This PPT delivered in Webinar to E&Y Team takes stock of theory and various basis of property tax, its status in indian municipal finance, issues associated with it and what reforms need to be undertaken to improve property tax revenue by Indian Municipal Bodies.

1. Reforming Property Tax in
India
For E&Y Team – 15th April 2020
Ravikant Joshi

2. Property Tax – Present Status
 Study of Property Tax in 36 million plus cities (2007-08
data) for 13th CFC
◼ Rs. 486 per capita average; Mumbai Rs. 1334, Patana Rs. 25
per capita
◼ Properties paying tax to total properties – 56%; collection
efficiency – 37% of demand; Cities collected only 21 % of
their potential property tax
◼ Property tax revenue – 0.16 to 0.24 % of GDP much lower
compared to developing countries average of 0.6 % of GDP
and developed countries average of 2 % of GDP
 Study conducted (2012-13 data) by the 14th CFC
indicated that highest per capita revenue from property
taxes was at Rs.1677 with a low of just Rs. 42.
 Property Tax Potential Unexploited – Economic
Survey of India 2017-18
◼ Evidence from satellite data indicates that Bengaluru and
Jaipur collect only between 5% to 20% of their potential
property taxes.

3. Property Tax – present status
 Property tax contributed about 60 per cent to municipal tax
revenue in India in 2017-18
 Within OSR, Property taxes formed the major revenue head
with a 35% share but grew slower than Central and State
transfers at 13% CAGR during FY 11-18.
 In GDP terms, property tax revenue hovered at 0.14-0.15%
of GDP.
 Among the larger states, Maharashtra, Telangana and
Karnataka reported the highest property tax revenue relative
to their Gross State Domestic Product (GSDP) at 0.39%,
0.23% and 0.22% respectively.
 Maharashtra and Gujarat report the highest realisation in
annual per capita terms at Rs. 1512 and Rs. 1911
respectively. (National avg. ~ Rs. 688).

4. Property tax – Present Status
4
 As documented by Bahl et al (2008), in the 2000s this ratio was 0.6 per cent in developing
countries and 1.04 per cent in all countries.
 India lags even developing country peers on property taxes ~ 0.15% of GDP and Rs. 688 per
capita p.a
 Property tax ~ 37% of own revenue of ULBs in FY 18; Karnataka highest @ 68% of own revenue
 Maharashtra, Gujarat and Karnataka ~ 60% of all India property tax revenue income of ULBs
0
200
400
600
800
1000
1200
1400
1600
Property tax - Rs per capita
0
0.2
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
Property Tax revenue as percentage of
GDP (2017)
Source: OECD.sats and CRIS analysis Source: State of Municipal Finances in India, A Study Prepared for the
Fifteenth Finance Commission , 2019

5. Property Tax – present status
 Analysis of Data of 20 ULBs shows -
◼ Property taxes accounted for 22% of
revenue income and mirror the trend in
OSR.
◼ However, inter-se variation in property tax
revenue per capita was sizeable even within
these relatively better-off cities.
◼ Pune had the highest property tax receipts
in per capita terms at Rs. 4325 in FY 18;
only 7 of the 20 cities reported a property
tax realisation higher than Rs. 1000 per
annum in FY 18.

6. Potential to expand revenues –
Property taxes
6
 Aggregate property tax revenue @ 0.15% of GDP (or) ~ Rs. 30,000 crore
is abysmally low
◼ Tripling property taxes to 0.45% of GDP can yield an incremental Rs. 60,000 crore at current
prices and is an achievable target and should be an immediate priority, but remains a big
challenge
 For instance,
◼ Despite Tamil Nadu’s Fifth State Finance Commission recommending an increase in property
taxes from 0.2% to 0.6% of GSDP in five years, there has been a roll back in tax increase
done in 2018
◼ In ULB in Karnataka, although the property tax fixation basis was changed to capital value,
property taxes continue to be fixed on the basis of 2010 Guideline values instead of the
prevalent Guideline or market values. CRIS analysis (illustration below) suggests that revision
to the 2018 Guideline value by itself could lead to doubling of property taxes
Illustration to assess PT potential
As per 2010 Cap
Value
As per 2018
guideline value
As per 2018 market
value
Market value (building) Rs. / sq. mt 6456 23,200 41426
Taxable capital value of land 137200 3,50,000
Taxable capital value of building 322800 11,60,000 2071300
Depreciation value of building 3228 1,31,788 252698.6
Taxable capital value of the building after depreciation 319572 10,28,212 1818601
Taxable capital value of land + building after depreciation 456772 13,78,212 1818601
Property tax Rs. 3090 10,061 13403
Upside potential - ~225% ~333%

7. Property Tax – Universal Local Tax
 Most important autonomous revenue source
of local governments across the world
 Can provide access to broad and expanding
tax base
 Compare to indirect taxes and grants it
promotes broader efficiency aspects
 Accounts for almost 100 per cent of tax
revenues in several developed countries
 Degree of reliance varies; it is linked with
decentralisation and stronger tradition of local
governments

8. Property Tax - Concept
 Unresolved issue – Is it a general or a
benefit tax?
◼ Both are one-sided positions
◼ Should have a land and service tax
component
 Level of government collecting property
tax revenues differs worldwide
◼ Eastern European Countries – national govt
◼ Singapore – levied by national government
◼ Indonesia/India – by local governments

9. Property Tax - Concept
 Bases and mechanism of the tax also
differ from country to country
◼ Singapore & India – ARV comparison
method
◼ Germany & France – Levy two taxes -
ARV gross rent but can use capital value
if rent info not available
◼ Brazil – market value of land and
improvements

10. Property Tax – Relevance
 Most appropriate local tax…
◼ Satisfies theoretical requirements of a local tax -
immobility, non-exportation and non-redistributive
◼ Properties are a primary source of storing
accumulated wealth; hence, a clear indicator of
wealth
◼ Properties are visible and immobile, Property tax is
therefore unavoidable and easy to administer
◼ Space specific not subject to fluctuations
◼ Most appropriate tax for generating local revenues,
acceptable to people
And….

11. Property Tax - Relevance
◼ Provides realistic and stable revenue base
◼ Stimulates occupiers' interest in local
government
◼ Encourages fuller occupation of property
 The worldwide movement to abolish
tax on entry of goods at the local level
is giving property tax a unique place
But in reality…

12. Property Tax - Weakening Factors…
 Inappropriate property tax policy
 Freezing of tax base due to rent
control mechanism to protect tenants
 Widespread under-reporting of actual
rents for tax purposes
 Subjective and non-transparent
practices of tax assessment
 Generous exemptions
And…

13. Weakening Factors (continued)
 Lack of indexation with inflation
 Absence of transparent, organised real estate
market leads to high taxes on property
 Inefficient tax administration
◼ Failure to bring all properties under tax net
◼ Failure to demand and recover tax from properties
under the net
◼ Absence of trained professional staff
◼ Weak enforcement mechanism, recovery and
penalty provisions
As a result…

14. Results of Weaknesses in Property Tax
 Poor revenue growth or stagnant revenues
 Loss of potential property tax due to low
assessed annual value to market rent ratio
(Bhal and Linn, 1992)
 Wide scope for discretion and corruption
 Gross disparities in property tax assessment
 Inordinately high tax rates to compensate
for narrow base; this induces evasion and
creates distortions

15. Property Tax – Components
 Tax Base – Relates more to political and
social processes and concerns
◼ Annual Rental Value
◼ Capital Value
◼ Area Base Standardisation
 Tax Rate
◼ No one way to factor correct rate of tax
◼ Important to ascertain whether it is paying --- -
-- the cost or price of the service
-- acceptable to people at large

16. Property Tax – Components (contd)
 Tax Coverage – The ratio of properties
covered under the tax to properties
liable to the tax
◼ Capturing new properties and alterations to
old properties
◼ Systematic coverage leads to buoyancy,
productivity and equity
◼ Traditionally done through field surveys
◼ In recent times, through GIS, IT and self-
assessment systems

17. Property Tax – Components (contd)
 Tax Collection or Administration – Refers
to a system through which a tax is
implemented or actualised
◼ It is the other side of the coin
◼ It envisages or requires
 Professionally qualified human resources,
 an rational organisational structure,
 Streamlined, simple administrative procedures,
 collection and enforcement mechanisms,
 recovery and penalty provisions and the like

18. Property Tax Bases - Introduction
 Tax base should closely tie tax burden
to urban growth
 Rental value reflects the value of the
property in its current use
 Capital value reflects the market’s
expectation of its future use
 Area Base Standardisation is a hybrid
system, an intermediate step towards
a capital value base

19. Rental Value Base
 Since the beginning, property tax has used
the annual rental value (ARV) as a base
 Derived from British system of taxing
rentals in a free market regime
 ARV = Gross annual rent of land and
buildings at which they may reasonably be
expected to be let
 Reasonableness not defined
 No clear guidelines to capture market rent

20. Inadequacies of Rental Value Base
 Subjectivity – Enormous discretion to
assessor, resulting in corruption
 Failure to capture prevailing market
rent ensures no buoyancy
 Low valuations of long tenancies
 Stranglehold of Rent Control Laws
 Perpetuation of inequity

21. Inadequacies of Rental Value Base (contd)
 Absence of organised and transparent real
estate and rent market
 Under-reporting of actual rents
 Generous tax exemptions
 Administrative inefficiencies
◼ Non-coverage of properties
◼ Narrow base resulting in high tax rate
◼ Non-collection of tax from properties covered
◼ Toothless enforcement mechanism

22. Area Base Standardisation
 Devised to overcome inadequacies of rental
base property tax
 Area Base Tax basically a presumptive
taxation of holdings in terms of their zonal
and structural characteristics
 Implies classification of homogeneous land-
value zones in a city, and taxing land and
buildings in terms of factors such as
location, land use, type of construction and
age of building

23. Inadequacies of Area Base Standardisation
 Lack of clarity on nature of the base – Is
it a presumptive rental value or capital
value or simply an annual value?
 Lack of transparency on how the
multipliers, their relativities and their
various figures are calculated
 Logic of multiplying the weight or
multiplier for one factor by that of
another is questionable

24. Inadequacies of Area Base Standardisation
 Rigidity
◼ The basis for a revision is unclear
◼ Are multipliers to be treated as a given?
◼ Will a revision of the multipliers be put to
public test?
 Inequity – Can create inequity
 Hardship – Can result in astronomical
increase in property tax

25. Capital Value Base
 Capital value based assessment is
applied on the current sale price of
a property
 Worldwide movement to shift property
tax to capital value base
 UK, Netherlands, Indonesia and
Thailand among countries that have
moved to capital value

26. Merits of Capital Value Base
 Most revenue productive system
 Free from stranglehold of rent
 Land and buildings can be taxed
separately
 Optimum use of land can be promoted
 Brings in benefits of area base system
 Equity and social concerns can be
better addressed

27. Issues Associated with Capital Value
Base
 Main difficulty is widespread under-
reporting of property transactions
 Real estate market not competitive and
organised
 Involves considerable administrative
costs or at least one-time costs
 Qualified professional valuers
 Qualitative data base

28. Property Tax – Part III
Reforming Property Tax
Introduction
Difficulties
Property Tax Reform Options
Other Land-Based Revenue Options

29. Recommendations for a good
Property Tax Structure
 Have a low rate, making it acceptable to the public at large
 Minimise discretion and avoid arbitrariness in assessment
 Make assessment & collection process transparent & simple
 Ensure equity among classes of tax payers and property
owners by fixing the assessments in a uniform manner in
respect of similar buildings situated in the same locality and
used for similar purposes
 Keep exemptions to the absolute minimum
 Facilitate self-assessment of property tax by property
owners and occupiers
 Evolve a specific method of levying property tax, and
 Delink the provisions of the Rent Control Act from property
tax assessment.

30. Reforming Property Tax – Difficulties
 Unpopularity – Property tax is one of
the most unpopular taxes
◼ Visible, unavoidable, direct and hurts
◼ High degree of subjectivity; no
transparency; tax payer does not know
how it is derived
◼ Based on accrued rather than realised
wealth; hence, does not take into account
ability to pay
◼ Viewed as benefit tax by citizens; high
level of dissatisfaction on service level

31. Reforming Property Tax – Difficulties
 Presumptive tax – Does not increase
with price rise
 Absence of transparent, free real
estate market
 Irregular, inadequate revisions in
the past
 Absence of database
 Politically sensitive issue

32. Property Tax – Issues/Challenges
 Inappropriate Property Tax Policy
Design (legal infirmities)
◼ Judicial ruling tying down the tax base to
the norms of standard rent
◼ Perverse incentives
 Inappropriate Tax Structure
 Inappropriate Tax Administration
(administrative infirmities)
◼ No periodic revision though law provides
◼ Poor coverage, exemptions, identification
◼ Lack of qualified valuers

33. Reforming Property Tax - Steps
 Thorough analysis of existing system
 Identifying constraints and opportunities
 Appropriate reform strategy
 Any reform strategy will have to be holistic
and address:
◼ Tax Base
◼ Tax Rate
◼ Tax Coverage
◼ Tax Collections
 Political and social buy-in important
Policy and Legal Structural
Reforms
Administrative Reforms

34. Reforming Property Tax – Corrective
Measures on Rental Value Base
 Delinking it from Rent Control Laws
 Amendment of municipal laws
 Standardisation of tax with norms for
determining annual rental value
 Eliminating assessors’ discretionary
powers
 Creation of a transparent real estate
and rent market and database
 Improving tax administration

35. Reforming Property Tax - Adoption of
Area Based Standardisation System
◼ Logical bifurcation of city, different
properties under appropriate factors after
detailed study of city
◼ Use of infotech for mapping properties
◼ Involve public to evolve appropriate factors
◼ Should be backed by self-assessment
system

36. Reforming Property Tax - Adoption of
Capital Value Basis
◼ Availability of good property mapping data
◼ Existence of transparent and competitive real
estate market
◼ Low incidence of property tax
◼ Well-trained and professional tax assessors
and revenue officers
◼ Central Valuation Board manned by experts
◼ Adequate participation of people

37. Reforming Property Tax – Supportive Tax
Policy Reforms for all Bases
 Property tax should be levied on occupiers with
concurrent liability of the owners
 Repeal Urban Land Ceiling Acts
 Reduce stamp duty
 Remove barriers from other taxes like income tax
 Set up Appellate Board or Tribunal and create strong
institutional framework
 Tax powers should be devolved to local governments
by higher governments in such a way that tax
exports are minimised

38. Reforming Property Tax – Things to
be Remembered
 Simplicity beyond a point leads to
distortion
 Multiple dimensions of equity cannot be
built in any tax

39. Property Tax – Concept,
Issues, Bases and Reforms
Thank You