The document discusses various aspects of property tax systems. It covers different methods of property valuation used for tax assessment, including the rental value base, capital value system, and area-based systems. It notes the shortcomings of the rental value system commonly used in India and recommendations for reform, including moving to alternative valuation methods and improving tax administration procedures. Key goals of property tax reforms are outlined as increasing revenues, improving equity and transparency, and reducing compliance costs. Case studies from India are also briefly mentioned.

1. PROPERTY TAX SYSTEM
SARVAJANIK COLLEGE OF ENGINEERING
& TECHNOLOGY, SURAT
URBAN GOVERNANCE AND DEVELOPMENT MANAGEMENT
Presented by: Manoj Patel Guided by: Prof. Bhasker Bhatt
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2. CONTENTS
1. Intro
2. Property tax
3. Why PT ?
4. Components and important aspects of PT
5. Application of the rental value base
6. Inadequacies in the rental value base
7. Corrective measures on the rental value base
8. Alternative methods of valuation for pt
9. The capital value system:
10. The site value system
11.The area detail or area-based system
12.The composite area-linked system
13.Why PT reforms?
14.Case study Surat city
15.References
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3. Discussion on how to improve
financial viability of local governments
streamline the flow of funds to them
parameters of state control over local governments.
The 73rd and 74th Constitutional Amendment Acts, 1992 and
Article 280(3) have altered the fiscal devolution system and
framework between states and municipalities.
Under the new fiscal devolution system, every five years, each
state government is required to set up a finance commission to
review the financial position of local governments.
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4. Property taxes have been levied by local governments since ancient
times. These taxes constitute local bodies‟ most important
autonomous revenue source, especially for urban governments.
Jurists define the term property as a title or ownership conferred by
law in respect of tangible goods or things to a person.
Because the state gives rights to owners of property for its exclusive
use, enjoyment, possession, and disposal, the government can
legitimately tax such properties.
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5. As observed by McCluskey (1999), “The property tax is a unique
mechanism for local revenue generation. The primary store of
accumulated wealth in both developed and developing countries
is in real estate. Such property is visible, immobile, and a clear
indication of one form of wealth.
The property tax is thus difficult non-distortionary, to avoid or to
shift and if well administered can represent a and highly efficient
fiscal tool.”
PT is a space-specific tax and not subject to constant fluctuations
in its returns therefore it can be a very reliable revenue source for
local governments.
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6. 1. Tax base
2. Rate
3. Coverage
4. A tax collection system
1. Tax Base:
The valuation of land and buildings is the base for PT.
The choice of a PT base whether annual rental value or capital value
or standardized area base tends to relate to social and political
processes or concerns.
Consequently, one can observe different countries adopting different
bases for PT assessment, there is a definite preference for the capital
value base of PT. A municipal body may select a particular base for
PT, but “it should also be kept in mind that the purpose of property
valuation is only to arrive at the relative value of properties at a
given time. 6

7. 2. Tax Rate:
There is no one way to factor the correct rate for PT. Concentrating
on the proper valuation of property to avoid underestimation of the
tax base and to levy tax at lower rates seems a better practice than to
have high tax rates and a narrow tax base.
3. Tax Coverage:
Coverage is another very important component of any tax.
There should be an attempt to bring each and every property onto
the PT books.
Tax coverage was conventionally achieved through field survey by
tax inspectors, but recent innovations such as the use of geographic
information systems (GISs) and information technologies for tax
mapping and self-reporting from property owners.
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8. 4. Tax Collection System:
Although the tax collection system is obviously a very important
component of any tax system,
It is the most inefficient aspect of PT in developing countries.
The tax collection system consists of an enforcement mechanism,
stringent recovery provisions, and penalty provisions, which are
weak in developing countries.
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9. Historically the PT system in India has used the concept of annual
rentable value (ARV). The basis of taxation is derived from the
British system of taxing rentals in a free market.
Most relevant legislation defines ARV as the rent at which the
property might reasonably be expected to be let from year to year
after allowances for certain deductions (such as cost of repairs,
insurance, and so on). Service taxes are often levied also; along
with PT; these service taxes include taxes for water, sewerage,
street lighting, and so forth.
Most urban local governments do not have any guidelines for
capturing the prevailing market rent,
In countries with reasonable rent as the base, PT rates have become
largely discretionary, and this situation has often led to corruption.
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10. 1. Policy and Administrative Constraints:
An assessor‟s subjective judgment in deriving ARV can lead to gross
variations in tax assessments on the same premises for identical use,
between old and new buildings on the same street, or for buildings in the
same vicinity having the same land use ARV. Such discretion often leads
to undervaluation of properties, creating a fiscal gap and revenue loss that
increase over time.
There is often an absence of reliable data on the rental market. In the
absence of such data, rent estimation has become discretionary.
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11. 2. Legal Constraints:
The provisions in the rent control laws for fixing fair or standard
rent levels have depressing effects on the determination of the
ARV
3. Behavioral Constraints:
Lack of proper attitude of assessors toward assessment and
corruption among assessment officers also cause problems.
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12. 1. Removing the ARV from Standard Rent
The ARV assessment could be removed from standard rent through
amendments to the rent control laws or the municipal acts. This would
result in increased revenues as well as more efficient functioning of the
property market and use of land.
2. Changes in Rent Control Laws
Rent control laws are very stringent in the fixation of standard or fair rent.
Though these laws differ from country to country, a few basic reforms are
needed for all rent control laws. Most countries‟ legislation calculates
standard rent with respect to a fixed base year. This base year should be
modified, and standard rent should be linked to market rent to redefine the
base. Rent control laws also need to allow periodic increases in standard
rent.
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13. 3. Alternate Valuation Bases
Alternative valuation bases include replacement of the ARV by capital
value, site value, and an area detail system. There are only a few
practical alternatives to the existing ARV method. Various studies have,
however, suggested ways of widening the PT base, such as taxation of
plant and machinery, full taxation of government- and owner-occupied
properties, taxation of vacant land, and substitution of “reasonable” rent
by actual rent.
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14. The Capital Value System:
The capital value–based assessment is applied to the current sale price of
a property.
Properties incapable of producing rent are to be taxed on a cost or profit
basis that resembles capital value.
SEVERAL MERITS:
•A capital value–based tax system is the most revenue productive system.
•It can help to preserve the merits of an area-based system in a transparent
manner.
•Valuation of land and buildings can be undertaken separately, allowing
optimum use of land through an inclination in favor of construction.
•Variation in value because of usage can be taken care of through rate
differentials.
•The valuation rolls can show the value of unimproved land and that of
improvements separately. 14

15. • The main difficulty in adopting capital value as a base for PT
is the widespread underreporting of property transactions. This
is due to the high incidence of a variety of taxes on property
by all levels of government, as well as the widespread use of
“black money” in such transactions.
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16. Site value–based assessment is a variant of capital value–based assessment,
but it is applied only to land.
The use of site value–based assessment suffers from the same drawbacks as
capital value based assessment.
Site value assessment can be effective in planned locations with designated
uses for permissible floor-area construction.
In old cities, adoption of the site value system of assessment could prove
punitive to property owners residing in high value zones.
Use of the site value system of assessment is practical only in new towns
with zoning and development controls, not in towns and cities that have had
spontaneous growth.
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17. An area-based tax system is devised to overcome the problems of the
rental value based system. The area detail system is basically a
presumptive taxation of holdings in terms of their zone and structural
characteristics.
It implies classification of homogeneous land value zones in a city and
taxing land and buildings in terms of a few factors that appear to be the
main determinants of their value for example, location, land use, type of
construction, and age of buildings.
Although the area detail system is supposedly a tax on the physical
attributes of a property.
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18. It has helped local governments to increase their fiscal health;
drawbacks,
1. Lack of Clarity about the Nature of the Base
2. Lack of Transparency
3. Rigidity
The usual formula for assessing area-based PT as under
PT = (rate) x (area in square feet) x (f1 x f2 x f3 x f4)
The value of property can be derived as a discrete function of five or six
attributes
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19. PT to be levied should take into account the level of services
provided to the properties as well as their physical
characteristics.
The unit area value of different groups can be determined with
respect to location, structural characteristics of buildings, year of
construction, prevailing market values or rents of lands and
buildings in the locality.
The Composite Area-Linked System
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20. PT reform is a global phenomenon because urbanization is
increasing, thus the scope, volume, and complexity of urban services that
must be provided by local governments is increasing.
Fiscal needs of local governments are increasing. Because PT is the
mainstay of local public finance and the only real local and productive tax
source, reforms are inevitable.
The objective of PT reforms should not only be to increase PT revenues,
but also to lead to improvement in equity, transparency, simplicity,
reduction of arbitrariness, and minimization of compliance and collection
costs.
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21. 1. Property enumeration and mapping
2. Records management
3. Public information
4. Revenue collection
5. Incentives and penalties
6. Self-assessment
7. Periodic updating of valuation.
These reforms should include
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22. PROPERTY-TAX STRUCTURE
April 01, 2010 onwards
Area Based Property Tax System
Formula for calculation of Property tax
Property Tax = R X M X A
Where, R stands for the Annual Rate
M for the product of various factors = { (Factor 1) X (Factor 2) X ( Factor 3) X (Factor 4) }
A stands for the area of the property
Annual Rate (A)
For Residential Properties : Per square meter per annum – Rs. 10
For other properties : Per square meter per annum – Rs. 21
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23. Area of the Property (A)
The area of property under assessment depends upon the carpet area of the
property. While calculating carpet area, whole area except area of the external as
well as internal wall will be considered.
Factors affecting the property tax:
(A) Factor - 1 : Factor depending upon the location
(B) Factor - 2 : Factor depending upon the duration of the year wise
construction of property
(C) Factor - 3 : Factor depending upon the kind in case of residential property
and use in case of Non-residential property.
(D) Factor - 4 : Factor depending upon usage person/entity
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24. Education Cess
General Tax Percentage (%) of General Tax
Residential Property Non-Residential Property
200 to 500 5% 10%
501 to 3000 10% 20%
3001 & above 15% 30%
Minimum Tax Calculation
Sr.
No.
Residential Property Non-Residential Property
Area
(Sqmt)
Minimum Tax Area
(Sqmt)
Minimum Tax
Water
Zone
Non-water
Zone
Water
Zone
Non-water
Zone
1 < 25 60 36 < 15 540 459
2 25 to 50 120 72 15 to 30 660 561
3 > 50 180 108 > 30 780 663
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25. User Charges
Area
(in Sq.Mt.)
Residential Property
Non-Residential Property
(Except Industrial-A
Property)*
Water +
Drainage
Solid Waste
Water +
Drainage
Solid Waste*
Up to 15 180 240 270 240
16 to 25 270 240 405 240
26 to 50 360 240 540 240
51 to 100 540 240 900 300
100 to 200 720 240 1200 300
Above 200 900 240 1500 300
* Solid Waste is Rs. 600/- per Annum for Industrial-A Property.
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26. ARREARS
Rents, collection, tax which are still left, not paid or remaining by the
owner due to any reason in previous year transferred to current year.
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27. Q-1 What are the base reference documents applicable to Property taxes? Which
are the relevant and applicable laws and circulars and their amendments
from time to time?
A-1 The corporation is governed by the Bombay Provincial Municipal
Corporation Act 1949; as such it is an autonomous body, but refers to the
state government on a need basis and at the centre level it falls in the
Ministry of Urban Development. Matters related to Property Tax are
covered in chapters 1, 8, 11 including clause 409 of the BPMC Act 1949.
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28. Q-2 What are the Compulsory registers/documents to be maintained by the
corporation in relation to ptax?
A-2 Assessment book for the past few years is maintained with the Zonal
Assessment & Recovery Office and can be viewed by any taxpayer during
specified time period. These assessment books are kept open for the property
holder every year in the month of April and the notice regarding this is
published in the news papers in April. Within 15 days of publishing of such
notice in the news paper, any tax payer can raise the objection regarding the
assessment by submitting Vandha Application to Appellate officer.
Q-3 How is Property defined and what all could be liable to Property Tax?
A-3 Each property is defined by the unique Tenement Number e.g. 01A-01-0001-
0-001. Property tax shall be levied in respect of all buildings and lands in the
city except…
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29. Q-4 Do open plots invite taxes?
A-4 Yes, they do invite taxes. As per BPMC Act the span of property tax is not
only limited to buildings, even the land falling under the jurisdiction of the
corporation is covered in it.
Q-5 What are the components of Property Tax?
A-5 Components of Property tax are as under [Section-129]
[a] General Tax, [b] Water Tax, [c] Water Charge, [d] Conservancy Tax and
[e] Betterment charges.
Q-6 When does a property get listed out from assessment?
A-6 In the unfortunate case of fire, earthquake or such other calamity due to
which the property remains unoccupiable or vanishes entirely.
The residual open plot is still liable for these taxes.
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30. References
1. February 2002. “Property Tax Reform Options and Issues.” Paper presented at the
National Seminar on Reforming the Property Tax, United Nations Development
Program and National Institute of Urban Affairs, Bangalore - India
2. Bagachi Soumen (2003), „Politics and Economics of Property Taxation‟, Paper
presented at the 3rd International Convention of Asia Scholars organised by the
National University of Singapore, August 19-22, 2003.
3. Dillinger, William (1991), Urban Property Tax Reform: recommendations and
guidelines, Washington DC: World Bank
4. Ravindra A. and Vasanth Rao (2003), „Reforming the Property Tax‟, Study Report,
National Institute of Urban Affairs. New Delhi: UNDP
5. Book: Municipal finance in the metropolitan cities of India, JAI BHAGWAN
6. SURAT MUNICIPAL CORPORATION LINKS
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31. THANK
YOU
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