and raised revenue,why can’t other cash-strapped cities?

Written by Isher Judge Ahluwalia |
June 29, 2011 12:22:46 am

The poor state of finances of our cities is a source of major concern. On the one hand,the adequacy and quality of public services leaves a lot to be desired,and on the other hand,payment for these services and collection of local taxes falls far short of what is needed to cover the costs of delivery. This chicken-and-egg problem has got us into an apparently intractable situation. Bangalore’s property tax reform offers a ray of hope.

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 which 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 benefited neither the taxpayer nor the corporation.

In April,2000,the BMC introduced a self-assessment scheme (SAS) which was effectively a self-declaration scheme,based on simple and transparent guidelines for assessment — using a formula which included the location of the property,its built-up area,type of construction,usage (residential or commercial),occupancy (with a rebate for own use),and age (for depreciation). The tax rate was 20 per cent for residential property and 25 per cent for non-residential. Owner-occupied property received a 50 per cent rebate. Bangalore,with its area of 200 square km,was divided into 6 land-value zones for assessment purposes,based on the published guidance value of 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 five years,thereby creating an environment of certainty for the tax payer. Apart from the option of filing the return at any branch of eight public-sector banks,50 payment clinics were opened to assist taxpayers filing returns.

The BMC’s commissioner,K. Jairaj,showed tremendous leadership in pushing the self-assessment scheme with considerable sensitivity. For example,increase in property tax liability was capped at 2.5 times the original liability,but any calculated decrease over the previous period was also restricted to 25 per cent. The government set up the Bangalore Agenda Task Force (BATF),as a group of private-sector technocrats and eminent citizens to understand citizen’s concerns,reach out,and suggest 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 answering frequently asked questions about the SAS,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 per cent in 2000-01,revealing that taxpayers were keen to get the middlemen out. There was an increase in the collection rate,increase in the number of properties on the tax roll,and increase in tax per property. The one time sharp increase was to be expected. But growth in collections dropped sharply to 3.8 per cent and 2.5 per cent in the subsequent two years. Since the scheme 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 cent per annum. But it was clear that buoyancy in revenue collection from property tax can only be ensured if property valuation is revised at regular intervals.

It was time for reform again. By 2007,after the BMP’s expansion and the merger of a number of jurisdictions,the BBMP had emerged as a much larger municipal corporation,covering 800 square km,and with a population of 75 lakh in 198 wards and eight zones. Taxpayers in greater Bangalore had got so comfortable with SAS that they strongly resisted the attempt to move to a capital value system legislated in the year 2002. As U.A. Vasanth Rao,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,and adopt an area-based system (known as the unit area value system) for assessment of properties with effect from 2008-09. This reform was carried out,again,with active support of civil society,print media and 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 three zones of the 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 per cent for early payment; over 70 per cent of taxpayers took advantage of this rebate. The option of filing returns online was also made available to taxpayers.

The new legislation stipulates a mandatory random check of 15 per cent 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 Rs 430 crore in 2007-08 to Rs 780 crore in 2008-09,Rs 880 crore in 2009-10,and Rs 1120 crore in 2010-11.

If Bangalore can improve its finances through property tax reform with active support of taxpayers,why not other Indian cities?

The writer is chairperson of ICRIER,and also chaired the high-powered expert committee on urban infrastructure services,which submitted its report in March 2011

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