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A Case Study on Property Tax Reforms S.K. Singh, I.A.S.

A Case Study on Property Tax Reforms S.K. Singh, I.A.S. INDIA: URBANISATION SCENARIO. INDIA: URBANISATION SCENARIO Distribution of Urban Centres by Size (1991). INDIA: URBANISATION SCENARIO Metropolitan Cities/Agglomerations. 2001

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A Case Study on Property Tax Reforms S.K. Singh, I.A.S.

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  1. A Case Study on Property Tax Reforms S.K. Singh, I.A.S.

  2. INDIA:URBANISATION SCENARIO slide number

  3. INDIA:URBANISATION SCENARIO Distribution of Urban Centres by Size (1991) slide number

  4. INDIA:URBANISATION SCENARIO Metropolitan Cities/Agglomerations 2001 No.of Metropolitan Cities(> 1 Million) - 35 slide number

  5. ROLE & CONTRIBUTION OF URBAN AREAS ROLE OF URBAN AREAS • Cities and Towns are : • Reservoirs of Skills • Centres for Hope for Millions of Migrants • Engines of Productivity & Economic Growth • Need to Sustain and Augment High Urban Productivity for the Country’s EconomicGrowth. slide number

  6. ROLE & CONTRIBUTION OF URBAN AREAS CONTRIBUTION TO NATIONAL INCOME Percentage of Urban Population 1980-81 23% 1990-91 26% 2000-01 27.8% Estimated contribution to National Income 1980-81 47% 1990-91 55% 2000-01 60% slide number

  7. 50% 50% STATUS OF URBAN INFRASTRUCTURE (As on 31.3.99) WATER SUPPLYCovered Deficit Population Coverage SANITATION Population Coverage WASTE MANAGEMENT LIQUID WASTES(MLD) SOLID WASTES(MT/DAY) GENERATED TREATED GENERATED (Primary/Secondary) Mumbai2156 1109** 6000 Delhi 2179 1271 5500 Chennai 352 352 2550 Calcutta 690690**2500 Hyderabad 350 115 1500 Bangalore 496 286 2500 * Indicate accessibility only. Adequacy and equitable distribution of water is not as per the norms of Govt. of India ** Primary Treatment only 90%* 10% slide number

  8. Consequences of Urban Infrastructure deficiencies • Wide spread Water borne and other diseases (Diarrhoea, Hepatitis, Jaundice) • Contamination of ground water • Densification of existing Urban Habitats creates Slum like conditions • Choked drains and sewer lines • High air and water pollution • Direct impact on poor slide number

  9. Investment Requirement and Shortfall(As per Rakesh Mohan Committee Report – 1996) Investment Requirement (Rs. in million) Sector1996-2001 2001-2006 1996-2006 • Water Supply 597670 588930 1186600 • Sanitation 513620 604880 1018500 • TOTAL 1111290 1093810 2205100 • Per Annum Requirement 220510 • Flow of Plan Funds per annum 50000 • Shortfall per annum 170510 slide number

  10. Structure of Municipal Finances - Mix of Taxes - User Charges and Fees - Transfers - Loans

  11. Broad Pattern of Municipal Finances Vertical imbalance – Most of the ULBs suffer from the inadequate “own” resources. Horizontal imbalance – Municipalities often suffer from uneven access to resources which gives rise to imbalances between Municipalities of various population sizes. Control by higher governments – Higher levels of government control the municipal authority to levy taxes and user charges, fix rates, grant exemptions, etc. High-yielding and buoyant sources of revenue are seldom assigned to ULBs.

  12. Cont..Municipal revenue -Taxes and transfers constitute the predominant sources of municipal revenues. Property tax is the most common and the single most important municipal tax..Systematic inefficiency – ULBs generally suffer from under-exploitation of “own” revenues sources, and high administrative and revenue collection costs. slide number

  13. Property Tax Property Tax is the most important component of Municipal finance. This generally consists of Holding tax, Water tax, Scavenging tax, lighting tax, fire tax, street tax and general tax. This tax is a indirect user charge whose benefits are collective and not confined to identifiable individuals. Property tax suffers from lack of adequacy, buoyancy and acceptability.

  14. Property Tax and Urban India The share of property tax varies in the range of 40-80% of municipal income. Wherever octroi is levied, the share of property tax is just next to octroi. The 74th Amendment Act added a series of functions in the municipal functional domain which require additional funds.

  15. Property Tax in Major Indian Cities - According to 2001 census, the urban population is 285 million which account for 27.8% of the total population. - As per 1991 census, more than 65% of the urban population live in cities with more than1,00,000 population and about 1/3rd living in the 23 metropolitan cities. - This has resulted in serious problems relating to provision of infrastructure and civic amenities. - Urban Local Bodies are not in a position to provide these amenities and infrastructure in view of their poor financial health. cont.

  16. Cont.. - Full potential of property tax is not utilised anywhere in the country. - Its base is considerably eroded by administrative and procedural inadequacies - The property tax structure has not been free from certain flaws. - The problem relate to the fixation of tax base and tax rate, tax assessment, tax collection, tax exemptions, disputes, resolutions etc. - No scientific and simple basis is followed for the determination of the tax. - People are harassed by the Inspectors due to discretionary powers.

  17. Attempt for Property Tax Reforms - In the recent year some State Governments and ULBs have tried property tax reforms. - Patna Municipal Corporation in Bihar have attempted drastic simplification in tax assessment procedure.

  18. Characteristic of a good property tax structure - Make the process of assessment, levy and collection, transparent and simple. - Minimize the discretion on the part of the assessors in tax levy. - Low rate of property tax to make it acceptable by the public at large. - Ensure equity between classes of tax payers/ property owners. - Facilitate self-assessment of property tax by property owners/occupiers.

  19. Annual Rental Value - Annual Rental Value of a building is the rental which a building is likely to fetch. - It delinks the concept from rental approach to Area Based Approach. - Conventional administration of rental based valuation is loose and defective and property tax based on it becomes in-elastic in long run. - This also resulted in a purely adhoc and discretionary assessment.

  20. Unit Area Method - Unit Area Method (UAM) has emerged as alternative to rental value. - This tends to remove the disparity in assessment of similar properties. - Under this, basic tax is related to plinth area/carpet area. - UAM is based on the principal of classification.

  21. Key elements of UAM 1. Location of buildings - Building on Principal main road - Building on Main road - Building on Other roads 2. Type of buildings - Pucca Building with RCC Roof - Pucca Building with Asbestos or Corrugated Sheets - Other Buildings which do not fall in the above two cont..

  22. cont..3. Use of building- Commercial or Industrial - Residential - Other which do not fall in the above two

  23. Property Tax Assessment – Patna Model - The definition of Annual Rental Value has been defined as “The Rent that a holding is capable of fetching over a period of one year”. - The rate of tax has been reduced to 9% from 47.5%. Cont..-

  24. Earlier Tax Rates • Holding Tax 12.5% of the Annual Rental Value (ARV) • Latrine Tax 10% of the ARV (Scavenging Tax) • Water Tax 10% of the ARV • Education Tax 50% of the holding Tax i.e. 6.25% of the ARV • Health Cess 40% of the Holding Tax . i.e.5% of the ARV Total 43.75% of ARV slide number

  25. New Tax Rates • Holding Tax 2.5% of the Annual Rental Value (ARV) • Latrine Tax 2% of the ARV (Scavenging Tax) • Water Tax 2% of the ARV • Education Tax 50% of the holding Tax i.e. 1.25% of the ARV • Health Cess 50% of the Holding Tax . i.e. 1.25% of the ARV Total 9% of ARV slide number

  26. Cont.. - The UAM has reduced the scope for subjectivity and discretion. - In the new rules, no exemption has been provided to any type of building. - For specifying the type of construction, the buildings have been classified into three categories which makes a matrix of 3x3x3, as follows:-

  27. Holding on the Principal Main Road Holding on the Main Road Holding on other Roads TYPE OF CONSTRU-CTION Fully Comm- rcial or Indust-rial Others Fully Resi- dential Fully Comm- rcial or Indust-rial Others Fully Resi- dential Fully Comm- rcial or Indust-rial Others Fully Resi- dential Pucca Building with RCC Roof Pucca Buil-ding with Asbestos or Corrugated Sheets Other Buildings Patna Tax Assessment Scheme (Rs. Per square feet) 18.0 12.0 18.0 36.0 24.0 12.0 6.0 54.0 36.0 12.0 24.0 36.0 24.0 16.0 8.0 12.0 8.0 4.0 18.0 12.0 6.0 12.0 8.0 4.0 4.0 2.0 6.0

  28. Before revisions After revisions Earlier Definition of Annual Rental Value: The gross annual rent at which the holding may resonably be expected to let Earlier Rate of Taxation:43.75% of ARV Higher rate gave rise to: - arbitrary and unreasonable assessment by inspector -corruption and unscrupulousness Property Tax Demand : Rs.4 crore Under new Rules ARV is redefined as the rend that a holding is capable of fetching over a period of one year Rate of Taxation reduced to 9% of ARV Lower rates coupled with simpler rules: -has eliminated any scope of discretion of tax inspectors -have been acceptable to people at large Property Tax Demand : Rs. 17 crore Estimated to grow to Rs.40 crore if estimated properly. Comparison between New and Old Method to Assess Properties

  29. Government of India issued guidelines on property tax reforms. • Many States such as Gujarat, Madhya Pradesh, Karnataka, Bihar, Uttar Pradesh, Tamil Nadu and many other Municipal Corporations are adopting this new model • State of World Cities Report acknowledge best practices for governance / municipal finance. slide number

  30. THANKS.

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