Unleashing property tax potential
Mumbai, the economic, financial and trading hub of India, is constrained by its infrastructure bottlenecks, viz. poor drainage system leading to floods, inadequate road network leading to traffic congestions, and so on.
However, with tax reforms, it should be able to increase its property tax collections even without increasing tax rates and hence would be able to finance its infrastructure investments on its own. According to a Crisil study on property tax across municipal corporations, reforms can enhance the property tax collections by two to four times.
Most progressive tax, but under-utilised
Property tax is one of the most progressive ‘direct tax’ imposed on the property owners, while octroi is an ‘indirect tax’ imposed on entry of goods and services in the city. Of the total revenue income of Rs 4452 crore, the property tax currently contributes only about 17% for Brihanmumbai Municipal Corporation (BMC). This is much lower than octroi collections, which contribute more than 60% of BMC’s revenues.
As octroi is expected to be abolished in the near future, the corporation needs to develop property tax as a major source of revenue. The property tax reforms have also become mandatory for securing grants under the National Urban Renewal Mission (NURM), with an objective of making property tax the major revenue source of the corporation.
Shortcomings in existing tax system The major problems impacting the property collections are low collection efficiency of 56%, high number of unassessed properties and irrational rateable value computation. The collection efficiency compares unfavourably with the target of 85% stipulated under NURM.
The annual rental value (ARV) system of Mumbai coupled with the Maharashtra Rent Control Act (MRCA) results in distortions in the assessment of annual rateable value. As a result, the capital value of a property is much higher than the rental values. This is despite the fact that theoretically, the discounted stream of net rent payments should be equivalent to the capital value of the property.
In Mumbai, all rental properties have the protection of the MRCA, which has virtually frozen the rent to the 1940 levels. It provides a cushion to old residential and commercial properties, mainly located in expensive South Mumbai, while the properties in suburbs pay exorbitantly high taxes. This is paradoxical as the property values decrease and property tax increase as one move from South Mumbai to suburbs.
Hence, the lower to middle-income group, which occupy suburbs, pay the highest property tax in Mumbai. The property tax has limited buoyancy relative to the overall growth in economic activity. This partly explains the steady 10-15% growth in tax collections in the last two years, despite the fact that the property prices in Mumbai have risen by 100% to 200% during the same period. Mumbai needs to undertake reforms in the areas of tax administration and adopt the capital-value based rateable value system.
Need for tax administration reforms
The major tax administration reforms required are enforcement of property tax to boost collections, identifying unassessed properties, introducing e-governance initiatives and introducing self assessment schemes.
The tax-enforcement involves taking steps towards deterring default and incentives for compliance. The deterrents include penalties, attaching properties, disconnection of services and publishing lists of defaulters. The incentives for prompt payments would include discounts, rebates and public felicitations. The unassessed properties can be detected through Geographic Information System (GIS), door-to-door verification and cross-checking with building permits issued. The e-governance initiatives involve dissemination of tax calculations and individual notices through website, facilitation of online payments through banks/ internet/ electronic clearing system and providing hand-held computing devices to revenue staff. The self-assessment can result in collection of considerable data in a short time and reduction in administrative costs.
Need for market-linked property taxation
Capital-value based rateable value is followed in the US, Germany, Austria and Denmark. Among Indian states, in Karnataka, capital-value based property tax has been adopted across municipalities, wherein land is assessed as per the market value notified under the Stamp Duty Act and the constructed part is valued on the basis of cost of construction. Municipal Corporation of Hyderabad has changed from ‘reasonable rent’ to ‘area-based’ ARV that takes into account property location, type of construction, plinth area, age and nature of use. Ahmedabad Municipal Corporation arrives at a differential property tax based on factors such as location, age, type, and occupancy of properties. This ensures that the property tax rate takes these varying factors into consideration though the rateable value remains the same. The property prices in Mumbai have reached tizzy heights despite the huge infrastructure lacunae the city faces. In case the infrastructure was to improve, the property prices can rise many times over. The property owners should be willing to contribute a fair value towards infrastructure investments. The property tax collections in Shanghai, which have grown at an annualised 41% in last 5 years, have funded its infrastructure to a large extent.
To conclude, Mumbai must take command of its future and undertake requisite steps that can facilitate infrastructure investments and help the city to ‘overtake’ Shanghai.