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ECON Publications Department of Economics
2009
Urban Property Tax Potential in India Urban Property Tax Potential in India
Om Prakash Mathur
Debdulal Thakur
Nilesh Rajadhyaksha
Roy W. Bahl
Georgia State University
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Mathur, Om Prakash; Thakur, Debdulal; Rajadhyaksha, Nilesh; and Bahl, Roy W., "Urban Property Tax
Potential in India" (2009).
ECON Publications
. 112.
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URBAN PROPERTY TAX POTENTIAL IN INDIA
OM PRAKASH MATHUR
DEBDULAL THAKUR
NILESH RAJADHYAKSHA
with
assistance from
ROY BAHL
JULY, 2009
NATIONAL INSTITUTE OF PUBLIC FINANCE AND POLICY
NEW DELHI
ii
Contents
Sl. No. Contents Page
No.
Study Team
iv
Preface
v
Executive Summary
vii
1 Introduction: Context, Purpose, and Methodology . 1
2 Property Tax System: An Introduction. . 8
3 The Productivity and Performance of Property Tax Survey Results. 14
Introduction 14
Productivity of Property Tax .. 16
Performance of Property Tax . 23
4
Estimates of ALL-INDIA Property Tax Revenues: Current and Potential..
47
Introduction 47
Estimated All-India Yield: Assumptions and Results .. ... 47
Estimated Potential of Property Taxes: All-India 50
5 Tapping the Untapped Property Tax Potential: A Strategy for Reform ... 53
Annexures
61
iii
List of the Tables
Page
No.
Table 1: List of Sampled ULBs 3
Table 2: Revenue Status of Property Tax: Sample of 36 Largest Cities. 17
Table 3: Composition of Property Tax Revenues, 2006-07 18
Table 4: Size-Class Differences in Per Capita Property Tax Collection 19
Table 5: Per Capita Property Tax Yield .. 19
Table 6: Revenue Importance of Property Tax for the Sample Cities for 2006-07. 21
Table 7: Insignificant Role of Property Taxes in Meeting Municipal Expenditure. 22
Table 8: Performance of Property Tax System (Percent) ..................... 29
Table 9: Assessed Values as a % of Market Values . 31
Table 10: Methods of Valuation in use in Sampled Cities . 33
Table 11: Revenue Cost of Exemptions . 35
Table 12: Property Tax Rates . 38
Table 13: Impact of State-level Growth Factors on Property Tax Productivity . 40
Table 14: Distribution of Cities and Towns and their Population Share, 2001 ..... 48
Table 15: Estimated All-India Property Tax Yield under Method 1 . 49
Table 16: Estimated All-India Property Tax Yield under Method 2 49
Table 17: Estimated All-India Property Tax Yield under Method 3 49
Table 18: Estimated All-India Tax Demand 50
Table 19: Estimates of Property Tax Potential (Rs. Crore) . 52
List of the Boxes
Box 1: Indicators for Assessing the Performance of Property Tax System
..
4
Box 2: Methods of Assessments 9
Box 3: Rate of Property Tax 10
Box 4: What is a Property Tax? 13
Box 5: Basic Features of the Questionnaire . 23
Box 6: Estimates of Total Properties in the 36 Largest Cities .. 24
Box 7: Penal Provisions for Non-Payment or Delayed Payment.. 28
Box 8: Issues concerning taxation of central government properties examined
by the Working Group ..
37
Box 9: State Finance Commissions on Property Taxation . 54
List of the Charts
Chart 1: Per Capita Collection of Property Tax for 2006-07 (in Rs.).. 20
Chart 2: Coverage Ratios . 26
Chart 3: How Effective is the Realization of the Assessed Tax Base? ................ 27
iv
Study Team
OM PRAKASH MATHUR
Research Design and Report
ROY BAHL
Methodology and Modeling
DEBDULAL THAKUR
NILESH RAJADHAYAKSHA
HARPREET KAUR AZAD
DIBYENDU SAMANTA
RITA RAKSHIT
SATADRU SIKDAR
Data Collection and Analysis
USHA MATHUR
Word Processing
Sponsored by the
Thirteenth Finance Commission
Government of India
New Delhi
Analysis, interpretation and conclusions contained in this study are the responsibility of the
study team, and do not bind the NIPFP or its Governing Council in any way.
v
Preface
The purpose of this study entitled URBAN PROPERTY TAX POTENTIAL IN
INDIA is to estimate the potential of property taxes and suggest how that potential might be
realised. The study rests on the postulate and the commonly-held perception that the
productivity and performance of property taxes in India as a source of revenue have been
poor and that these taxes as an instrument of financing municipal services have not been used
optimally. This study focuses on estimating the money value of the potential and on the steps
that may be necessary to enhance the role of property taxes in financing municipal services.
The study has important implications for the mandate of the Thirteenth Finance
Commission (TFC). If the findings of this study indicate a large untapped potential, with
inadequate effort on the part of the states, state finance commissions, and municipalities to
tap this potential, then, prima facie, there exists no case for the TFC to provide supplementary
resources for municipalities. Indeed, a soft approach under such a situation may be inimical
to the long term financial viability of municipalities and injurious to what the Constitution
(seventy-fourth) Amendment seeks. Alternatively, given that the municipalities are still to
acquire a de facto legitimacy in the country’s federal structure, the TFC could develop and
put in place an incentive structure for the states and municipalities to improve the
productivity and performance of property taxes. This study has taken the latter option as its
guiding principle.
The study has been conducted with the data base of 36 large municipal corporations
Considering that India has 5161 cities and towns of different sizes (2001 Census), this sample
is small. Also, the data base of the sampled municipalities is fragile. Several adjustments
have, therefore, been made, first to secure the representation of small and intermediate sized
cities and towns into the data sets and, second to deal with the fragility of the data base, in
order to arrive at a reasonable estimate of the current as well as the potential yields from
property taxes. Emphasis is not so much on precision of the estimates as on identifying the
areas of under-performance, where even with relatively small efforts, gains in terms of
increasing the yields could be substantial.
The National Institute of Public Finance and Policy (NIPFP) and the research team
that worked on the study are grateful to the Thirteenth Finance Commission (TFC) for the
opportunity afforded to them for studying property taxation from the point of view of
estimating its “potential”, something that has so far not been attempted in India and possibly
in other countries. In this sense, the entire effort has been a fresh one. The research team
deeply appreciates that the Thirteenth Finance Commission (TFC) led by its Chairperson, Dr.
Vijay Kelkar and other members were able to review the earlier drafts of this study on two
occasions (3 December, 2008 and 15 May, 2009), leading the team to recognize the relevance
of other land and property based levies for property taxes and to also examine the merits of a
centralized valuation system.
The NIPFP and the research team are thankful to the World Bank for providing the
services of Professor Roy Bahl (Andrew Young School of Policy Studies, Atlanta and a
known authority on property taxation), for this study. Dr. Bahl’s continued interaction with
the team, particularly on the alternative ways in which property tax potential could be worked
out, was very useful. The team duly acknowledges his assistance.
vi
The NIPFP also places its gratitude to the Commissioners of the 36 Municipal
Corporations for providing to us the needed data and to the participants of a Consultative
Workshop of Property Tax Assessors to explain the nitty-gritty of implementing a property
tax system.
Dr. M. Govinda Rao, Director, NIPFP gave to the research team the flexibility to
structure and design the study and to carry it out in ways that it served the purposes of the
TFC. The research team would like to thank him for providing this flexibility.
The study must underline the fact that the importance of property taxation in India is
low and barely recognized. It is viewed as an inferior tax and, therefore, subject to a
discretionary treatment by the states. Seldom has it been realised that this tax is a proxy for
prices that city residents pay for municipal services. The changes that have been made to the
property tax system in a few states over the past two decades are sporadic, often lop-sided,
and not a part of any comprehensive strategy to bring it in line with the contemporary
developments such as decentralization and globalization. Immovable property offers one of
the few tax bases that can not be readily shifted to another jurisdiction and therefore, needs to
be properly nurtured. Municipalities need a stable local revenue source to be effective as
decentralized tiers. Fiscal decentralization requires better and fuller use of property taxes by
the urban local bodies (ULBs). This study reminds the team of Ursula Hicks’s seminal work
of 1961 where she noted that: “If local bodies are to play any significant part in economic and
social development, they must clearly have access to adequate finance. If they are both to act
responsibly and to show initiative, some, not negligible, part of this control over resources
must be independent, in the sense that the local councils are free to choose the rates –”
1
. It is
hoped the TFC and the Ministry of Urban Development which is seeking reform of property
taxation under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) would see
the study in this light.
Om Prakash Mathur
Professor
July 2009 National Institute of Public Finance and Policy
1
Ursula Hicks 1961. Development from Below: Local Government and Finance in Developing
Countries of the Commonwealth.
vii
Executive Summary
Property Tax System: An Introduction
The study, Urban Property Tax Potential in India, has two principal purposes: (i) to
estimate the property tax potential in India, and (ii) to suggest measures for tapping the tax
potential. The study accordingly examines the productivity and performance of property tax
and attempts to estimate the potential under alternative scenarios relating to the performance
of this tax.
2. Property tax is an important urban local tax in India, owing itself Entry 49 in the State
List of the Seventh Schedule of the Constitution. The responsibility of designing the property
tax system in India rests with the state governments. The state governments lay down, in the
statutes governing the constitution and functioning of municipalities, the tax bases for
property tax procedures for valuation, exemption and rebate policies, rate structures, and
measures for dealing with delays, tax evasion and the like. The autonomy of municipal
governments in formulating property tax policy or designing the system is severely restricted,
and allowed at best in fixing the tax rates within certain ranges and often in designing
collection strategies. In view of the property tax polices being determined at the level of the
state governments, there is a large scale diversity in almost every sphere of property
taxation
ii
. For instance: assessment and valuation of properties is done by four different
methods. One is the annual rateable value (ARV) of lands and building, second is a variant
of the ARV where the determination of ARV is with reference to location, type of
construction, age of building, and the nature of use to which a property is put; third is capital
valuation, recently brought in use in Karnataka, and the fourth is direct computation of
property tax by using a tax rate per unit of carpet area.
3. Exemptions from local property taxation constitutes an important ingredient of a
property tax system, and is a common feature worldwide. The underlying objectives in
granting exemptions are social justice, high administrative and collection cost particularly
from low tax yielding properties, and properties that provide, directly or indirectly, services
having characteristics of a merit or public good. Article 285 of the Constitution exempts
properties of the Union government from payment of property taxes. Exempted properties in
India constitute approximately 10 percent of the total urban properties and about 11 percent
of the assessed properties.
4. Provisions in respect of the rate structure of property taxes vary significantly between
states and among cities within states. There are six different ways in which rate structures are
prescribed: a consolidated rate which include imposts on the same tax rate; statutory
specification of the maximum and minimum rate; progressivity in rate structure; and
discrimination in rate structure according to use, location etc. In addition, there are area–
specific values in cities where unit area systems are in place for estimating the ARVs, and
rates of taxing the capital values where capital valuation is in use.
ii
This is in sharp contrast with the position in South Africa where there is a national law that governs the
tax system. See Michael E. Bell and John Bowman. 2002. Property Taxes in South Africa. Lincoln
Institute of Land Policy. Cambridge. Mass.
viii
These systems direct impact on property tax yields, and need to be kept in view in
understanding the role of property taxes in India’s cities and towns.
The Productivity and Performance of Property Tax Survey Results
5. Property tax revenues in the 36 largest cities in India are estimated at Rs. 4,522.3
crore
iii
, yielding a per capita of Rs. 486. Over a three-year period, property tax revenues
recorded a growth of 12.4 percent, or an average annual growth 7.9 percent which is roughly
half of the growth in per capita municipal revenues. Property tax revenues constitute 22
percent of the total municipal revenues and 28 percent of own-source revenues. Property tax
revenue are able to cover 28 percent of the revenue account expenditure. In sum, these ratios
represent the fiscal role of property tax in India. These ratios represent the fiscal role and
revenue importance of property taxes in India.
6. Property tax yield comprises (i) current tax collection, and (ii) arrears. In 2006-07,
current collections accounted for 76 percent of the total collections, with the balance being
the `arrears’. Effective annual yield of property taxes (excluding arrears) is thus Rs. 370, or
just about Rs. 1/day. Arrears represent payments withheld by property owners; high arrears
are explained by frequent amnesties that are extended by municipal bodies from time to time.
The existing systems for identification of delinquents are both weak and weakly enforced,
leading to huge revenue loss for municipalities.
7. These are large inter-city variations in property tax revenues, with the Mumbai
Municipal Corporation registering a per capita annual revenue of Rs. 1334 as against Rs. 25
by Patna Municipal Corporation and Rs. 40 by Dhanbad. While the population size of a city
has an effect on property tax revenue – a simple correlation shows a significant relationship
between property tax collection and population size (correlation coefficient 0.82) – size alone
is unable to explain such large inter-city differentials. Other factors such as coverage,
collection, and valuation influence property tax collections.
8. Revenue productivity of property taxes as measured in terms of the yields is low and
has shown, at best, a marginal rise over the three-year period of the study. There is no
evidence of this tax being a buoyant one. Moreover, its growth rate is lower than that of
municipal expenditure, indicating increasing financial strain on the municipal corporations
for maintaining the services. Property taxes are contributing less towards the maintenance of
services.
9. The total tax demanded over the study period has shown signs of stagnancy, clearly
suggesting that the rate of incorporation of new properties into the municipal tax register is
low; property tax values are not being revised as per the provisions of municipal acts; and
provisions relating to depreciation in property tax yields on account of age of building
combined with other rebates have seriously eroded the productivity of property taxes.
10. There is a large gap between tax demanded and tax collected, indicating the level of
inefficiency that exists in the implementation and enforcement of this tax.
iii
The 36 largest cities used as a sample for this study account for 35 percent of the country’s total urban
population.
ix
11. Property tax revenues are determined by a combination of policy parameters and
administrative practices, the following being the principal determinants -
• Coverage and enumeration of properties on the municipal tax register
• Collection rate
• Assessment and Valuation System
• Extent of Exemptions
• Level of the tax rate
12. An analysis of these determinants is important as the causes of India’s weak property
tax revenue performance must be identified if a programme for enhanced revenue
moblisation is to be initiated. The first determinant of revenue performance is the coverage
of properties, i.e., the percent of taxable properties that are on the municipal tax register; the
percent of total registered properties that are assessed for tax purposes; and the percentage of
tax paying properties. Note should be made of the fact that municipalities have no system in
place that enables them to have a formal count of all properties within their jurisdiction.
Delhi offers an example where the total number of properties is stated to be 25.3 lakh, but
only 9.6 lakh properties are on the municipal tax register. Absence of a formal count of
properties is one of the major handicaps in reaching a more accurate estimate of the
property tax potential in India.
13. 88 percent of properties are on the tax roll of municipalities and 63 percent of the
assessed properties pay taxes. Of the total properties, the tax paying properties constitute 56
percent. Exclusion of 44 percent of properties from the tax net and the fact that they do not
contribute to the provision and maintenance of municipal services is a major problem that
severely limits the role of property taxation in the economy of cities.
14. Non tax-paying properties comprise (i) exempted properties, (ii) vacant properties,
and (iii) properties that are not on the tax roll of municipal governments. The exempted
properties comprise, approximately 10 percent of the total and 11 percent of the assessed
properties. Apart from the exemption of charitable and religious properties and low-valued
properties that are exempted for equity reasons, Article 285 of the Constitution of India
exempts the property of the Union from payment of property tax on the principle that a
soverign can not tax itself. Pursuant to this provision, central government properties are
excluded from the purview of municipal taxation. However, such properties are subject to
the payment of “service charges” for services which include not only direct services such as
water and electric supplies, scavenging etc. but also general services such as street lighting,
drainage, approach roads connecting the central government properties, etc. (Ministry of
Finance letter No. 14(1) – P/52-1, dated 10 May 1954; No 4 (7) – p/65, dated 29 March,
1967.)
iv
.
iv
It is not altogether clear if the central government properties uniformly pay service charges. The final
report gives instances from court cases where levy of service charges and the basis of calculating the
service charges has been contested.
x
15. A policy question that arises in respect of non tax-paying properties is whether the
cost of these is too high. Measurement is a problem as exempted properties are not subject to
valuation, and therefore, the amount of property tax foregone is difficult to estimate. This
study, therefore, attempts to impute the average tax liability for taxed properties to exempted
properties, according to which 11.74 percent of revenue is lost due to exemptions (money
value of exemption/total property tax collection x 100).
16. Reference may be made here of property valuation and its impact on the overall
performance of the property tax system. Significantly, the property tax system does not make
any provision for assessed value to approximate market value of properties, although the
prevailing rents and the sale value of properties represent the market conditions. Market
value of properties which forms the base for taxation in many countries is not explicitly
incorporated in India’s property tax system. The study finds four types of property tax
systems in the country which reflect property values but none of which approximates market
values. Spotty data suggest assessed values to be markedly lower than the market values,
often as low as 8-10 percent but on average, about 30 percent of the market values. Absence
of the concept of market value in the determination of property values constitutes a major
lacuna in the property tax system which is a major factor in depressing the property values
and consequently the property tax yields
v
.
17. The revenue performance of property tax is significantly effected by the collection
rate, i.e., the percent of “demand” that is actually collected. Low rate of tax collection, i.e.,
tax collected as a proportion of tax demanded, is common feature in the 36 largest cities. On
average, collection rate is 37 per cent of the tax demanded; of the 36 cities, 9 of them report a
collection rate of less than 40 percent and 4 of them between 40-50 percent. The highest
collection rates are reported form the municipal governments of Karnataka, Tamil Nadu,
Kerala, and Andhra Pradesh. Low collection are a characteristic of city governments in Bihar
and Madhya Pradesh. Low collection rates are also a dominant feature of Delhi, and the
municipal corporations of Gujarat and Maharashtra, the latter two otherwise reporting higher
per capita collections. The opportunity cost of a lower coverage and collection rate is
extremely high; bringing all cities to a 85% rate could increase property tax revenues to Rs.
22000-32000 crore without effecting any change in other variables.
18. To what extent are property values influenced and impacted by larger, state-level
economic factors such as economic growth, the efficiency with which the states use their tax
instrument, literacy levels, and the like. It is an important line of enquiry, primarily to see if
property taxes are an integral part of the larger economy or used as an isolated instrument for
revenue raising. It is significant that property tax displays a weak link with the regional,
state-level economy; the correlations run between property tax revenues and state’s gross
domestic product (GDP) and state’s tax to GDP ratios are 0.41 and 0.42 respectively. The
importance of this tax in the hierarchy of taxes in low.
v
There is no data on the market value of properties except what is occasionally published by the Real
Estate Companies. Many states, however, use guidance values or circle rates as benchmarks for
registration of property transactions. Random check shows these to be significantly lower than the
prevailing market values.
xi
Estimates of All-India Property Tax Revenues: Current and Potential
19. India has a total of 5161 cities and towns of different population sizes (Census of
India: 2001). The survey of property tax potential study covers the 36 largest cities in the
country. In order to estimate the current levels of property tax collections for the 5161 cities
and towns (i.e., an All India, urban estimate). Three methods are used to develop these
estimates. The first assumes that the remaining 5125 municipalities raise, on average, an
amount equivalent to that raised by the four municipalities with the smallest populations in
the large city sample. The second method is based on per capita collection of those among
the 36 largest cities which show the poorest collection performance. A variation of the second
method has been used where state-wide estimates are made and aggregated, using the per
capita collection showing the poorest collection performance in each state
vi
.
20. The All-India estimate of property tax yields varies between a low of Rs. 6,274.4
crore and a high of Rs. 9,424.4 crore, or between 0.16 and 0.24 percent of the country’s gross
domestic product (GDP). These are far below the average for the developing countries (0.6
percent) and 0.68 percent for the transitional economies. Raising these ratios to the
developing countries norms requires firstly, a proper recognition of the role that property tax
plays in the finances of municipalities, and secondly a design and structure of property tax
which is consistent with the objectives envisaged under the Constitution (seventy-fourth)
Amendment Act, 1992.
Estimates of Property Tax Yields: All India (Urban)
Cites and Towns Amount
(Rs crore)
% of
GDP
36 largest cities 4522.3 0.109
5125 small and intermediate cities
Estimate 1: average of the 4 smallest municipalities
within the sample
3893.5
All India -Total 8415.8 0.202
Estimate 2: lowest yield from among the sampled cities 1752.1
All India-Total 6274.4 0.151
Estimate 3: lowest yield from among the sampled cities
in each state
4902.1
All India- Total 9424.4 0.227
21. The primary objective of this research study is to estimate the revenue potential of
urban property tax in India. A restatement of this objective is “what is a reasonable
expectation for revenue mobilization from the property tax”. Revenue potential is a relative
term, representing a gap between the current level of revenues and the revenues that would be
generated under “optimal” or “normative” considerations. The Jawaharlal Nehru National
Urban Renewal Mission (JNNURM) for instance, fixes two targets in respect of property tax:
(i) raising coverage of properties by putting in place a Geographical Information System
(GIS), and (ii) raising collection to tax demanded ratio upto 85 percent within a seven-year
period ending in 2012 A.D. Unquestionably, low coverage and low collection hold vast sums
of money untapped. This study also points to large scale undervaluation of properties for
taxation purposes, and observes arbitrariness in fixing tax rates. The former impacts the
vi
Detailed methodology is contained in the final report.
xii
property tax yields, while the latter delinks the property tax from the concept of benefit
taxation.
22. There are several models for estimating the tax potential. What has been attempted
here is based on two basic objectives that underline the current efforts aimed at improving the
performance of property taxation in the country, namely improve tax coverage and collection.
Thus, two estimates: (i) what would be the resulting tax yield by raising the coverage of
properties to 85 percent of the total; (ii) what would be the resulting tax yield by raising the
collection rate of property taxes relative to total tax demand to 85 percent, are presented here.
Estimates of Property Tax Potential (Rs. Crore)
Estimates Estimates of the
current property
tax yields (Rs)
Estimates of
property tax
potential (Rs.)
% of GDP
Estimate 1 8,416 29,346 0.708
Estimate 3 6,274 21,877 0.527
Estimate 3 9,425 32,864 0.793
Potential =
}
}
percent85topercent37fromcollectiongsinrai)b(
percent85topercent56fromeragecovgsinrai)a(
23. These are substantial improvements over the existing yields. What is important to
note is that these are possible to be achieved by strengthening administrative procedures.
While increasing the tax coverage and collection are immediate, compelling objectives, the
study also notes that reforms of property tax system requires improved valuation and
rationalisation of the structure of tax rates. The real potential of property taxes lies in
correctly assessing the property values and in choosing a rate structure that corresponds to the
concept of benefit taxation. Assessed to market values of properties, as the study shows, are
in the range of 30 percent, although supplementary data shows it to be 8-10 percent.
Similarly the structure of tax rates is obsolete country-wide This study does not attempt to
estimate the potential that remains trapped in these two areas, but suggests the need to carry
out reform both in the area of assessment as well as the structure of tax rates.
24. A third method is to estimate the effort that would be needed to raise the potential tax
yield to 1 per cent of the country’s gross domestic product, i.e., comparable to what the
developing countries have. Property tax to GDP ratio in India has not undergone any change
over the past several years. Income-elasticity of property tax is very low. Raising it to 1
percent will require broad-based efforts involving coverage, collection, assessments and
restructuring of the tax rates.
Tapping the Untapped Property Tax Potential
25. Tapping the potential of property tax requires appropriate policies and effective tax
administration. To achieve a sustained increase in yields, both need to be addressed. The
agenda comprises –
i. Broadening the tax base by instituting a GIS system for mapping properties in all
cities with a population of 100,000;
xiii
ii. Establishment of Central Valuation Board in each state, on the lives of the West
Bengal Central Valuation Board in order to standardize property valuation;
iii. Indexation of property tax values so as to help maintain the real level of property
tax revenues as tax valuation do not increase automatically with inflation
iv. Improving collection efficiency by establishing a system of collection efficiency
that is able to identify tax evasion and delinquency and enforcement of penal
clauses.
v. Use of guidance values in assessing property value
vi. Reinforcing the JNNURM with a mandate to issue guidelines for the reducing the
gap between assessed and market value of properties.
26. The property tax generates a level of political opposition that is disproportionate to its
yields. The property tax accounts for 0.8 percent of the overall tax burden in India. A
tripling of property tax yields would therefore represent a minor increase in the average tax
burden. The inherent political liabilities of the property tax suggest that efforts to reform
should begin with a clarification of objectives as it is a major means of increasing municipal
revenues.
1
Introduction
Context, Purpose, and Methodology
Property tax is an important, possibly the most important, revenue source for local
governments in much of the developing and developed world. At the same time, it is also a
grossly underused source among the family of taxes. This is the case in India. Despite the
property tax being the principal own-source revenue for municipal governments, its
performance has been poor, in fact, poorer than most large developing and transitional
economies. In 2006-07, revenues from property taxes were estimated anywhere between Rs.
6,275 crore and Rs, 9,425 crore
1
, or 0.15 percent – 0.23 percent of the country’s gross
domestic product (GDP), compared with 0.6 percent for the developing countries, 0.68
percent for the transitional economies, and 1.04 percent for all countries (Bahl and Martinez –
Vazquez: 2008). In several Indian states, annual property tax revenues are significantly lower
than the All-India average for large cities (Rs. 486 per capita) with Bihar and Jharkhand
collecting less than Rs. 40 per capita. The property tax base in India is narrow and
constricted, with only about 50-55 percent of the 715 million urban properties paying
property taxes. Assessed value of properties for purposes of taxation uniformly lags behind
the market values; in some places, assessed values are reported to be about 8-10 percent of
market values. The income-elasticity of property tax is said to be low. The system is also
characterised by other forms of inefficiencies that are connected to the structure of tax rates
and collection strategies. As Roy Bahl puts it: “property taxation in developing countries is a
fiscal paradox. On the one hand, it seems to be everyone’s candidate for the primary source
of local government revenue. On the other hand, the property tax is little used in developing
countries”
2
.
Past studies on India’s property tax system (A. Bagchi, A. Datta, Gangadhar Jha,
R.M. Kapoor, Om Prakash Mathur, Rakesh Mohan, P.K. Mohanty, Sham Nath, Pulin Nayak,
Vasantha Rao, and Chetan Vaidya), research institutes (NCAER, NIPFP, and NIUA), and the
government appointed expert groups, committees, and commissions point to the property tax
1
Rs. 1 crore is equal to Rs. 10 million.
2
Roy Bahl et.al. 2008. Making Property Tax Work: Experiences in Developing and Transitional
Countries. Lincoln Institute of Land Policy. Cambridge. Mass.
1
2
as having the potential to be a major own-source revenue for municipal governments
3
.
Studies also indicate that the actual property tax revenues fall short of its potential, on
account of low coverage, low valuation, low collection and an obsolete tax structure.
Significantly, none of the past studies have placed a money value on its potential nor
attempted to estimate the additional tax revenues that might be generated by plugging the
systemic and operational loopholes. Significantly, studies aimed at estimating the tax
potential have also not been conducted in other countries. This study attempts to fill in this
vital gap.
Undertaken at the behest of the Thirteenth Finance Commission (TFC), this study is
designed to serve five purposes: first to assess the revenue importance of property tax in
India (i.e., current levels of property tax revenues for all municipal governments), second to
measure the performance of property tax, third to estimate the potential of property tax,
fourth to outline how the potential might be realised, and fifth to suggest a research-cum-data
base programme for improved property tax policy. The basic research question addressed
here is whether property tax can be an important source of financing municipal services in
India.
Property tax in India is commonly understood as a tax on property that permits a
municipal government to cover a part of the cost of services that it provides. It is thus in the
nature of a benefit tax. Its role is limited to revenue generation, and not extended to serving
other purposes such as optimizing the use of land. Nor is it considered as a mechanism to
solve economic, political, and social problems. Nor are property tax remissions or rebates
used for influencing economic growth and development, e.g., attracting business and industry
to specific areas within cities and towns.
For purposes of this study, property tax potential is assumed to depend on two sets of
factors: the first set of factors, endogenous in nature, are those that are linked to the base of
property taxation, valuation system, including revaluation, determination of the rate structure,
and the design of collection strategies, while the second set consists of those that are assumed
to impact property values via the larger economy-wide economic and fiscal factors. The latter
are exogenous and assumes that a relatively growing regional and city economy would have a
positive effect on property values and consequently on property tax revenues. The former
3
See bibliography.
3
has a direct impact on property tax revenues, while the impact of the latter accrues via the
property values.
The study mainly uses the property tax data of a sample of 36 cities (29 cities with a
population of over 1 million and seven cities with a population ranging between 500,000 and
1 million). The list of sampled cities is in Table 1. Recognizing that the property tax values
of these cities may not represent the value of properties in the relatively small and
intermediate-sized cities, appropriate adjustments have been made to the property tax data of
the sampled cities (See chapter 4). Measuring the performance of property tax is an integral
part of the study. Typically, it requires an examination of the structure of the property tax
market, property tax base, revenue structure, and collection efficiency. Given the data
constraints, the study uses a set of indicators that relate firstly to the property tax system, i.e.,
the extent to which the prescribed system or framework allows it to be used as a source of
revenue, and secondly, the efficiency with which it is applied. Box - 1 provides a list of
performance indicator.
Table 1: List of Sampled ULBs
State Municipal Corporations
Andhra Pradesh Hyderabad, Vishakhapatnam, Vijaywada
Bihar Patna
Delhi Delhi
Gujarat Ahmedabad, Surat, Rajkot, Vadodara
Haryana Faridabad
Jharkhand Dhanbad
Karnataka Bangalore
Kerala Kochi
Madhya Pradesh Bhopal, Indore, Jabalpur
Maharashtra Greater Mumbai, Pune, Nashik, Nagpur
Orissa Bhubaneswar
Punjab Amritsar, Ludhiana
Rajasthan Jaipur
Tamilnadu Chennai, Coimbatore, Madurai
Uttar Pradesh Lucknow, Allahabad, Agra, Meerut, Kanpur, Varanasi
West Bengal Kolkata, Asansol, Durgapur
The study simultaneously assesses the impact of regional (state) growth and fiscal
performance on property tax revenues, and addresses the question: to what extent is property
tax revenue linked with the regional economic and fiscal performance?
4
Box 1
Indicators for Assessing the Performance of Property Tax System
Coverage
• Assessed properties (AP) as a % of total properties (TP)
• Tax-paying properties (TPP) as a % total properties (TP)
• Tax-paying properties (TPP) as a % of assessed properties (AP)
• Annual growth rate of tax-paying properties (AAGR-TPP) vis-à-vis the annual
growth rate of assessed properties (AAGR-AP)
Collection
• Tax collection (PTC) as a % of tax demanded/assessed (PTA)
• Tax collection (PTC) as a % of total municipal revenue account expenditure (MRE)
• Tax collection (PTC) as a % of expenditure on providing joint services (MR-JS)
• Tax arrears (PT-AR) as a % property tax demanded/assessed (PTA)
Assessment
• Assessed property values (APV) as a % market property value (MV)
Property tax potential is a relative term; it connotes a gap between the current tax
yield and what the tax may yield under certain conditions. A text book views it as “the
amount of revenue that could be raised in a given jurisdiction if a normal tax rate is applied to
a base that is narrowed by normal exemptions, and is subjected to a normal level of
administrative effort”. This definition makes it clear that the measurement of revenue
potential will be no easy matter (Roy Bahl: 2009). The potential is envisaged here under two
scenarios: one under which assumptions are made with respect to the improvements that are
essential to be made in broadening the tax base, narrowing the distance between assessed and
market values, improving collection, and aligning the tax rate structure to meet the cost of
joint services. Assumptions are drawn from the protocol of the Jawaharlal Nehru National
Urban Renewal Mission (JNNURM) which is seeking country-wide reform of property
taxation. A second method used here is to use the performance level of property tax in
developing and transitional economies as the targeted norm for property tax reform in India,
and to estimate the extent of changes that would be needed in collection, coverage and other
aspects in order to reach the developing countries norms. Needless to add, tapping the
potential, whichever way it may be estimated, is a major fiscal challenge for India.
Central to the study is the nature of reform that should be in place for improving the
performance of property tax system, tapping the potential, and making it an important source
5
Property tax is a key
ingredient of fiscal
empowerment for
municipal governments.
of revenue for financing and maintaining municipal services and infrastructure. This study
makes specific suggestions in this regard, which are divided into short-term, immediate
measures and those that are of a long term nature. Reform of property taxation is vitally
dependent on the perception of state governments about the role of municipal governments in
urban development and broadly, in economic and social
development, poverty alleviation, and slum
improvement and upgrading. The Constitution
(seventy-fourth) Amendment, 1992 seeks
empowerment of municipal governments including their fiscal empowerment. Property tax is
a key ingredient of fiscal empowerment for municipal governments. Reviews of the reports
of the State Finance Commission (SFCs) which are mandated under the Constitution to assess
the financial position of municipal governments and make appropriate recommendations on
their fiscal domain show that in estimating their financial needs, while some kinds of
expenditure norms have been applied, issues relating to norms for revenue enhancement have
been ignored. None of the SFCs have laid down or considered any norm for property tax
collection. This is an important gap and needs to be corrected
4
.
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) - a seven year
reform-linked grant programme of the Government of India, also requires the JNNURM
cities to achieve within a span of seven years (2005-2012), improved coverage of properties
with a Geographical Information System (GIS) and 85 percent collection of property tax
demanded. As the JNNURM enters its fourth year, it shows that there is no reliable count of
the number of properties in cities and towns, and therefore, fixation of any target relating to
the universe of properties is, at best, conjectural until a GIS is established. Moreover,
notwithstanding the JNNURM, two states namely Haryana and Rajasthan have abolished
property taxation, while nearly two-thirds of properties are outside of the purview of property
taxation in Punjab. Such steps are inimical to what the 74
th
Constitutional Amendment
envisions for municipal bodies. This study suggests reinforcement of the JNNURM mandate
in respect of property taxation as also a broadening of its scope to include (i) valuation
system with the aim of reducing the gap between assessed and market values, and (ii)
rationalisation in tax rate setting methodologies. It also underlines the need to establish a GIS
4
This aspect has been examined in some detail in another study report titled as “The State Finance
Commissions: An Agenda for Reform”. 2009. National Institute of Public Finance and Policy. New
Delhi.
6
By improving coverage and
collection, urban property tax can
yield a sum anywhere between
Rs. 21,877 crore to Rs. 32,864 crore
annually; much more is possible by
effecting improvements in
valuation and rate structures.
in all cities and towns as a priority and as a basic step in tapping the potential of property
taxes.
The study recognizes that there are two other land-property linked taxes, namely
capital gains tax levied by the central government, and stamp duties on conveyance by the
state governments ; however, no exploration is made in this study if capital gains tax and
stamp duties – both having a high buoyancy, have a dampening effect on property taxes in
any way. The study takes the view that while all the three taxes are meant to appropriate a
part of the value of land and property or the value of the transactions, the purpose for levying
property taxes differs from the purposes that govern capital gains and stamp duties. It is the
premise of the study that property taxes have a raison detre of their own.
Interest of the Thirteenth Finance Commission in commissioning this study is,
therefore, timely. Property tax is a legitimate local tax. Its importance in financing
municipal services forms a part of
the goals envisaged under the
Constitutional (seventy-fourth)
Amendment and the Jawaharlal Nehru
National Urban Renewal Mission
(JNNURM). On a conservative
estimate, for example, simply by
improving coverage and collection, urban property tax can yield a sum anywhere between
Rs. 21,877 crore to Rs. 32,864 crore annually; much more is possible by effecting
improvements in valuation and rate structures. This study lays out a road map for realising
the potential of this vastly under-used tax.
The report is laid out in five sections including the section on the Context, Purpose
and Methodology. Section - 2 provides a brief introduction to the property tax system in
India. Apart from indicating the general statutory framework within which the system
functions in India, it also points to the declining relevance of the framework and its inability
to capture the shift in the real estate market. Section - 3 gives the results of a survey of
property taxation in 36 largest cities; these results with appropriate adjustments form the
basis of working out the all India estimates of property tax yield and subsequently of property
tax potential. The results indicate huge lags in performance and attempt to bring out where
7
the lags lie. Section - 4 provides all-India estimates of current level of yields from property
taxes and potential yields, respectively, using various assumptions. The last section offers
suggestions on the steps for tapping the tax potential. Given that the study is based on an
extremely limited and poor quality data base, the study underlines the need to strengthen it
and what might be done to lay a foundation for sustained improvement in the system
5
.
5
Market value of properties in India is subjected to various forms of distortions. Many label them as
speculative prices. Adjusting such prices to reflect the true market value require field studies which
have not been carried out as a part of this study.
8
Property Tax System
An Introduction
A tax on land and property is the single most important local government tax in most
countries. It is the same in India, where it owes itself to Entry 49 in the State List of the
Constitution. For the reason of this tax being a part of the State List, the state governments
lay down the framework for its levy which refers to the tax bases (defining the universe of
properties for tax purposes i.e., which properties should be within the tax net and which
properties should be excluded), procedure for valuation, rebate and exemption policies, rate
setting, tax liability, and measures for dealing with delays and tax evasion. There are
important inter-state differences in the various constituents of the framework. For instance,
assessment and valuation of properties is done by four different methods. One is the annual
rateable value (ARV) of lands and buildings, second is a variant of the ARV where the
determination of ARV is with reference to location, type of construction, age of building, and
the nature of use which a property is put to, third is capital valuation, recently brought in use
in Karnataka, and the fourth is direct computation of property tax by using a tax rate per unit
of carpet area
6
.
The statutory frameworks contain provisions for revaluation of property values,
requiring it to be done once in three to five years; in the interim, assessment can be altered
only if additions or alterations are made to the property. No adjustments are possible in the
assessed values even if such changes are known and have actually occurred.
6
None of the state Statutes describe the object of property taxation. However, it is inferred that it is
meant to cover a part of the cost of services which are not chargeable on the basis of consumption or
use, and in this sense, it is a benefit tax. Also, property values are said to capitalise the cost of
municipal services.
2
9
Box 2
Methods of Assessments
“The annual value of land and buildings shall be deemed to be the gross annual rent at which
they (properties) may reasonably be expected to let from month to month or from year to year
less a deduction –
Provided that in the case of any Central or State government or railway building or any
building of a class not ordinarily let the gross annual value of which cannot, in the opinion of
the Commissioner be estimated, the annual value of the premises shall be deemed to be six
per centum of the total of the estimated market value of the land and the estimated present
cost of erecting the building after deducting for depreciation a reasonable amount which shall
in no case be less than ten per centum of such cost”.
The Madurai City Municipal Corporation Act.
“116E: The annual value of any covered space of building in any ward shall be the amounts
arrived at by multiplying the total area of such covered space of building by the final base
unit area value of such covered space and the relevant factors as referred to clause (b) of sub-
section (2) of Section 116A”.
The Delhi Municipal Corporation Act.
“127(7): i - The rate of rental value per sq. ft. shall be fixed by the Municipality with the
prior approval of the State government having regard to the situation, use and the type of
construction of the holdings; ii - the Annual Rental Value shall be computed as a multiple of
the carpet area and the annual value fixed under sub-rule (i); iii - the rental value per sq.ft. of
carpet area for different classes of holdings shall be published from time to time by the
Municipality with the prior approval of the State government”.
The Bihar Municipality Act.
“102. Method of Assessment of Property Tax. – (1) The taxable capital value of the building
shall be assessed (together with the land occupied by it) shall be assessed having regard to the
(market value guidance or properties published) of the land notified by the Government under
section 45B of the Karnataka Stamp Act, 1957 subject to such rules as may be prescribed, the
taxable capital value of the building shall be (equivalent of fifty percent of) the market value
guidelines of properties published under section 45B of the Karnataka Stamp Act, 1957
minus depreciation at the time of assessment as may be notified by the Government from
time to time.
The Karnataka Municipalities Act.
Likewise, there are six different ways in which rate structures are prescribed: a
consolidated rate which include imposts of various kinds on the same tax rate; statutory
specification of the maximum and minimum rate known as a ‘ceiling’ – interestingly there
exists both an upper ceiling in some states and a lower limit in others; progressivity in rate
structure; and discrimination in rate structure according to use, location etc. In addition, there
are area–specific values for estimating the ARVs, and rates of taxing the capital values where
10
capital valuation is in use. There are large inter-state differentials in the rate at which tax is to
be levied. The annual rateable values (ARVs) or property values assessed by other methods
are subjected to various forms of deductions and rebates. Thus, there are provisions for
rebates to owner-occupied houses, rebate for senior citizens, women and physically
challenged persons, rebate on early payment, vacancy remissions, depreciation as per the age
of the building, and rebates for repairs and maintenance.
Box 3
Rate of Property Tax
114D - The base of property tax on buildings in Delhi shall be between a minimum of six
percent and a maximum of twenty percent of the annual values of such buildings as may be
specified by the Corporation from time to time:
• provided that the Corporation may, at any time, prescribe fixed rates between the
minimum and the maximum rates of tax as aforesaid for different colonies or for different
groups of buildings in such colonies;
• provided further that the Corporation may also introduce graduated rates of tax within the
minimum and the maximum rates of tax as aforesaid on the basis of straight line system
or any other system as may be specified by the Corporation.
Explanation – “Straight line system” shall mean the system in which the rate of tax
is equivalent to the annual value of a property (x) divided by the minimum annual value X
and Y being added to the quotient so arrived, Y being the difference between the maximum
rate of tax and the quotient of maximum (X2) and minimum (X1) annual values.
The Delhi Municipal Corporation Act,
1957 (as amended 2007)
Exemptions from local property taxation constitutes an important ingredient of a
property tax system, and is a common feature worldwide. The underlying objectives in
granting exemptions are social justice, high administrative and collection cost particularly
from low tax yielding properties, and properties that provide directly or indirectly, services
having characteristics of a merit or public good. Article 285 of the Constitution of India
exempts properties of the Union government from payment of property taxes. Exempted
properties in India constitute approximately 10 percent of the total urban properties and about
11 percent of the assessed properties and to this extent, tax bases are narrowed and coverage
is inequitable.
11
More generally, the following categories of properties stand exempted from payment
of property taxes –
• Residential properties whose rateable values are below a minimum threshold
• Central and state government properties and selectively, properties of the other levels
of government
• Charitable organisations
• Places of worship
• Ancient and heritage monuments
• Burial and cremation grounds
• Properties used for sheltering the destitute, orphanages, and similar organisations run
on philanthropic lines
• Recognized educational institutions including hostels, libraries and play grounds
• Vacant properties of certain categories
• Slum dwellings not having any title over the land
Efficient tax collection is one of the important constituents of property taxation. The
municipal legislations lay down procedures for issuance of assessment notice, period within
which tax is required to be paid, mode of payment, and actions under the law for defaulting
on tax payment. The Bihar Municipal Act, 2007 while providing for self-assessment of the
liability, lays down a penalty ranging between 50-100 percent in case of discrepancy in the
assessed values or tax amount or under - assessment as also of a charge on the bank account
of property owners.
Over the past two decades, several state governments have made changes to the
statutory framework for the levy of property taxes, as a result of which the historically - used
system of annual rateable value (ARV) has been replaced by other methods referred to earlier
in this section (i.e. capital valuation, unit area values for determining the ARV, and rate per
unit of carpet area). Several states have made changes in the methods of billing and payment
procedures, bringing in self-assessment of tax liability, providing for hardship and anomaly
committees to consider the petitions regarding any hardship or anomaly arising out of
12
property tax imposed, levy of service charges in slums and resettlement colonies, and the
like. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) – a flagship
programme launched in December 2005, also underlines, as a part of a larger urban agenda,
the need to improve both coverage of properties and collection of tax – the former referring to
building up a proper inventory of properties for tax purposes, and the latter referring to doing
away with the inefficiencies in the system of tax collection, leakages, tax delinquency etc.
However, none of these measures can be said to be a part of any comprehensive strategy to
re-examine the role of property taxes in financing municipal services and how that role might
be best carried out. The frameworks including the changes introduced therein, are lopsided,
representing one-time adjustments. This is evident from the fact that the replacement of
using rents (hypothetical) by unit area values for estimating the ARVs has not been able to
sustain the initial step-up in the property tax yields. In Delhi, the property tax revenues have
declined as a result of putting in place a system of self-assessing the tax liability without
having an inventory of properties. None of the assessment methods proximate to capturing
the market value of properties, depriving municipalities of the buoyancy of the real estate
market. Also, none of the changes have imparted any autonomy to municipalities in matters
relating to determining the tax base or fixing the tax rate; e.g., the Kerala Municipality Act
states that any resolution (of the municipality) abolishing an existing tax or reducing the rate
at which a tax is levied shall immediately be reported to the Government and in the case of a
municipality which has an outstanding loan, such abolition or reduction shall not have effect
without the sanction of the Government. Other statutes are in the same league. The entire
emphasis of most statutes continues to be on rebates and exemptions – a race to the bottom in
a few instances
7
- which in combination with the high rate of tax delinquency, has eroded an
important part of the revenue base. Even in places such as California (USA), measures such
as proposition 13 have made adverse impacts on the finances of the state. In a recent article
Paul Krugman points out that the seeds of California’s current crisis were planted more
than 30 years ago, when voters overwhelmingly passed Proposition 13, a ballot measure
that placed the state’s budget in a straitjacket. Property tax rates were capped, and
homeowners were shielded from increases in their tax assessment even as the value of
their homes rose (New York Times: 26 May 2009). In contrast, fearing that intangible
sources of revenues may overtake tangible sources such as property taxes, attention is once
again directed on refixing and redefining the role of property taxes. Joan Youngman, for
7
There are instances where the list of exemptions has been expanded.
13
instance, has argued for an expanded role for the real property tax in an era of globalisation.
First, at a time when markets and economic activity cross borders with ease, immovable
property offers one of the few tax bases that cannot be readily shifted to another jurisdiction.
Second, in an era of tax harmonization, only a purely local revenue source permits local fiscal
autonomy. Third, the era of globalisation is also an era of devolution and subsidiarity, which
require stable local revenue sources to be effective
8
. It is in this context that property tax
system needs to be reviewed and rewritten. It is also necessary to consider the need to bring
about some degree of uniformity in the basic framework for the levy of this tax, instead of
having each state develop its own system and rules
9
.
Box 4
What is a Property Tax?
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 to avoid and if well
administered can represent a non-distortionary and highly efficient fiscal tool.
William McCluskey: Property Tax An International Comparative Review
8
Joan Youngman. 1999. Property Tax in an Age of Globalization. Mimeo.
9
The Republic of South Africa has one Act that governs the levy of property tax in the country.
14
The Productivity and Performance of Property Tax
Survey Results
Introduction
Unlike the data on taxes levied by the central government and state governments
which are regularly collected and published and which form the base for assessing their fiscal
health and determining the central and state-level fiscal policies, data on taxes levied by
municipalities and panchayats are not collected or brought together by any level of
government or governmental agency. The result is that neither there are country-wide or
state-wide data bases on the finances of municipalities nor any robust estimates of the scale
and composition of municipal revenues or of municipal expenditures are available in the
country. All assessments about their finances and financial health that have been undertaken
so far are based on an extremely limited data base, generated by studies of a sample of
municipalities that have been conducted from time to time, mainly for the central finances
commissions
10
. These studies have been made use of for pointing out that the revenue role of
municipalities in India as measured in terms of gross domestic product (0.7% of GDP) and in
terms of the revenue share of municipalities in publicly-raised resources (2.5%) is low, and
therefore needs attention. These have also been used to underscore the point that such low
levels of incomes and expenditures are grossly insufficient for meeting the infrastructural
needs of cities and towns. Many developing countries spend 4-6 percent of their GDP on
municipal services. Also, there exists no standardization in the accounting classification of
municipal revenues and expenditures, which makes inter-state and inter-municipal
comparison of their performance less than robust.
This study makes use of the property tax data of a sample of 36 largest cities in the
country: 29 of the sample cities having a population in excess of one million each, and the
balance falling in the population range of 5,00,000 and 1 million. Together these account for
10
See Om Prakash Mathur et. al. 2000. Options for Closing the Revenue Gap of Municipalities 2001/01
to 2004/05. National Institute of Public Finance and Policy, New Delhi; Om Prakash Mathur and
Sandeep Thakur. 2004. India’s Municipal Sector. National Institute of Public Finance and Policy.
New Delhi (These studies were conducted for the XIth and XIIth Finance Commission respectively).
Also, National Institute of Urban Affairs. 2004. Reform of Property Taxation. Research Study Series
No 97. New Delhi. The XIth and XIIth Finance Commission reports also contain data on the revenues
and expenditure of municipal bodies, aggregated at the level of states. However, there are
inconsistencies in the data sets provided in those reports.
3
15
38 percent of the country’s total urban population. A questionnaire (attached with the report)
was used for collecting information on (i) classification of properties; (ii) property tax
receipts and expenditure; (iii) property tax assessment system; (iv) finances of the municipal
bodies, and (v) views and suggestions on reforming the property tax system
11
. As this study
will point out later, the existing data base in respect of property tax which is the most
important source of revenue for municipalities (except in cities where octroi is levied) is
fragile, with most municipalities unable to provide information even on the number of total
properties in their jurisdictions; the number of un-assessed and under-assessed properties, and
property tax yields separately for domestic and non-domestic properties. Few municipalities
maintain any record or estimate of revenue lost on account of properties exempted from
payment of taxes, or on account of rent control, or provide any understanding of the factors
that contribute to the determination of the tax structure, suggesting that tax structures may be
ad-hoc adjustments to the historical rates with no relationship to the cost of providing joint
municipal services.
Box 5
Basic Features of the Questionnaire
The key sub-blocks of each of the five categories in which information
was sought are as under: (i) classification of properties: (a) number of total
properties, (b) number of properties assessed for taxation, (c) number of
unassessed properties, (d) number of under-assessed properties; (ii) property tax
receipts and expenditure: (a) property tax receipts, (b) service charge receipts
from central government and state government properties, (c) estimated
expenditure on property tax assessment, billing, and collection; (iii) property tax
assessment system: (a) annual rateable value with rent as the basis, (b) unit area
values for estimating the ARV, (c) unit area values per sq. meter as a basis for
taxation, and (d) capital valuation; (iv) finances of the municipal corporations: (a)
opening balance, (b) revenue receipts, (c) capital receipts, (d) revenue
expenditures, (e) capital expenditure; and (v) views and suggestions.
The weakest components in the survey results relate to (i) size and composition of the
property market, and (ii) the estimation of tax demand or tax liability. As stated earlier, there
is no system that enables a municipality to “count” properties, excepting in those cities where
a Geographic Information System (GIS) has been established. The number of such cities is
small. The size of the property market is significantly larger than what the municipal records
are able to capture. Delhi offers a case in point where roughly 15 lakh properties out of a
11
On a selective basis, checks on data were made from the budgets of municipal corporations.
16
total of 25.5 lakh or 60 percent of the total are outside of the municipal tax register. In several
cities including many in this sample, the size of the property market is not known and has
proved to be a limiting factor in estimating the potential of this tax. A second component
where data are weak relates to the estimation of tax demand or tax billing. Tax demands are
uniformly understated for reasons that are attributed to a collusion between tax assessor and
property owners. The results of the study should be seen in this context.
Productivity of Property Tax
Studies on property taxation refer to property tax as a low-productive tax. Bahl and
Linn (1992) in their seminal work point out that “the property tax does not generate enough
revenue to satisfy public expenditure demands at any given point in time, nor does it grow as
rapidly as do expenditure requirements”
12
. Other studies have presented evidence of its low
buoyancy compared to other tax instruments. In this study, the term revenue productivity is
used somewhat narrowly, referring to (i) property tax demand, and (ii) property tax yield, as
measures of productivity: the former represents the estimated liability or demand on account
of property taxes usually referred as billed tax amount, and the latter represents the actual
collections on this account.
The survey data place the total property tax liability or demand of 36 municipal
corporations at Rs. 11,432 crore or a per capita of Rs. 1,229, and collections at Rs.4,522 crore
or a per capita of Rs. 486. The difference between the liability and collection is the
unrealised tax amount. The size of the tax demand is an important indicator of what the
property tax can yield, within the existing framework of property taxation. It is the result of
the application of tax rates to the assessed value of properties that are on the municipal tax
register excepting those that are statutorily exempted from the levy of property taxation. It is
surprising that the total aggregate demand of property tax in the 36 corporations has changed
little over the three year period of 2004-05 and 2006-07, a period marked by a real estate
boom and high economic growth in the country. Increase in the tax demanded as shown in
table below is negligible. Several explanations are advanced for this stagnation: (i) a
marginal change in the number of properties in the municipal tax register, (ii) allowable
depreciation in the assessed value of properties on account of age of property, and (iii) the
12
Roy Bahl and Johannes F. Linn. 1992. Urban Public Finance in Developing Countries. A World Bank
Publication. The Oxford University Press, New York.
17
Effective annual yield of
property taxes (excluding
arrears) is thus Rs. 370, or
just about Rs. 1/day.
increasing number of dead properties – a term used for those properties which are locked out
of business failures
13
. What is to be noted that while the statutes have provisions for
depreciation in the assessed value of properties on account of age and owner-occupation,
there are no provisions to protect the real value of property tax yields excepting via
revaluations which are expected to take place every 3-5 years. The study takes note of this
and suggests a form of indexation so as to prevent any decline in the assessed value of
properties.
The total yield from property taxes in the 36 sampled city, as stated above, is Rs.
4,522.3 crore and a per capita of Rs 486. Over a three year period, property tax revenues
recorded a growth of 12.4 percent, or an average annual growth of 7.9 percent which is
roughly half of the growth in municipal revenues. Property tax revenues constitute 23 percent
of the total municipal revenues and 28 percent of own-source revenues. Property tax
revenues are able to cover 28 percent of the revenue account expenditure. In sum, these ratios
represent the fiscal role and revenue importance of property taxes in India.
Table 2: Revenue Status of Property Tax: Sample of 36 Largest Cities
Year
Revenue status
2004-05
2005-06 2006-07
Property tax demanded 11,213.7 10,965.5 11431.5
Property tax revenues (Rs. crore) 3,884.1 4023.3 4522.3
Property tax collection to tax demanded % 34.6 36.7 39.6
Per capita tax revenue (Rs.) 442.1 445.1 486
Property tax as a % of own source municipal revenue 32 30 28
Property tax as a % of total municipal revenue 26 28 23
Property tax as a % of municipal expenditure 29 28 27
Property tax yield comprises (i) current tax collection, and (ii) arrears. In 2006-07,
current collections accounted for 76 percent of the total collections, with the balance being
the `arrears’. Effective annual yield of property taxes
(excluding arrears) is thus Rs. 370, or just about Rs.
1/day. Arrears represent payments withheld by
property owners; high arrears are explained by
frequent amnesties that are extended by municipal bodies from time to time. Few state acts
provide for penalty for delayed or deferred payments which are one of the reasons for tax
13
Many attributed the rise in the number of dead properties to structural adjustments, e.g., closed mills
and factories.
18
Property tax revenues constitute less than 20
percent of municipal revenue in as many as 19 out
of 36 municipal corporations - their role in
financing municipal services is limited and the
municipalities have no choice but to rely on state
government transfers even for meeting the
recurrent expenditures.
delinquency in the country. Also, the existing systems for identification of delinquents are
both weak and weakly enforced, leading to huge revenue loss for municipalities.
Table 3: Composition of Property Tax Revenues, 2006-07
Composition Rs. crore
Per capita (Rs.)
Current 3,442.07 369.9
Arrears 1,080.24 116.1
Total 4,522.31 486.0
Revenue productivity of property taxes, varies sharply with Mumbai Municipal
Corporation yielding a per capita annual revenue of Rs. 1334 and Bangalore and Pune in
excess of Rs. 700 per capita, and Patna and Dhanbad Municipal Corporations recording a per
capita of Rs. 25 and Rs. 40 respectively. Low productivity of property taxation is not limited
to Patna and Dhanbad; it is as much a characteristic of Jaipur (36), Bhopal (97), Agra (51),
Varanasi (86), Allahabad (86), Meerut (50), Asansol (87)and Amritsar (61). Also noted are
large size-class differences in the “revenue productivity of property taxes; the average per
capita property tax yield in cities with over 4 million population is 1.55 times higher than the
average for the 36 cities; 1.94 times higher than the next size category of cities with
population ranging between 2-4 million, and several times higher than the lower size
categories of cities (Table below).
Table 4: Size-Class Differences in Per Capita Property Tax Collection
Per capita property tax collection
Population size class
2004-05 2005-06 2006-07
> 4 million 693 677 750
2-4 million 328 362 386
1-2 million 152 154 159
< 1 million 211 227 263
Average for samples cities 441 444 485
The survey shows that property tax is not the principal source of revenue for a number
of municipal
corporations, which
include not only those
corporations that have
access to octroi but also
19
the non-octroi municipalities. Property tax revenues constitute less than 20 percent of
municipal revenue receipts for as many as 19 out of 36 municipal corporations (octroi-
levying municipal corporations number is 8). Their role in financing municipal services is
limited, municipalities have no choice but to rely on state government transfers even for
meeting the recurrent expenditures.
Table 5: Per Capita Property Tax Yield
Annual per capita (Rs) Sampled cities
>700 - Bangalore, Mumbai, Pune
>500 - 700 Chennai, Kolkata, Ahmedabad, Surat, Coimbatore
400-500 Hyderabad
300-400 Delhi, Nagpur, Visakhapatnam, Vijayawada,
Vadodra, Kochi, Nashik
200-300 Indore, Ludhiana, Madurai
100-200 Lucknow, Kanpur, Rajkot, Faridabad, Jabalpur,
Bhubaneshwar, Durgapur
<100 Jaipur, Patna, Dhanbad, Bhopal, Asansol, Amritsar,
Agra, Varanasi, Allahabad, Merrut
Source: Calculated on the basis of survey of 36 ULBs.
20
Chart 1: Per Capita Collection of Property Tax for 2006-07 (in Rs)
Per Capita Collection of Property Tax for 2006-07 (Rs.)
25
36
40
50
51
61
86
86
87
97
106
108
115
139
145
161
195
241
277
291
302
305
310
310
313
313
322
443
486
500
504
535
614
616
704
811
1334
0 200 400 600 800 1000 1200 1400 1600
Patna
Jaipur
Dhanbad
Meerut
Agra
Amritsar
Allahabad
Varanasi
Asansol
Bhopal
Bhubaneswar
Kanpur
Rajkot
Lucknow
Jabalpur
Durgapur
Faridabad
Ludhiana
Indore
Madurai
Visakhapatnam
Vadodara
Nashik
Vijaywada
Delhi
Nagpur
Kochi
Hyderabad
All India
Chennai
Surat
Ahmedabad
Coimbatore
Kolkata
Bangalore
Pune
Gr.Mumbai
Municipalities
Values in Rs.
21
Table 6: Revenue Importance of Property Tax for the Sample Cities for 2006-07*
Property tax collection as a percentage of
Sample Cities Per capita
property tax
demand (Rs)
Per capita
property tax
collection (Rs.)
Own source
revenue
Municipal revenue
receipts**
Municipal revenue
expenditure
Delhi 1607 313 30.1 18.1 16.3
Bangalore 811 704 69.0 53.0 30.4
Gr. Mumbai 3438 1334 23.9 23.1 24.4
Chennai 585 500 63.7 36.7 37.2
Kolkata 1035 616 46.0 27.4 29.2
Hyderabad 665 443 35.3 35.0 47.7
Ahmedabad 2568 535 21.7 19.1 28.5
Surat 775 504 25.3 22.7 35.4
Pune 1954 811 23.9 22.7 39.9
Nagpur 603 313 20.7 18.7 22.9
Jaipur 77* 36 13.0 5.6 7.1
Lucknow 249 139 75.8 26.1 30.2
Kanpur 147 108 63.3 18.9 23.5
Visakhapatnam 352 302 23.8 17.7 26.0
Patna 101 25 27.0 11.2 9.0
Vadodara 650 305 16.2 14.6 20.3
Rajkot 1998 115 54.0 8.4 10.3
Faridabad 190 195 NA 16.7 28.0
Bhopal 168 97 26.5 12.8 10.5
Indore 1100 277 79.5 27.2 16.5
Jabalpur 159 145 35.8 18.8 18.4
Nashik 428 310 10.9 10.7 18.1
Amritsar 151 61 6.7 6.7 6.4
Ludhiana 428 241 25.4 13.1 21.1
Varanasi 131 86 67.8 19.6 17.0
Agra 47 51 46.6 11.9 12.8
Allahabad 139 86 68.0 22.1 13.0
Meerut 154 50 67.6 13.3 23.5
Vijaywada 592 310 44.0 31.8 35.3
Bhubaneswar 155 106 53.5 43.0 11.9
Dhanbad 109 40 73.6 8.1 55.6
Kochi 410 322 42.9 36.8 35.8
Madurai 563 291 45.0 28.7 18.4
Coimbatore 816 614 71.1 46.3 23.5
Asansol 102 87 49.2 28.6 36.6
Durgapur 492 161 60.9 38.7 46.3
All India 1229 486 28.5 23.4 26.6
Note: * Property tax collections comprise of current collection and arrear collection for the respective year for
the concerned ULBs. ** Municipal income (revenue) comprises of own source revenue income and
state Government transfers to revenue account for the respective ULBs. NA = Data not available.
Further, note that Jaipur has abolished property tax and put in place an urban development tax. The
figures relate to urban development tax.
Source: Survey of 36 ULBs
22
Few cities have attempted to capture the real estate boom and a relatively high
economic growth of the three-year period from 2004-05 to 2006-07 for strengthening their
revenue base who continue to be heavily dependent on state government transfers and grants
for meeting their revenue expenditure.
Table 7: Insignificant Role of Property Taxes in Meeting Municipal Expenditure
Cities Per capita property
tax (Rs.)
% of municipal
expenditure covered
by property taxes
Dependence of
municipal corporation
on transfer ratio%
Jaipur 36.0 7.0 56.6
Patna 25.5 9.0 58.5
Bhopal 96.7 10.5 51.7
Ludhiana 39.1 - 48.7
Agra 51.1 12.8 74.5
Varanasi 86.3 17.0 71.0
Allahabad 85.6 13.0 67.4
Meerut 50.2 23.5 80.3
Delhi - 16.3 39.9
* The total per capita municipal expenditure in Dhanbad Municipal Body is Rs. 72.39
In sum:
• Revenue productivity of property taxes as measured in terms of the yields is low and has
shown, at best, a marginal rise over the three-year period of the study. There is no
evidence of this tax being a buoyant one. Moreover, its growth rate is lower than that of
municipal expenditure, indicating increasing financial strain on the municipal
corporations for maintaining the services. Property taxes are contributing less towards
the maintenance of services.
• Effective annual yield of property taxes is Rs. 370, or just about Rs. 1/day.
• The total tax demanded over the study period has shown signs of stagnancy, clearly
suggesting that the rate of incorporation of new properties into the municipal tax register
is low; property tax values are not being revised as per the provisions of municipal acts;
and provisions relating to depreciation in property tax yields on account of age of
building combined with other rebates have seriously eroded the productivity of property
taxes.
• There is a large gap between tax demanded and tax collected, indicating the level of
inefficiency that exists in the implementation and enforcement of this tax. This aspect is
dealt within the next section.
23
Absence of a formal count of
properties and of a common
understanding of the term
“property” for purposes of
property taxation are major
handicaps in arriving at an
accurate estimate of the property
tax potential in India.
Performance of Property Tax
The performance of property tax as measured by the size of the revenues that it yields
is determined by a combination of policy parameters and administrative practices, the
following being the principal determinants -
• Coverage and enumeration of properties on the municipal tax register
• Collection rate
• Assessment and valuation system
• Extent of exemptions
• Level of the tax rate
An analysis of these determinants is important as the causes of India’s weak property
tax revenue performance must be identified if a programme for enhanced revenue
moblisation is to be initiated. The first determinant of revenue performance is the coverage
of properties, i.e., the percent of properties that are on the municipal tax register; the percent
of properties that are assessed for tax purposes; and the percentage of tax paying properties.
In this context, note should be made of the fact that the term “property” for purposes of
property taxation is defined in different
ways. The Mumbai Municipal
Corporation considers multi-
storeyed apartments and often
even the entire housing cooperative
society as a single property. Other
corporations and municipalities apply
the criterion of ownership for defining a property. Another fact that has a major impact on
the performance of property tax is that municipalities have no system in place that enables
them to have a formal count of all properties within their jurisdiction. The property tax
registers are thus uniformly incomplete with virtually no reliable estimate of the number of
properties in the jurisdiction of the municipalities. Delhi offers an example where the total
number of properties is stated to be 25.3 lakh, but only 9.6 lakh properties are on the
municipal tax register. In Bangalore, 40 percent of taxable properties are outside of the tax
net and these are said to be conservative estimates
14
. Absence of a formal count of properties
14
The Times of India: 1 February 2009, quoting from a seminar deliberations held at the Centre for
Public Policy (IIM), Bangalore.
24
and of a common understanding of the term “property” for purposes of property taxation are
major handicaps in arriving at an accurate estimate of the property tax potential in India
15
.
(See Box 6).
Box 6
Estimates of Total Properties in the 36 Largest Cities
Total properties in a city are assumed to be the sum of properties assessed for
taxation, those legally exempted from taxation and those which exist but are not on
the tax roll. Total properties and exempted properties can be extracted from
municipal registers, an estimate for the unregistered properties is more conjectural in
that it is based on local knowledge of new colonies or building sites, the extent of
unauthorized colonization in the city and so on.
Three methods were used to arrive at estimates of the number of properties
remaining outside the tax net (for which records were not available).
• In the first case, the cities themselves estimated the number of unrecorded
and unassessed properties.
• In the second case, cities suggested an approximate percentage of properties
that remain outside the tax bracket. In these cases the percentage was used to
arrive at the number.
• Where the city administration did not give any data, other proxy sources were
used for the purpose. For instance, the MoA signed between the cities and the
GoI for the JNNURM mission required the cities to fill in certain data
regarding property taxation. This study used average coverage ratios found in
these documents to estimate the number of properties not enumerated for
such cities.
Another level of problem with the data arose from the fact that while some cities
reported assessed properties as being separate from those legally exempt from
taxation, others did not. Thus the figure of total assessed properties in some cases is
inclusive of exempt properties. Therefore, the final coverage ratios only considered
those cities for which the corrected figures excluding exempted properties were
available.
15
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) requires all JNNURM cities to
institute a geographic information system (GIS) for creating a data base on properties, their count, size
and locations. The institution of GIS has begun in a few cities.
25
Exclusion of 44 percent of properties from the
tax net, and the fact that they do not
contribute to the provision and maintenance
of services is a major free rider problem that
constricts the tax base and severely limits the
role of property taxation in the economy of
i. Coverage ratios
According to the data from the 36 largest cities, 88 percent of properties are on the
tax roll of the sampled municipal corporations and are assessed for taxation, and 63 percent
of assessed properties pay taxes. Of the total properties, the tax paying properties constitute
56 percent. This represents the effective coverage ratio. The performance of cities in terms
of effective coverage is particularly low in such cities as Jaipur (which has abolished property
tax and replaced it with an
urban development tax that
mandates taxation of a limited
number of large properties),
Bhopal, Jabalpur, Dhanbad
and Indore. The effective
coverage ratio in these places is less than 40 percent. Many cities show a high coverage
ratio
16
, but when analysed in relation to property tax yields, suggest that high coverage is not
necessarily an indicator of high level of performance. Factors such as low assessment and
low tax rates keep the yields at abysmal low levels. Exclusion of 44 percent of properties
from the tax net and the fact that they do not contribute to the provision and maintenance of
services is a major free rider problem that constricts the tax base and severely limits the role
of property taxation in the economy of cities.
16
The data on the number of total properties is an under-estimate and should be read with this
qualification.
26
Chart 2: Coverage Ratios
% Coverage of Properties
90
98
95
91
95
92
96
82
100
97
72
58
84
92
97
78
95
92
93
90
93
13
93
88
99
90
88
79
70
74
46
72
1
67
49
84
47
34
35
24
51
72
57
52
74
76
81
79
13
67
70 70
86
56
0
20
40
60
80
100
120
BANGALORE
MUMBAI
PUNE
NAGPUR
HYDERABAD
JAIPUR
LUCKNOW
KANPUR
VISAKHAPATNAM
RAJKOT
BHOPAL
INDORE
JABALPUR
NASHIK
AMRITSAR
LUDHIANA
VARANASI
AGRA
ALLAHABAD
MEERUT
VIJAYAWADA
DHANBAD
KOCHI
MADURAI
DURGAPUR
BHUBANESWAR
ALL INDIA
Cities
Values in %
Coverage Ratio Real Coverage Effective Coverage
Source: Survey of the ULBs
Coverage ratio = Assessed properties/Total properties x 100
Real coverage = Tax paying properties/Assessed properties x 100
Effective coverage = Tax paying properties/Total properties x 100
27
Chart 3: How Effective is the Realization of the Assessed Tax Base?
100
How well do municipalities capture the potential tax base?
50 85
Bhubaneshwar
9086
100Vaisakhapatnam
84
Meerut
90
81
Vijayawada
93
79
Banagalore
9079
93
Allahabad
76
Pune
9574
Agra
92
74
Amritsar
97
72
95
Hyderabad
72
99
Mumbai
Durgapur
98
70
70
Madurai
88
70
Lucknow
96
67
93
Kochi
67
Ludhiana
78
57
Varanasi
95
52
92Nashik
51
Kanpur
82
49
97Rajkot
47
Nagpur
9146
Indore
58
35
Bhopal 72
34
Jabalpur
84
24
Dhanbad
13
Expected coverage - JNNURM
ACTUAL REVENUE GENERATING TAX BASE
Paying properties as a percentage of total properties
CAPTURED TAX BASE
Assessed as a percentage of total properties
10050 85
ACTUAL REVENUE GENERATING TAX BASE
NOTE: 100% represents the total estimated number of properties in the city OR the total potential tax base
28
On an average 37 per cent of the
tax demanded is collected - 63
percent of the aggregated tax
liability remains unrealized.
ii. Collection Ratios
The tax collection ratio, i.e., percentage of tax demanded that is actually realised or
collected is major determinant of the revenue performance of property tax. In the aggregate,
survey reports that on an average 37 per cent of the tax demanded is collected; 63 percent of
the aggregated tax liability remains unrealized. It should be noted that this proportion is
disproportionately weighted by low collection in several large cities, such as Delhi where
only 19 percent of tax demanded is collected; in Mumbai, where the collection ratio is 39
percent and in Ahmedabad, where the ratio is 21 percent. Low collections are a characteristic
of city governments in Bihar, Madhya Pradesh, Punjab and Jharkhand. Low collection rates
are also a dominant feature of Delhi, and the
municipal corporations of Gujarat and
Maharashtra, the latter two otherwise
reporting higher per capita collections. It is
significant that this high rate of tax delinquency running across the corporations persists
despite the penal provisions for delayed payments (See Box 8). The opportunity cost of a
lower coverage and collection rate is extremely high; bringing all cities to a 85% as laid down
in the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) rate could increase
property tax revenues significantly without effecting any change in other variables.
Box 7
Penal Provisions for Non-Payment or Delayed Payment
• Distraint, distress and seizure and sale of movable property
• Attachment and sale of immovable property
• Attachment of rent payable by the occupier to the owner
• Filling a suit against the defaulter in a Civil Court
• In case where sufficient distraint is not effected, then prosecution of the defaulter before a
Magistrate
• Attachment and realization from the bank accounts and other financial instruments held
by the defaulter
• Auction the property in case of unknown owner or disputed ownership, if dues not paid
after the requisite notice period.
29
Table 8: Performance of Property Tax System (Percent)
Indicators 2004-05 2005-06 2006-07
Coverage
Assessed to total properties 84.4 84.9 88.1
Tax paying properties to total properties 54.2 56.3 56.7
Tax-paying properties to assessed properties 64.1 66.2 63.7
Exempted properties to total properties 10.3 10.5 10.0
Collection
Property tax collection to property tax
demanded
34.6 36.7 39.7
Current tax collection as a % of current demand 75.4 71.2 73.8
Arrears as a % of tax demanded 66.9 62.9 59.2
Collection of arrears as a % of total properties
tax collection
26.9 25.2 23.8
iii. Assessment and Valuation System
Reference may be made here of property valuation and its impact on the overall
performance of the property tax system. Valuation of properties, it must be the amount of
property recognised, is crucial to determining how much this can tax yield. The system of
valuation therefore, holds the key to its productivity and performance
17
. Assessment and
valuation of properties in India is done under four methods. One is the annual rateable value
(ARV) of lands and buildings; the second is a variant of the ARV where the determination of
ARV is with reference to location, type of construction, age of building, and the nature of use
to which a property is put; third is capital valuation, recently introduced in Karnataka; and the
fourth is the direct computation of property tax by using a tax rate per unit of carpet area.
The following table shows the systems in use. As will be seen from the table, several cities
use mixed systems, e.g., ARV for domestic properties and capital valuation for non-domestic
properties. The system of valuation in the sampled cities is attached with this section.
17
Canada reimburse the local bodies for the loss of tax revenue on government buildings; In Switzerland,
tax exempt organisations usually pay a minimum amount; in the United Kingdom, the treasuries
negotiates with local bodies some kind of a quasi payment in lieu of loss of tax revenue.
30
Valuation Systems
System
• Annual rateable value (ARV) with rent as the basis (hypothetical rent)
• Annual rateable value (ARV) with unit area characteristics representing the base
• Capital valuation
• Tax rate applied directly to carpet
The valuation systems are to be so designed as to capture the market value of
properties. Market value is determined on the one hand, by demand and supply factors, and
on the other hand, specific locational factors, which include the quality of municipal services.
It is hypothesized, that market value is best reflected in the sale value of a property which, in
combination with other factors, is determined by the capitalised value of services provided by
municipal bodies, a part of which the municipalities recover via taxation of properties. Thus,
“rents” and the extent to which they determine the ARV and the capital values wherever the
sale value of properties is used, represent the market conditions and are considered to be an
indicator of market valuation. In one way or the other, “market conditions” are implicit in
other methods of valuation as well.
In India, none of the methods outlined above approximate the market value of
properties. For example, instead of the actual rents, hypothetical rents are used for
determining the ARVs. Guidance values form the base for determining the market value of
properties instead of the actual sale and purchase values. Guidance values represent
anywhere between 20-40 percent of the market value of properties. Unit area values are also
adjusted, ostensibly on the ground that the market value of properties as the tax base would
place a disproportionately large burden on property tax payers.
31
Absence of the concept of
market value in the
determination of property
values constitutes a major
lacuna in the property tax
system which is a major factor
in depressing the property tax
values and consequently the
property tax yields.
There exist no data on the market value of properties for cities. A survey of five cities
with respect to the market values – see the following table – shows the assessed to market
values to be ranging between 9.4 percent in the
case of Ludhiana and 31.1 percent for
Nagpur. On average, assessed values are 30
percent of the market values, although other
spotty data suggest these to be markedly
lower, often 8-10 percent of the market
values. Such assessed values narrows the tax
base and leaves the tax burdens unfairly
distributed. Market value of properties which forms the basis of taxation in many countries is
not explicitly provided in India’s property tax system. Absence of the concept of market
value in the determination of property values constitutes a major lacuna in the property tax
system which is a major factor in depressing the property tax values and consequently the
property tax yields
18
. Upgrading the valuation system is a necessary condition for improving
the property tax system. As Roy Bahl states: Government must decide what they are taxing,
they must devise a way to accurately measure this base and they must have the courage to
impellent a tax role that reflects proper values (Roy Bahl. April 2009).
Table 9: Assessed Values as a % of Market Values
Cities Assessed values as a % of market values
Faridabad 29.2
Ludhiana 9.4
Kolkata 20.3
Nagpur 31.1
Lucknow 30.3
Note should however, be made of the fact that the concept of market values carries
with it some degree of “tentativeness”. And, there are many definitions of market value,
mostly revolving around the idea of making some sort of predictions about a property’s sale
price. The Appraisal of Real Estate (1978) defined market value as:
18
There is no data on the market value of properties except what is published by the Real Estate
Companies. Many states use guidance values or circle rates as benchmarks for registration of property
transactions. Random checks show these to be significantly lower than the prevailing market values.
32
“The higher price in terms of money that a property would bring in a competitive and
open market under all conditions requisite to a fair sale, the buyer and seller each acting
prudently and knowledgeably and assuming the price is not affected by undue stimulas”
19
.
In this connection, the concept of market value and how it is applied elsewhere has
been briefly reviewed for purposes of this study. The United States offers an interesting
example where some states are moving closer to market-based assessment and others moving
away from this way of assessing values. California’s Proposition 13 is the best known case
where a statewise ballot eliminated the market value tax and adopted an “acquisition-based
system”, with taxes generally based on purchase price and annual inflation adjustment capped
at 2 percent. Several other states in the United States also limit the use of market value as the
value for taxation Limitations on local property taxes have produced greater dependence on
state aid and a consequent centralization of power and authority.
Scholars studying this aspect of property taxation point out that accuracy in
assessment is a necessary but not a sufficient condition for stability of a property tax system.
The assessment system in California’s Proposition 13 was highly accurate, but lacked any
mechanism to limit tax rates as property values soared, leaving homeowners to face rapidly
rising tax bills based on accurate assessments. Ideally, in such a situation local governments
would reduce rates and maintain stability in actual tax bills. However, “the appeal of
increased collections without any change in tax rates is often too much for hard pressed
officially to resist”
20
.
The study has taken note of these practices and made suggestions on the alternative
ways for assessing property values, without the burden of the “market values” which, in
India, carry huge distortions including policy-induced distortions.
19
William McCluskey (Ed). 1999. Property Tax: An International Comparative Review. Ashgate.
England.
20
Joan Youngman “The Property Tax in Development and in Transition”, in Roy Bahl et. al (Eds). 2008.
Making the Property Tax Work. Lincoln Institute of Land Policy. Cambridge Mass.
33
Table 10: Methods of Valuation in Use in Sampled Cities
City Valuation method
Delhi Unit Area Values for estimating the ARV
Bangalore Capital Value based ARV system
Gr.Mumbai Annual Reatable Value (rent as the basis for estimating the ARV)
Chennai Unit Area Values for estimating the ARV
Kolkata Annual Reatable Value / Capital value method for estimating ARV. Expected
to switchover to the Unit Area method in FY 2009-2010.
Hyderabad Unit Area Values for estimating the ARV
Ahmedabad Unit Area Values per sq.m as a basis for taxation
Surat Unit Area Values per sq.m as a basis for taxation
Pune Annual Reatable Value (rent as the basis for estimating the ARV) & Unit
Area for new properties.
Nagpur Annual Letting Value (rent as the basis for estimating the ARV)
Jaipur Unit Area Values per sq.m as a basis for taxation
Lucknow Unit Area Values for estimating the ARV
Kanpur Unit Area Values for estimating the ARV for residential. Capital Valuation
for commercial properties.
Visakhapatnam Unit Area Values for estimating the ARV
Patna Unit Area Values for estimating the ARV
Vadodara Unit Area Values per sq.m as a basis for taxation
Rajkot Unit Area Values for estimating the ARV
Faridabad Annual Reatable Value (rent as the basis for estimating the ARV)
Bhopal Unit Area Values for estimating the ARV
Indore Unit Area Values for estimating the ARV
Jabalpur Unit Area Values for estimating the ARV
Nashik Annual Reatable Value (rent as the basis for estimating the ARV)
Amritsar Annual Reatable Value (rent as the basis for estimating the ARV)
Ludhiana Annual Reatable Value (rent as the basis for estimating the ARV)
Varanasi Unit Area Values for estimating the ARV
Agra Unit Area Values for estimating the ARV
Allahabad Unit Area Values for estimating the ARV
Meerut Unit Area Values for estimating the ARV
Vijaywada Unit Area Values for estimating the ARV
Jamshedpur Annual Reatable Value (rent as the basis for estimating the ARV)
Dhanbad Unit Area Values for estimating the ARV
Kochi Unit Area Values per sq.m as a basis for taxation
Madurai Unit Area Values for estimating the ARV for residential. Capital Valuation
for commercial properties.
Coimbatore Unit Area Values for estimating the ARV
Asansol Annual Reatable Value/Capital value method for estimating ARV.Expected to
switchover to the Unit Area method in FY 2010-2011.
Durgapur Annual Reatable Value (rent as the basis for estimating the ARV)
34
iv. Exemption
Like in most countries, exemptions are a common feature of all statutes governing the
levy of property taxation in India. Broadly, such exemptions fall into three categories.
• Government-owned property on the ground that sovereign can not tax itself. In India,
Article 285 of the Constitution exempts the property of the Union government;
• Exemption of charitable, educational and religious properties on grounds that their
services are in the category of public goods or merit goods; and
• Low valued properties for reasons of (a) equity and (b) high administrative cost in
enforcing the property tax regime on them.
In addition, most statutes grant various forms of rebates and reliefs many of which are
comparable with international practices. These include rebates for owner-occupied properties
as well. This survey provides an inventory of the nature of properties that stand exempted in
the 36 cities (attached with this section). The survey shows that approximately 10 percent of
the total properties are exempted from the payment of property taxes
21
. The exempted
properties are not subjected to valuation and therefore, it is not possible to estimate the
property tax foregone . However, what has been done here is to estimate the revenue cost of
exemptions by applying the average tax liability per tax paying property to exempted
properties. The money value of exemptions for 36 cities is Rs. 531.2 crore or 11.7 percent of
the property tax collection of the 36 sampled cities. Given, however, that most exempt
properties including the central government properties are located on larger, and valuable
lands, the revenue cost of exemptions as given here is a gross underestimate of what
municipalities forgo. In some cities, the revenue cost is significant; in others, it is low.
Rebate and relief policy, a form of tax credit, is coded in State legislations, is often
justified on grounds of equity. Yet its application is a source of inequity as such rebates
21
A simple model for estimating the revenue cost of exemptions is as under:
RCE
x
=
where
AP
T
)NE(
D
x
RCE
x
= estimated revenue cost of exemption
NE
x
= number of exempt property
T
D
= Property tax demand for taxable properties
AP = Number of taxable properties assessed
(Roy Bahl: Notes on Property Tax Potential: April 2009)
35
create unequal tax treatment for different property uses. Tax rebates mean less revenue and
higher tax rates in certain circumstances that exacerbates problem of inefficiency and non-
neutrality. The revenue loss on this account is high. The revenue cost on the account could
be large.
Table 11: Revenue Cost of Exemptions
Revenue Cost of Exemptions as a Percent of Total Collections
(Money Value of Exemption / Total Property Tax Collected)x100
Average
for 3 years
Value of
exemptions
Rs. Crore
2004-05 2005-06 2006-07 2006-07
Bangalore 2.09 2.23 2.19 2.17 7.59
Gr.Mumbai 15.41 16.15 14.80 15.43 259.85
Hyderabad 8.41 8.04 7.41 7.92 13.14
Pune 0.42 0.38 0.30 0.36 0.80
Nagpur 0.49 0.41 0.43 0.44 0.31
Jaipur 87.01 59.03 4.91 49.80 0.52
Lucknow 7.08 6.87 6.69 6.86 2.36
Kanpur 1.61 1.85 1.64 1.70 0.53
Visakhapatnam 1.54 0.72 1.66 1.33 0.58
Rajkot 13.24 19.32 48.90 23.95 6.99
Bhopal 9.70 8.36 13.59 10.82 2.25
Indore 79.78 76.27 89.01 82.00 43.22
Jabalpur 12.62 10.78 20.41 14.93 3.17
Nashik 0.01 0.01 0.01 0.01 0.00
Amritsar 518.93 552.65 555.53 543.08 40.50
Ludhiana 115.30 106.77 106.64 109.26 41.69
Varanasi 3.83 3.49 4.71 4.16 0.49
Agra 4.72 5.92 3.17 4.36 0.25
Allahabad 1.68 2.17 2.39 2.09 0.23
Meerut 0.31 0.35 0.39 0.35 0.03
Vijaywada 2.80 2.76 2.48 2.67 0.78
Bhubaneswar 6.90 9.46 10.63 9.44 0.93
Dhanbad 0.49 0.55 0.60 0.54 0.01
Kochi 15.22 16.02 17.18 16.15 3.94
Madurai 4.88 3.48 2.22 3.46 0.60
Durgapur 1.73 1.81 3.18 2.49 0.27
Total 13.94 14.36 13.12 13.77 531.21
Source: Survey of 36 ULBs
Article 285 of the Constitution of India exempts properties of the Union from state
taxation (which includes taxation by any authority within a state.
36
Article 285 states:
• The property of the Union shall, save in so far as Parliament may by law otherwise
provide, be exempt from all taxes imposed by a state or by any authority within a state.
• Nothing in clause (1) shall, until Parliament by law otherwise provides, prevent any
authority within a state from levying any tax on any property of the Union to which such
property was immediately before the commencement of this Constitution liable or treated
as liable, as long as that tax continues to be levied in that state.
Taxation of government properties has been a contentious issue in India. A Working
Group set up by the Ministry of Urban Affairs and Employment (Government of India) in
1996 examined this issue in detail, alongwith the representations made both by the central
government and state governments (See Box 8) for the issues that the Working Group
examined). The Working Group also examined the relevant provisions in some of the state
municipal acts as well as the orders of the Ministry of Finance in respect of the levy and
payment of a service charges in lieu of a tax on properties of the Union
22
. The orders point
out that the Union government properties are subject to the payment of service charges for
services which include not only direct services such as water and electric supplies,
scavenging etc., but also general services such as street lighting, drainage, and approach
roads connecting the central government properties (Ministry of Finance: 29 March 1967).
The Working Group could not reach a consensus on this issue with the state governments
putting up arguments for a levy of a tax on central government properties, and the central
government opposing any change in the existing arrangements. The Working Group
indicated that the Constitution (seventy-fourth) Amendment Act, 1992 endows the local
bodies with a larger set of responsibilities, the discharge of which requires mobilisation of
additional resources. The central government did not find this argument strong enough to
alter its known position.
22
Ministry of Finance Letter No. 14(1) – P/52-1 dated 10 May 1954.
Ministry of Finance Letter No. 4(7) – P/65 dated 29 March 1967.
Ministry of Finance Letter No. 4(z) – PFI/74 dated 28 May 1976.
Ministry of Finance Letter No. 42(1) – PFI/79 dated 26 August 1986.
37
Box 8
Issues concerning taxation of central government properties
examined by the Working Group
• Whether the sovereign can be taxed?
• Whether self-contained properties where infrastructural properties are provided by
the concerned government agencies should enjoy preferential treatment?
• Whether lessees of government properties should enjoy the preferential treatment
accorded to government properties?
• Whether a central legislation should be brought about which could clearly define the
categories of Union properties to be taxed, the valuation procedures of such
properties, the rate structure, the exemptions and other matters conventionally
covered by the tax laws including the levy of service charges.
Extracts from the Taxation of Government Properties in India.
Report of the Working Group, July 1996.
v. Tax Rates
Setting of tax rates is an extremely important exercise in implementing a property tax
system. These rates are laid down in law or alternatively determined by the level of
expenditure proposed to be met by property taxation. In India, many states set a ceiling or a
band, even when it is argued that property tax is a local government revenue, and its
determination should, therefore, be a local government responsibility. As Michael Bill notes:
“If one wants accountability of local officials to local voters, then rate setting should be a
local power, i.e., voters would impose the limits”. In spite of this, most governments do not
give local governments unlimited rate-setting powers.
The system of tax-rate setting in India is outlined in an earlier section. This section
gives the rates of property taxation in the surveyed cities, that shows several key
characteristics:
i. Progressive tax rates, indicating that the principle of the “ability to pay” is an
important factor in the determination of the tax structure;
ii. Differential rate structure, which places a larger load for financing joint municipal
services on the non-domestic sector; the differentials are often as large as 100 percent.
38
Table 12: Property Tax Rates
City Property Tax Rates
Delhi For residential it is 6% to 10% and for non residential properties the rate
is 10%
Bangalore For residential it is 0.5% & for commercial properties the rate is 2%
Greater Mumbai General tax 30% for residential properties
Chennai For residential properties it is 13.24% to 24.8%
Kolkata For residential properties 13% (11% Gen tax +2% Howrah Bridge Tax)
Hyderabad For residential properties property tax rate ranges from 17% to 30% of
the ARV
Ahmedabad Rs 10/sq.m.for residential properties & Rs 22/sq.m for non-residential
properties
Surat Rs 10 to Rs 40 per sq.m. for residential properties and Rs 20 to Rs 80
/sq.m for non-residential properties
Pune Gen tax 14% to 38% for residential properties
Nagpur Gen tax 12% to 31% for residential properties
Jaipur District Level Committee (DLC) Rate
Lucknow ARV derived from circle rates for commercial properties. Rate of tax is
same for residential & commercial properties i.e 15% of ARV
Kanpur Rate of tax: 10% of ARV upto Rs. 1200 and 15% of ARV for more than
Rs.1200
Visakhapatnam 25.88 % for residential properties and 30% for non residential properties
Patna 7% to 9% for residential properties
Vadodara Rs 10 per sq.m. for residential properties and Rs 20 per sq.m. for non-
residential properties
Rajkot
Faridabad 2.5% for residential properties 5% for non- residential properties
Bhopal Rate of tax is 6%-8%-10% of ARV for residential properties
Indore Rate of tax is 6%-8%-10% of ARV for residential properties
Jabalpur Rate of tax is 6%-8%-10% of ARV for residential properties
Nashik 45% to 55% for residential properties and 48% to 64% for non-
residential properties.
Amritsar 10% for residential properties and 15% for non- residential properties
Ludhiana 10% for residential properties and 15% for non- residential properties
Varanasi Rate of tax is same for residential and commercial i.e. 15% of ARV
Agra Rate of tax is same for residential and commercial i.e. 13% of ARV
Allahabad Rate of tax is same for residential and commercial i.e. 11% of ARV
39
Meerut ARV derived from circle rates for commercial Rate of tax is same for
residential and commercial properties i.e. 12.5% of ARV
Vijaywada 22% for residential properties 29% for non-residential properties
Jamshedpur 6% to 8% of the ARV
Dhanbad 36% to 39% for residential properties
Kochi For residential properties it is Rs. 12/sq.m, and for commercial
properties - flat rate of Rs. 54/sq.m
Madurai Rate of tax for residential properties is 27% of ARV
Coimbatore Tax varies from 7.50% to 18% of ARV for residential properties
Durgapur Tax Rate:10% to 30% for residential properties
The tax structures in several cities do not provide for any difference in the tax rates
for domestic and non-domestic properties e.g., Varanasi, Agra, Allahabad, Lucknow, and
Meerut. In Jaipur which has abolished property tax and replaced it with an urban
development tax, the District Level Committee (DLC) plays a role in its fixation.
The table above show wide variance in the tax rates, with a large number of cities
reporting a tax rates for domestic properties ranging between 2.5 and 55 percent, and for non-
domestic properties between 5 and 64 percent. While the principles of tax setting are
generally known and understood, they have in almost all cities surveyed, not been adjusted to
the increasing cost in delivery of services on the plea that the statutes provide for a periodic
revaluation of properties. The role of tax rates in fuller utilization of property tax as a source
of revenue thus remains subordinate to other variables, mainly the revision in the assessed
value of properties.
It is evident from the above that despite the difference in the productivity and
performance of property taxes between cities, the system seem to suffer from a set of
common problems such as the inability to reach out the expanding property tax market,
inadequacy of assessment practices, and inefficient collection.
Exemption policies depress the revenues from this tax. Then, there is the
unwillingness to effectively use instruments such as tax rate setting for augmenting the
property tax base. This study also explores that performance and productivity of this tax are
influenced by other factors that are exogenous to the city system. There are, for example,
hypotheses that property values and consequently, property tax yields are impacted by larger,
40
state-level performance indicators, i.e., economic growth, the efficiency level with which the
states use their tax instruments etc. It is an important line of enquiry, primarily to see if
property taxes are an integral part of the larger economy or used as an isolated instrument for
revenue-raising. Two variables are chosen to test out this hypothesis, i.e., state-level gross
domestic product (GSDP) and tax to GSDP ratio. Are per captia property tax yields higher in
states that have a higher per capita GSDP and higher tax to GSDP ratio? Are low property
tax yields a characteristic of relating low-income states? The correlations in respect of these
are low, these being 0.41 and 0.42 respectively shows that the importance of this tax in the
hierarchy of taxes is low and that it remains unaffected by the movements in the larger
economy.
Table 13: Impact of State-level Growth Factors on Property Tax Productivity
States Per Capita
GSDP (Rs)
Tax GSDP
(%) 2006-07
Average Property Tax
Collection for 3 years (Rs)
Andhra Pradesh 33005.5 8.89 366
Bihar 10731.9 4.08 29
Jharkhand 21071.1 5.09 434
Gujarat 45608.7 7.25 197
Haryana 53268.3 8.64 10
Karnataka 33083.3 12.38 581
Kerala 42484.0 8.38 317
Madhya Pradesh 18973.5 8.17 161
Maharashtra 47878.1 7.87 970
Orissa 23207.8 6.65 86
Punjab 46757.2 7.31 155
Rajasthan 23410.9 7.82 42
Tamil Nadu 40026.8 10.57 456
Uttar Pradesh 16712.1 7.37 87
West Bengal 31651.3 4.29 461
All India 36738.4 17.74 458
Source: Economic Survey 2007-08, Ministry of Finance, Government of India
Directorate of Economics and Statistics
Indian Public Finance Statistics, 20078, Ministry of Finance
41
Annex 1 to Section 3
Exempted Properties: Public Purpose Category
States Cities Charitable Institutions Educatio
nal
Institutio
ns
Common Use Cultural
Institutions
Choultries /
Dharmshalas
(a)
Charitab
le
hospitals
and
dispensa
ries (b)
Schools,
Student
hostels
with no
profit/
Libraries
(d)
Places of
worship
(c)
Burial
and
cremati
on
ground
Govern
ment
land for
free
recreatio
nal
purposes
or no
income
derived
Ancient
monuments
protected
under an
Act. (b)
Hyderabad Exempt
Exempt if
school is
till 10th
Class
Exempt Exempt
Vijayawada Exempt
same as
above
Exempt Exempt
Andhra Pradesh
Visakhapat
nam
Exempt
same as
above
Exempt Exempt
Delhi Delhi Exempt Exempt Heritage
lands and
buildings
specified by
Archaeologi
cal Survey
of India
Ahmedabad Exempt Exempt Exempt
Surat Exempt Exempt Exempt
Vadodara Exempt Exempt Exempt
Gujarat
Rajkot Exempt Exempt Exempt
Karnataka Bangalore Exempt Exempt
(f)
Exempt Exempt Exempt Exempt
Kerala Kochi Exempt Exempt
(e)
Exempt Exempt Exempts - if
not used as
residential
quarters or
public
offices
Bhopal Exempt Exempt Exempt Exempt Exempt,
if rent
derived
is used
excl for
administ
ration of
it
Indore Exempt Exempt Exempt Exempt Exempt same as
above
Madhya Pradesh
Jabalpur Exempt Exempt Exempt Exempt Exempt
same as
above
42
Nashik Exempt Exempt Exempt
Pune Exempt Exempt Exempt
Nagpur Exempt Exempt Exempt
Maharashtra
Gr.
Mumbai
Exempt Exempt
Amritsar Exempt Exempt
(i)
Exempt Exempt
(i)
Exempt
Punjab
(Exemptions By
Order)
Ludhiana Exempt Exempt
(i)
Exempt Exempt
(i)
Exempt
Rajasthan Jaipur Exempt Exempt
Chennai Exempt Exempt
(f)
Exempt
(c)
Exempt Exempt
(g)
Exempt
Madurai Exempt Exempt
(f)
Exempt Exempt Exempt
(g)
Exempt
Tamil Nadu
Coimbatore Exempt Exempt
(f)
Exempt Exempt
(c)
Exempt Exempt
(g)
Exempt
Agra Exempt Exempt Exempt Exempt Exempt
Meerut Exempt Exempt Exempt Exempt Exempt
Lucknow Exempt Exempt Exempt Exempt Exempt
Allahabad Exempt Exempt Exempt Exempt Exempt
Kanpur Exempt Exempt Exempt Exempt
Exempt
Uttar Pradesh
Varanasi Exempt Exempt Exempt Exempt Exempt
Asansol Exempt Exempt ExemptWest Bengal
Kolkata Exempt (h) Exempt
(h)
Exempt
(h)
Exempt Exempt
Exempt
Haryana Faridabad
Bihar Patna
Jharkhand Jamshedpur
Dhanbad
Note: A blank signifies that no information is available.
(a) Without rent or rent derived is used for charitable purposes
(f) Maintained by Railways
(b) But not the residential quarters attached to it
(g) Riverbeds belonging to government with no income
(c) Exclusively used
(h) With approval of authority
(d) Building is donated by charitable institutions or dependent on grant-in-aid from
government or not run purely on commercial lines
(i) Registered charitable properties attached to it.
(e) Registered with government, or owned or occupied by municipality for teaching &
libraries open to public.
43
Annex 2 to Section 3
Exempted Properties: Properties Below Certain Threshold
States Cities Below Threshold
Threshold Level
Hyderabad may exempt residential properties occupied by owner if
annual rental value is below Rs.600
Vijayawada same as above
Andhra Pradesh
Vaisakhapatnam same as above
Delhi Delhi
Ahmedabad Annual rateable value less than Rs.600
Surat same as above
Vadodara same as above
Gujrat
Rajkot same as above
Karnataka Bangalore
Kerala Kochi (1) Building with mud walls, or roof thached with leaves
or light weight sheet and have plinth area below 20 sqm.
(2) residential building by a person from EWS, using
govt. subsidy (plinth area below 20 sqm)
Bhopal Yes, annual value below Rs.6000 (population-1 lakh or
above) or below Rs.4800 (pop less than 1 lakh)
(aggregate annual value if more than one building)
Indore same as above
Madhya Pradesh
Jabalpur same as above
Nashik
Pune
Nagpur Annual rental value less than Rs. 24.
Maharashtra
Gr. Mumbai
Amritsar Owner of a building and land occupied and un-occupied
having annual income below Rs. 2000/4000.
PUNJAB
(Exemptions By
Order) Ludhiana same as above
Rajsthan Jaipur
Chennai Yes, if annual value is less than Rs. 36, (aggregate in
case of more than one building)
Madurai Yes, if Annual Value below Rs.119
Tamil Nadu
Coimbatore
Agra Yes, if Annual value below Rs.360
Meerut same as above
Lucknow same as above
Allahabad same as above
Kanpur same as above
Uttar Pradesh
Varanasi same as above
Asansol Yes, may exempt if annual value is below Rs.300 if more
than one building then aggregate annual value
West Bengal
Kolkata Yes, Mayor-in-Council may exempt if annual value is
below Rs.300 if more than one building then aggregate
annual value
Haryana Faridabad
Bihar Patna
Jharkhand Jamshedpur
Dhanbad
Note: A blank signifies that no information is available.
44
Annex 3 to Section 3
Exempted Properties: Category ‘Others’
SOVEREIGN USE PERSONAL USE AGRICULTURAL
USE
DIPLOMATIC
or CONSULAR
MISSION
MISC.
States Cities Central (Union of India)
/State government/
corporation or municipal
properties used for
Government /public
purpose and not for
residential or
commercial purposes
Properties of urban
development
authority/ State
development
authority /State
housing board/ local
authority
Rebate on
self
occupied
residential
properties
Exemption on
self occupied
residential
properties
Land used for
agricultural
purposes
Land or buildings
belonging to
Diplomatic or
Consular Mission
of a foreign State
as Govt may
specify
Hyderabad Exempt
Vijayawada Exempt
Andhra
Pradesh
Visakhapatnam Exempt
Delhi Delhi Exempt (a) Exempt if not
leased or rented
Yes, if
occupied by
owner or heir,
covered space
is 100 sqm or
less
Yes, Buildings
excluded for
agricultural use
Ahmedabad Exempt
Surat Exempt
Vadodara Exempt
Gujrat
Rajkot Exempt
Kar Bangalore Exempt Exempt Rebate Exempt Exempt
Kerala Kochi Exempt
45
Bhopal Exempt 50%
Rebate
(1) Electric pole
erected by State
(2) Property
owned by
recognized
political party in
the State;
(3) Drinking
water fountains;
Indore Exempt Same as
above
same as above
Madhya
Pradesh
Jabalpur Exempt Same as
above
same as above
Nashik Exempt (a) Rebate on
Special
Development
Projects
Pune Exempt (a) same as above
Nagpur Exempt (a)
Maharashtra
Gr. Mumbai Exempt (a) Exempt
Amritsar Exempt Yes, which pay land
revenue
(1) Government
Nazul
23
land
(2) Newly
Constructed
buildings except
commercial
buildings and
cinema houses
for 3 yrs from
the date of
completion;
(3) Imambaras;
(4) Drinking
water fountains
Punjab
(Exemptions
By Order)
Ludhiana same as above same as above same as above
23
"Nazul Land’ is the land which is given on lease by the municipal authorities to private persons for non-agricultural purposes;
46
Rajasthan Jaipur Exempt (UOI)
Chennai
Madurai
Tamil Nadu
Coimbatore
Agra Exempt (UOI) Exempt if
owns only one
plot of 30sqm
with carpet
area 15 sqm
Any new area
included in
limits of
corporation -
exempted for 5
yrs or till the
time basic
amenities not
available
Meerut Exempt (UOI) same as above
Lucknow Exempt (UOI) same as above
Allahabad Exempt (UOI) same as above
Kanpur Exempt (UOI) same as above
Uttar Pradesh
Varanasi Exempt (UOI) same as above
Asansol May give
20% rebate
Yes, State govt
may exempt
West Bengal
Kolkata Yes, State govt
may exempt
Haryana Faridabad within lal dora
Bihar Patna
Jharkhand Jamshedpur
Dhanbad
Note: A blank signifies that no information is available.
(a) Places used for Public charity as mentioned under bye-laws and for medical relief or education of the poor, free of charge (for Public
purpose)
(b) UOI – Union of India
47
Estimates of ALL-INDIA Property Tax Revenues:
Current and Potential
Introduction
Property tax is the main revenue source for municipal governments in India. Most
local, municipal governments depend on this tax for meeting their revenue expenditures.
However, data on the yield from property taxes in India are sparse as these are in many
developing countries: the World Bank estimates that property taxes account for 40-50 percent
of local government finance in the developing countries. An earlier study of the National
Institute of Public Finance and Policy (NIPFP) showed that in 1990-91, property taxes
generated an estimated amount of Rs. 1425 crore, accounting for about one-fourth of the
municipal revenues, and forming 2.6 percent of the combined tax revenues of the centre and
the states and about 0.25 percent of the country’s gross domestic product. This estimate was
based on a sample study of 293 municipalities of different population sizes
24
. The object of
this section is first to make an estimate of the yield from property taxes for all the 5161 cities
and towns in India (Census 2001), and second to estimate the potential of this tax which is
one of the primary tasks of this study. The latter assumes that property taxes in India are
undertapped; the task is to make an estimate the under-tapped component. The property tax
data for the 36 largest cities in the country provide the main dataframe both for estimating
the current yields as well as the potential of this tax.
Estimated All–India Yield: Assumptions and Results
The 2001 Census of India recorded 5161 cities and towns of different population
sizes. The table on the following page shows the numbers of cities and towns in the different
size categories together with their share of urban population. The methods applied here for
estimating the current property tax yields (elaborated below) assume that the per capita
property tax yields for the 5125 remaining cities and towns are lower than the averages
24
Referred to in Om Prakash Mathur. 1996. “Property Tax Policy and Local Governance” in
Parthasarathy Shome (Ed.). Fiscal Policy, Public Policy, and Governance, National Institute of Public
Finance and Policy, New Delhi.
4
48
posted by the 36 sampled cities. It is a core assumption, drawing support from two
sources viz.
(i) the property tax yields are positively correlated with the population size of cities
in that the tax yields decline with the decline in the size of cities (see Table 4),
and
(ii) the land and housing prices and consequently the assessed values of properties are
lower in the smaller sizes of cities and towns compared to that in larger cities.
Table 14: Distribution of Cites and Towns and their Population Share, 2001
Population Size Class Number of Cities and Towns % Population
> 1,00,000 441 68.7
50,000 – 1,00,000 496 9.6
20,000 – 50,000 1388 12.2
< 20,000 2836 9.5
Total 5161 100.0
Three method are employed here for making an estimate of the property tax yields of
the smaller and intermediate-sized cites and towns. These are:
(i) applying the average per capita property tax yield of the four municipalities with
the smallest population in the sample to the rest of the cities and towns;
(ii) applying the per capita property tax yield of those municipalities that have the
poorest collection performance in the sample. For working out the average, all
municipalities having a per capita property tax yield of less than Rs. 100 per
capita were chosen.
A third method uses the lowest tax yield in each state to represent the average for
cities and towns in that state, excluding for those that are covered in the sample. The lowest
tax yield in each state multiplied to the urban population of that state (excluding the
population of sampled cities) provides the required yield estimates.
Results of the application of the three methods are given below:
Method 1 assumes that the non-sampled municipalities raise, an average, an amount
equivalent to that raised by the four municipalities with the smallest population in the sample.
The four smallest municipalities in the sample are Kochi, Dhanbad, Asansol and Durgapur,
which yielded a per capita average collection of Rs. 166. Applying this average to the
49
population of the 5125 cities and towns give a total yield of Rs. 3,893 crore (2006-07). On
this assumption, the total property tax in India is Rs. 8,416 crore, equivalent of 0.20 percent
of India’s gross domestic product.
Table 15: Estimated All-India Property Tax Yield under Method 1
Cities and Towns Amount
% of GDP
36 largest cities 4,522.3 0.109
Estimate under method 1: average of the 4
smallest municipalities
3,893.5 0.093
All-India total 8,415.8 0.202
Method 2 applies the per capita collection of those municipalities that have the lowest
performance in the terms of property tax yield to the population of 5125 cities and towns. Per
capita collection is worked out for all municipalities with less than Rs. 100 per capita
collection. Twelve municipalities in the sample reported a per capita collection of less than
Rs. 100. The average per capita property tax collection for these 12 cities is Rs. 75. The
results of imputation are shown in table below:
Table 16: Estimated All-India Property Tax Yield under Method 2
Cities and Towns Amount % of GDP
36 largest cities 4,522.3 0.109
Estimate under method 2: average of the 12
lowest yield municipalities
1,752.1 0.042
All-India total 6,274.4 0.151
A third method is to apply the lowest tax yield in each state to the urban population of
that state (excluding the sampled municipalities). These yields applied to the urban
population of the different states give an estimated tax revenue of Rs. 4902.1 crore, as shown
in table below.
Table 17: Estimated All-India Property Tax Yield under Method 3
Cities and Towns Amount % of GDP
36 largest cities 4,522.3 0.109
Estimate under method 3: lowest yield in each
state as the norm for smaller municipalities
4,902.1 0.118
All-India total 9,424.4 0.227
Property tax yields in the country, according to these methods are placed between a
low of Rs. 6,274 crore and a high of Rs. 9,424 crore, or between 0.151 percent and 0.227
50
percent of the country’s GDP, far below the yields in other developing countries. Estimates
are also made of the total tax demand under the two assumptions, the results of which are
contained in the following table.
Table 18: Estimated All-India Tax Demand
Cities and Towns Amount % of GDP
Tax demand for 36 cities 11,432.5 0.275
Tax demand, average tax demand for the smallest
four municipalities
6,909.0 18,341.5 0.442
Tax demand, average per capita lowest tax demand 6,471.9 17,904.4 0.431
Estimated Potential of Property Taxes: All-India
“Revenue potential” is a subjective term and is commonly taken as the amount of
revenue that could be raised in a given jurisdiction if a normal tax rate is applied to a base
that is adjusted to normal exemptions and is subjected to a normal level of administrative
effort. This definition makes it evident that estimation of the potential is no easy task; also
suggests that the revenue potential is dependent on the goal that is to be pursued in reforming
the property tax system and the assumptions that necessarily accompany the reform
measures. It could be higher or lower depending on the objectives fixed for reforming the
property tax and the constraints imposed. For instance, as Roy Bahl notes (April 2009), a
property tax could be viewed as a benefit levy designed to cover a specified share of the cost
of urban services, subject to administrative constraints. Or, the goal could be to increase the
rate of revenue mobilization, subject to some limits on how high the effective rate of property
rate could be. Or, the goal might be to allow cities to compensate for the loss of x percent of
transfers from the state government. Property tax potential will depend on the goals that are
to be pursued. The revenue potential of the property tax is as much a matter of political
economy as it is a matter of tax structure and administration. Different objectives will imply
different revenue potential targets.
51
There are several models for estimating the tax potential
25
one of which is footnoted.
What has been attempted here is based on two basic objectives that underline the current
efforts aimed at improving the performance of property taxation in the country, namely
improve tax coverage and collection. Thus, two estimates: (i) what would be the resulting tax
yield by raising the coverage of properties to 85 percent of the total; (ii) what would be the
resulting tax yield by raising the collection rate of property taxes relative to total tax demand
to 85 percent, are presented here.
25
The Capacity Effort Approach: Economists have long been intrigued by the possibility of estimating
the level of tax effort in various countries. The tax effort model is:
T = f(TC,e)
Where T = tax collections
TC = taxable capacity
e = tax effort, usually taken to be willingness to pay (or impose) taxes
Taxable capacity in this approach is the same as tax potential as defined above. Tax effort (e) is
defined as the
TC
T
e =
extent to which actual tax collections reach their potential.
Estimation: Two approaches have been taken to estimate tax effort. Both are based on direct
estimation of taxable capacity (tax potential).
In the regression model,
TC = f(X
i
, u)
Where TC is usually measured as the ratio of tax collections to GDP, and the X
i
are a set of exogenous
variables usually chosen to reflect the degree of economic development of the country (state).
The representative tax approach defines tax capacity (potential) as the product of the tax rate (r
i
) and
tax base (B
i
) for all taxes in the system, i .e.,
∑
=
ii
BrT
Both approaches are subject to the same criticism, first, they measure the tax potential of each country
(sate) relative to the average. Second, neither approach takes account of differences across countries in
the efficiency of the tax administration. This is a major short coming because the extent to which a
developing country realizes its tax potential may be primarily dependent on the efficacy of its tax
administration.
Results for the Property Tax: These approaches have focused less on the property tax than on total
tax potential and on the potential of the major taxes in the system. There are some revenue potential
estimates for the property tax.
(Roy Bahl: An Informal Note on Revenue Potential of Property Taxes, April 2009.)
52
Table 19: Estimates of Property Tax Potential (Rs. Crore)
Estimates Estimates of the
current property
tax yields (Rs)
Estimates of
property tax
potential (Rs.)
% of GDP
Estimate 1 8,416 29,346 0.708
Estimate 3 6,274 21,877 0.527
Estimate 3 9,425 32,864 0.793
Potential =
}
}
percent85topercent37fromcollectiongsinrai)b(
percent85topercent56fromeragecovgsinrai)a(
These are substantial improvements over the existing yields. What is important to
note is that these are possible to be achieved by strengthening administrative procedures,
without touching upon policy-level interventions.
While increasing the tax coverage and collection are immediate, compelling
objectives, the study also notes that reforms of property tax system requires improved
valuation and rationalisation of the structure of tax rates. The real potential of property taxes
lies in correctly assessing the property values and in choosing a rate structure that
corresponds to the concept of benefit taxation. Assessed to market values of properties, as the
study shows, are in the range of 20-30 percent, although supplementary data shows it to be 8-
10 percent. Similarly the structure of tax rates is obsolete country-wide This study does not
attempt to estimate the potential that remains trapped in these two areas, but suggests the
need to carry out reform both in the area of assessment as well as the structure of tax rates.
A third method is to estimate the effort that would be needed to raise the potential tax
yield to 1 per cent of the country’s gross domestic product, i.e., comparable to what the
developing countries have. Property tax to GDP ratio in India has not undergone any change
over the past several years. Income-elasticity of property tax is very low. Raising it to 1
percent will require broad-based efforts involving coverage, collection, assessments and
restructuring of the tax rates.
53
Tapping the Untapped Property Tax Potential
A Strategy for Reform
Introduction
There are two main expected outputs of the study: (i) an estimate of the potential of
property tax in the country, and (ii) a strategy for tapping the untapped tax potential.
Estimates of the potential as noted in the previous section suggest that improvement in the
performance of this tax via better coverage and collection could raise the yield from this tax
to about 0.53 percent – 0.79 percent of the country’s gross domestic product from the current
level of about 0.151 percent to 0.227 percent. It is a substantial step-up, the realisation of
which would make a decisive impact on the finances of municipalities as also the service
levels that municipalities are responsible for. The study calls for suggestions on a strategy
that the Thirteenth Finance Commission (TFC) can put in place for realising the potential
within the bounds of Article 280(3)(c) of the Constitution. This study attempts to do it
without, however, the constraints imposed by Article 280(3)(c). The past two decades,
especially subsequent to the judgement of Justice Jeevan Reddy on the system of valuing
properties in the Patna Municipal Corporation, have witnessed in the country a number of
steps that aim at reforming the property tax system. These steps have brought about a change
in the method of assessing property values from the age-old annual rateable value based on
hypothetical rents to unit area values or capital values
26
. This change has been effected partly
to eliminate the arbitrariness in the application of the ARV method as also to offset the
effects of rent control on assessed values. A second change that has come about relates to the
channels of payment of property taxes which have been opened up to include payment via
banks, internet and the like.
Note may also be made of the fact that the State Finance Commissions (SFCs) set up
in pursuance of Article 243 I and 243 Y of the Constitution too have made suggestions in
respect of reforming property taxation. The following box shows the nature of suggestions
made by a sample of State Finance Commissions.
26
Unit values involve determination of ARV with reference to location, type of construction, plinth area,
age of buildings and use of properties. In practice, it is seen as an alternative to ad valorem based
system.
5
54
Box 9
State Finance Commissions on Property Taxation
• Effect an annual increase in property values using land appreciation values or an inflation
rate, so as not to impose heavy burden at the time of the 5-yearly general revision;
• Tax mapping by using Geographical Information System (GIS)
• Computer fitted mobile van for tax collection
• Enhance rebate according to the age of property
Third Tamil Nadu State Finance Commission
• Assess property values on a rational basis consistent with the use and type of building
• Cap these values so as not to put undue burden on account of the change in the valuation
system.
Third Haryana State Finance Commission
• Use modern methods like the GIS for mapping the properties and increasing the coverage
• Introduce a self assessment system based on a unit area method for assessing values
Second Uttaranchal Finance Commission
The Jawaharlal Nehru National Urban Renewal Mission (JNNURM) is a key central
government intervention in urban development. A feature that distinguishes the JNNURM
from other central government initiatives is that it combines a grant-in-aid component with a
slew of urban sector reforms. The JNNURM visualizes that the urban sector reforms will
help eliminate the distortions in the land and housing market, improve the fiscal and financial
base of municipal bodies, bring about transparency and good governance, and reach out to the
urban poor. Property tax reform is an important ingredient of the JNNURM reform agenda
which aims on (i) broadening the property tax base by improving coverage of properties via a
Geographical Information System (GIS), and (ii) improving tax collection - - the underlying
postulates being that the current tax base is narrow and the rate of tax delinquency is high,
and both needs to be corrected. The JNNURM has laid down a collection target of 85
percent: the JNNURM cities have undertaken to achieve these targets within a period of the
Mission’s tenure of seven years. Other reform measures within the JNNURM like reform of
rent control laws and reduction in stamp duties are also like to positively impact on property
tax revenues. Thus, the concern with regard to improving the performance of property tax has
grown in the country, with the JNNURM being the latest expression of the need to undertake
reform of this tax instrument. It is also implicit in the Constitution (seventy-fourth)
Amendment Act, 1992 which aims at empowerment of urban local bodies. It has created a
demand for a framework for major reform in local government finance.
55
This study reinforces the need to continue with the reform of property taxation already
underway and argues that –
i. the scope of the property tax reform as contained in the JNNURM is narrow and
needs to be expanded;
ii. there is need to complement the JNNURM property tax reform agenda;
iii. while property tax has not been a buoyant tax, its productivity stands impeded on
account of a “soft budget” response to the fiscal and financial needs of the municipalities; a
hard budget constraint would be necessary to make property tax work effectively.
iv. the State Finance Commissions need to play a direct role in adequately assessing the
potential of this tax, and formulate state-specific responses to tapping the property tax
potential.
A Strategy for Reform
This study has shown widespread infirmities and inefficiencies in the way the
property tax system currently operates in the country. It has shown property tax revenues to
be depressed for reasons that are rooted in (i) a narrow and constricted tax base which is the
outcome of both the large scale statutorily exempted properties, and the low proportion of
properties forming a part of the municipal tax register, (ii) high rate of tax delinquency on
account of weak enforcement of provisions relating to non-payment or delayed payment of
taxes, (iii) inability of the assessment systems to capture the market value of properties and
(iv) obsolete tax rate structures. Consequential revenue loss is estimated on some of these
counts. Likewise, tax potential is also estimated on assumptions of better collection and
coverage.
What follows is a proposed strategy for reform. It must be stated that although the
property tax is ubiquitous, it generates little revenue compared to other tax instruments. It
may still be so, even after the quality of property tax administration and other policy-related
reforms are put in place. Yet, it is necessary to aim at achieving a sustained increase in yields,
by addressing inappropriate policies and poor tax administration. The following are the key
ingredients of a strategy for reform.
56
1. Update Municipal Tax Register
An inventory of properties and their incorporation in the municipal tax register is a
basic requirement to tap the property tax potential. Referred to in literature to as Discovery
and Identification is to bring all properties in a city on the municipal tax register by means
of either a system of self-declaration wherein a taxpayer or property owner is induced to
provide information to the municipal authority or a municipal-led inventory of properties
either by using its staff to monitor the property market or via a Geographical Information
System. Global experience indicates that self-declaration has a limited success and wherever
experimented with, had to be supplemented by field audits. By far, the most common
approach to building up an inventory has been for the fielding staff to obtain the required data
for administering the tax. The virtue of this approach is that it permits a field verification, the
drawback is its cost. An inventory system based on a GIS ensures that all properties are
listed and assigned an ineradicable identification code. The JNNURM requires it to be done
in the JNNURM cities, as a means to enlist all properties for improving coverage of
properties.
This study proposes that a Geographical Information System be extended to all cities
– 441 in number which have a population of 1,00,000 persons (2001 Census), and a proper
system to update the GIS inventory on an annual basis be established to do away with the
need to repeat the GIS in the foreseeable future. The study proposes the cost of the GIS to be
met out of a dedicated grant-in-aid by the 13
th
Finance Commission as also the cost of the
mechanisms that may be needed to regularly update the inventory of properties. The study
considers this step as basic to broadening the tax base and improving the aggregate tax yield.
2. Establish State-Level Valuation Boards
A major reform that is crucial to improving the productivity of property taxation is
uniformity in valuation and assessment of properties. Assessed values as noted in Section 3
are underassessed, and often the result of a collusion between property owners and municipal
authorities. A decentralized system of assessing values is found to be sub-optimal and subject
to various forms of abuses. The study proposes that a Central Valuation Board be set up in
each state on the lines of the West Bengal Central Valuation Board. Key features of the
procedures followed by the West Bengal Central Valuation Board include.
57
• Resolution of a municipal council or board, requesting the Central Valuation Board to
initiate the process of revaluation of lands and buildings, as per the provisions of the West
Bengal Municipal Act, 1993.
• Notification by the state government that the Valuation Board will take up revaluation of
lands and buildings.
• Central Valuation Board requests the municipality to forward copies of the ward map,
wardwise list with total number of holdings, and also a street list.
• Public notice asking the tax payers to file a statement of their properties
• Training of the field staff by the Central Valuation Board in assessing property values
• Actual valuation and assessment and its publication for public review and objections
• Resolution of objections etc.
The study finds huge merit in having a standardized system of valuation which is
possible to be applied across municipalities. The fact that valuation lists, prepared by a set
of staff properly trained, are published add to the transparency of the system, and help in
better compliance. The study recommends establishment of Central Valuation Board and
further proposes the cost of establishment of such Boards to be met by the Thirteenth Finance
Commission for a period not exceeding five years, after which the cost of such Boards shall
be met by the municipalities.
3. Index Valuations
Although property prices have been and are buoyant revaluations are needed if these
are to be reflected in tax assessments. The traditional approach to revaluation is to rely on
periodic field surveys, on a schedule determined by the state governments. This practice is
the relic of a pre-inflationary age, when property prices were relatively stable, and field
inspections served as a means of updating information on new constructions, as well as
adjusting prices. Under inflationary conditions, it results in a rapid real decline in assessed
values: a 10% annual inflation rate reduces the real value of an assessment by half in five
years. Failure to revalue during periods of inflation is often self-perpetuating: as valuations
fall in real terms, taxpayers become accustomed to low effective levels of taxation; as the gap
58
between tax valuations and market values widens, the political costs of revaluing to market
values rises, prompting further deferment of revaluations.
Annual indexation of such values is one way to address the issues of declining values
of property tax yields. While indexing, over time, tends to yield less accurate valuations than
field inspection, the amounts involved are small enough that the loss in fairness is well
justified by the gain in buoyancy.
4. Widen the scope of the Property Tax Reform under the JNNURM
Improving the coverage of properties and tax collection is one of the key reform
agendas under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). These
are unquestionably crucial to any reform of property taxation. However, the untapped
potential of this tax lies in (i) under-assessment of property values, and (ii) the ad-hoc
determination of tax rates for raising revenues. These are key determinants of the level of
revenues from property taxes.
The study proposes that the property tax reform as envisaged under the Jawaharlal
Nehru National Urban Renewal Mission (JNNURM) be expanded so as to include guidelines
to states for (i) narrowing down the gap between the assessed value of properties and market
values, and (ii) rationalization of structure of property tax rates. Sufficient evidence exists on
the disconnect between the assessed and market values as well as the obsolete rate structures
which bear little relevance to the cost incurred in providing various municipal services. The
study proposes that the JNNURM guidelines may suggest (i) use of guidance values or
circle rates for assessing property values; in several states, guidance values are revised on an
annual basis and are a better indicator of the market value than the unit area values
determined on the basis of the physical characteristics of the area, (ii) establishment of a set
of principles or a formulae for setting the tax rates.
In addition, there are other important areas such as reducing the list of exempted
properties, implementation of the Ministry of Finance instructions with respect to Central
government properties, and enforcement of penal clauses in order to reduce tax default and
delinquency. Exemptions and favorable treatment for particular types of properties have
adversely affected the property tax base. The obstensible objective of these policies is to
59
promote a variety of distributional or allocative objectives – to shift the tax burden onto
higher income groups. Irrespective of the objectives that underlie such exemptions, the
principle of benefit taxation should apply uniformly all properties. The reform of property
taxation must aim at pruning of the exempted list, by drawing up guidelines on what should
be exempted.
Data Base, Research and Property Tax Policy
The legal framework which governs property taxation in India empowers the state
governments to lay down – whom to tax; what to tax; at what rate to tax; how often to revise
assessments and tax rates and by how much, and what actions to take in case these steps do
not run the prescribed course. The powers of the state government in respect of this tax are
absolute; the municipal bodies levy the tax, and the only flexibility that they have is to choose
the rate within the limits and parameters imposed by the state governments. The changes that
have been made in the property tax system are partial and do not account for the concomitant
changes that become necessary when the assessment system changes. At no stage has the
property tax system been reviewed in its totality. It has also not kept pace with the shifts that
have come about in the role of municipal bodies, following the Constitution (seventy-fourth)
Amendment Act, 1992.
An important finding of the study is the extremely poor data base on property taxes
and a poor understanding of the role of property taxation in local area development. No
analysis exists of the incidence of property taxation and low it can be altered so as to
maximize land and housing market. In comparison, several countries have examined the
issue of property taxation far more thoroughly so as to use it effectively for financing
municipal services. In Ontario (Canada), property tax system has been reviewed an examined
by as many as eight Committees and Commissions.
• The McLennan Commission, 1902
• The Smith Committee, 1976
• The Blair Commission, 1976
• The Provisional – Local Government Committee, 1978
• The Ontario Fair Tax Commission, 1993
60
• The Greater Toronto Area Task Force, 1996
• Who does What Panel, 1996
• Establishment of Ontario Municipal Property Assessments Corporation 2001 (renioned
the assessment function from the Provinces)
No nation-wide study of property tax system exists in India. The study proposes a
one-time allocation of Rs. 5 crore for an Expert Group to review and examine the existing
system, compare it with the systems operating in other countries, and suggest what might be
done to make property tax a viable and buoyant source of revenue for financing municipal
services.
In closing, it is crucial to point out that reform of property taxation will deliver under
conditions where there is a hard budget constraint. Given the wherein political liabilities
attached with this tax, sustained improvement is unlikely as long as other means of increasing
resources are available for financing municipal services. The availability of open-ended or
discretionary grants has generally undercut efforts to improve property tax administration.
Large-scale recurrent account transfers combined by discretionary grants and vaguely defined
functional responsibilities have eliminated any support for property taxation. It is opportunate
that the 13
th
Finance Commission take cognizance of these trends and propose such measures
as would enable this tax to play its legitimate role in the economy of cities and towns
61
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64
Questionnaire
PART 1
Classification of Properties
URBAN PROPERTY TAX POTENTIAL IN INDIA
Number of properties
Nature and classification of properties
2004/05 2005/06 2006/07 2007/08
A. NUMBER OF TOTAL PROPERTIES
B. NUMBER OF PROPERTIES ASSESSED FOR
TAXATION
(a) Number of assessed properties that
paid taxes
(b) Number of assessed properties that
defaulted on payment
(c) Number of assessed properties that
disputed the assessment
C. NUMBER OF UN-ASSESSED PROPERTIES
Statutory and other form of exemptions
(a) Number of properties whose values are
below a certain threshold
(b) Number of properties which serve a
public purpose
(c) Number of properties whose occupants
belong to a disadvantaged category
Estimated number of properties not counted or
enumerated for purposes of taxation
Number of slum properties connected to
municipal services, i.e., street lighting, solid
waste collection, and paved roads
(a) Number of slum properties paying
property taxes
65
(b) Number of slum properties not paying
property taxes
(c) Number of properties paying charges
for water or other services
D. NUMBER OF UNDER-ASSESSED
PROPERTIES
(a) Approximate number of properties
under rent control
(b) Approximate number of rent
controlled properties paying taxes
(c) Appropriate number of properties
whose values have remained unchanged
for 5 years or more
PART 2
Estimates of Population
(in Rs. lakh)
2004/05 2005/06 2006/07 2007/08
ESTIMATED POPULATION OF THE
CORPORATION
PART 3
Property Taxes Receipts and Expenditure
(in Rs. lakh)
2004/05 2005/06 2006/07 2007/08
A. PROPERTY TAX RECEIPTS
(a) Amount of property tax demanded
(excluding arrears)
(i) From domestic properties
(ii) From non-
domestic
properties
(b) Amount of property tax arrears
66
demanded
(i) From domestic properties
(ii) From non-domestic properties
(c) Amount of property tax collected
(i) From domestic properties
(current)
(ii) From domestic properties
(arrears)
(iii) From non-
domestic properties
(current)
(iv) From non-domestic properties
(arrears)
(d) Amount of property tax under
dispute
(e) Amount of unpaid/defaulted
property tax
B. SERVICE CHARGES RECEIPTS FROM
CENTRAL GOVERNMENT AND STATE
GOVERNMENT PROPERTIES:
(a) Amount of service charges
demanded from Central /State
government properties
(b) Amount of service charges
collected from Central /State government
properties
C. ESTIMATED EXPENDITURE ON
PROPERTY TAX ASSESSMENT, BILLING, AND
COLLECTION
67
PART 4
Property Taxes Assessment System
PROPERTY TAX ASSESSMENT SYSTEM
Tick
Annual rateable value (rent as the basis for estimating the ARV)
Year in which property values were last revised
Rate of tax %
Unit area values for estimating the ARV
Year in which unit area system was introduced
Rate of tax %
Unit area values per sq.m as a basis for taxation
Year in which unit area values were last fixed
Rates (attach copy)
Capital valuation
Year in which capital valuation was introduced
Rate of tax %
Has your city introduced system of self-assessment for property taxation
(Attach a copy of the self assessment scheme)
Yes/No
PART 5
Finances of the Municipal Corporation
(Rs. lakh)
2004/05 2005/06 2006/07 2007/08
A. OPENING BALANCE
B. Revenue Receipts
68
(a) Tax receipts
(b) Non-tax receipts
State government transfers on revenue
account
Central Finance Commission transfers
Others, if any
Total revenue receipts
C. CAPITAL RECEIPTS
Transfers from revenue account
State government transfers on capital
account
JNNURM/UIDSSMT grants
Institutional loans
Others
Total capital receipts
D. REVENUE EXPENDITURES
Establishment, wages and salaries-
Public Health
69
(a) Solid waste
(b) Drainage, sewerage and
conservancy
(c)
Water supply (where supplied by the
corporation)
Public works
(a) municipal roads and flyovers
(b) others
Public safety
(a) Street lighting
(b) Others
Total revenue expenditure
E. CAPITAL EXPENDITURE
PART 6
Views and Suggestions
A. UN-ASSESSED PROPERTIES
• Does the Corporation have an estimate of property tax revenues lost
on account of exemptions? Rs.________________________
• Is there a case for reducing or eliminating exemptions? Yes/No; if
yes, which ones would you recommend for elimination?
• Should slum settlements that are connected to municipal services be
taxed? Yes/No.
If yes, what rate of taxation would you recommend?
70
If not, what is roughly the amount that the Corporation spends on
connecting such settlements with services? Rs.
____________________
• Do slum properties become liable to pay taxes under an “Unit Area
System” of assessment? Yes/No
• What should be the basis of valuing slum properties?
• Does the Corporation have an estimate of properties that remain
outside the municipal count? How many -- _______________? What
would be the estimated value of a property tax of such properties?
Property tax Rs. _______________________.
• What is the procedure for incorporating new properties into the list of
properties assessed for taxation?
B. UNDER-ASSESSED PROPERTIES
• Does the Corporation have an estimate of property tax revenues lost
on account of “rent control” properties? Rs. _____________________
• What would be a feasible way of estimating the current values of rent
control properties?
• Does the concept of “standard rent” or “fair rent” become irrelevant in
an “Unit Area System”?
• What is the rate of appreciation (or depreciation) of property values in
the Corporation area since 2006/07? __________________%
C. RATE OF PROPERTY TAX
• What considerations currently enter the fixation of property tax rate?
• Should the rate of tax be fixed in a way that it covers the cost of
providing joint services, namely, solid wastes, municipal roads, and
street lighting
D. ACTS IMPENDING FULL REALISATION OF PROPERTY TAX POTENTIAL
71
• If in your view, there are other Acts that impede full realisation of
property tax potential, please mention them below:
E. PROPERTY TAX POTENTIAL
• If property tax system in your city was designed and applied in an
efficient and equitable manner (e.g., JNNURM norms), what would be
the estimate of revenues from this tax? Rs. ___________________
For any clarification, write to or call
Professor Om Prakash Mathur
National Institute of Public Finance and Policy
18/2, Satsang Vihar Marg, Special Institutional Area
(Near JNU), New Delhi 110 067. INDIA
Tel: 91-11-26569303, 26569780, 26563305, 26961829, 26963421
Fax: 91-11-26852548, 26512703
Mobile: 98910 88111
Email: opm@nipfp.org.in
Please assist the NIPFP staff member in completing this questionnaire.
72
Annex Tables
Annex Table 1: Property Tax Collection as a Percentage of Property Tax Demand (%)
City 2004-05 2005-06 2006-07 Average for 3 Years
Delhi 15 15 19 16
Bangalore 77 81 87 82
Greater Mumbai 42 40 39 40
Chennai 84 84 86 85
Kolkata 70 70 60 66
Hyderabad 64 61 67 64
Ahmedabad 14 18 21 18
Surat 81 82 65 75
Pune 37 40 41 40
Nagpur 74 54 52 58
Jaipur 10 18 46 18
Lucknow 60 63 56 59
Kanpur 61 64 73 66
Visakhapatnam 72 70 86 75
Patna 28 38 25 30
Vadodara 63 60 47 56
Rajkot 14 11 6 10
Faridabad 80 74 102 84
Bhopal 42 53 58 51
Indore 24 25 25 25
Jabalpur 130 144 92 116
Nashik 72 67 73 70
Amritsar 43 42 41 42
Ludhiana 46 50 56 50
Varanasi 72 76 66 70
Agra 89 73 108 91
Allahabad 94 75 62 74
Meerut 43 38 33 37
Vijaywada 61 47 52 53
Bhubaneswar 56 65 68 64
Dhanbad 47 42 37 42
Kochi 71 76 79 75
Madurai 36 50 52 45
Coimbatore 73 66 75 71
Asansol 53 66 86 67
Durgapur 19 26 33 27
All India 34 36 39 37
Note: Annual Averages comprises of 2004-05, 2005-06 & 2006-07. NA = Not Available. Also, to note
that for some cities the proportion of property tax collection to demand shows an amount more then 100
is due to the fact that their demand estimation for these cities were quite lower then their collection
figures. The demand figures thus stated are ‘understated’ figures to some extent. Naturally, the
denominator being less then the numerator ultimately overestimated the proportion.
73
Annex Table 2: Current Property Tax Demand as a Percentage of Total Demand
City 2004-05 2005-06 2006-07 Average for 3 Years
Bangalore 87 87 87 87
Greater Mumbai 53 51 50 51
Chennai 76 85 85 82
Kolkata 65 68 50 60
Hyderabad 62 61 64 62
Ahmedabad 13 14 17 15
Surat 71 67 69 69
Pune 49 52 46 49
Nagpur 67 42 43 48
Jaipur 58 56 247 79
Lucknow 63 67 62 64
Kanpur 48 57 60 55
Visakhapatnam 64 74 83 73
Patna 55 55 55 55
Vadodara 67 65 50 60
Rajkot 15 18 24 20
Faridabad 42 42 71 50
Bhopal 37 40 59 45
Indore 36 33 32 34
Jabalpur 41 39 47 43
Nashik 58 56 57 57
Amritsar 45 47 44 46
Ludhiana 45 45 48 46
Varanasi 80 80 90 85
Agra 80 85 80 82
Allahabad 54 58 54 55
Meerut 46 47 44 46
Vijaywada 62 50 52 54
Bhubaneswar 57 71 69 67
Dhanbad 47 48 46 47
Kochi 61 69 76 69
Madurai 37 47 47 43
Coimbatore 100 100 100 100
Asansol 38 45 61 47
Durgapur 23 37 44 36
All India 33 37 41 37
74
Annex Table 3: Coverage Ratios for Different categories
A B C
Coverage Ratio Real Effective Coverage Effective Coverage
(Assessed Properties / Total Properties) x 100 (Properties Paying Taxes / Assessed Properties ) x 100 (Properties Paying Taxes / Total Properties ) x 100
Cities
2004-05 2005-06 2006-07 2004-05 2005-06 2006-07 2004-05 2005-06 2006-07
Bangalore 92 92 90 69 67 88 63 61 79
Mumbai 98 98 98 72 71 72 70 69 70
Pune 96 96 95 85 84 78 81 80 74
Nagpur 90 90 91 49 55 51 44 49 46
Jaipur 47 47 92 16 19 1 7 9 1
Lucknow 97 97 96 72 70 71 70 68 67
Kanpur 83 83 82 60 60 60 50 50 49
Visakhapatnam 99 98 100 78 75 85 77 74 84
Rajkot 93 95 97 51 55 49 48 53 47
Bhopal 69 70 72 44 45 46 31 31 34
Jabalpur 81 82 84 35 26 28 29 22 24
Nashik 92 92 92 NA 48 55 0 44 51
Amritsar 97 93 97 72 73 74 70 68 72
Ludhiana 75 77 78 70 72 73 53 55 57
Varanasi 95 95 95 72 61 55 69 58 52
Agra 91 91 92 80 80 80 72 73 74
Allahabad 93 93 93 89 92 82 83 85 76
Meerut 89 89 90 88 89 90 78 80 81
Vijayawada 90 92 93 88 85 85 79 78 79
Dhanbad 13 13 13 100 100 100 13 13 13
Kochi 95 95 93 70 72 73 67 68 67
Madurai 90 89 88 70 80 80 63 71 70
Durgapur 97 100 99 70 70 71 68 70 70
Bhubaneswar 96 94 90 86 90 95 83 85 86
Hyd 95 95 95 73 74 76 69 70 72
Indore 60 60 58 55 58 60 32 34 35
Total 84 85 88 64 66 63 54 56 56
75
Annex Table 4: Per Capita Property Tax Demand (Rs.)
City 2004-05 2005-06 2006-07 Average for 3 Years
Delhi 3118 2191 1607 2285
Bangalore 642 667 811 708
Greater Mumbai 2641 2997 3438 3030
Chennai 555 570 585 570
Kolkata 737 731 1035 835
Hyderabad 600 643 665 636
Ahmedabad 2834 2600 2568 2665
Surat 741 621 775 713
Pune 1487 1856 1954 1773
Nagpur 372 603 603 528
Jaipur 313 315 77 231
Lucknow 195 205 249 217
Kanpur 158 151 147 152
Visakhapatnam 438 388 352 392
Patna 90 96 101 96
Vadodara 521 517 650 564
Rajkot 1473 1674 1998 1723
Faridabad 264 254 190 235
Bhopal 165 153 168 162
Indore 982 1036 1100 1040
Jabalpur 66 103 159 110
Nashik 419 427 428 425
Amritsar 134 134 151 140
Ludhiana 456 464 428 449
Varanasi 61 66 131 87
Agra 44 44 47 45
Allahabad 87 120 139 116
Meerut 123 140 154 139
Vijaywada 441 572 592 536
Bhubaneswar 99 144 155 134
Dhanbad 113 108 109 110
Kochi 445 411 410 422
Madurai 698 560 563 607
Coimbatore 588 736 816 715
Asansol 152 122 102 124
Durgapur 306 384 492 395
All India 1277 1213 1229 1239
76
Annex Table 5: Per Capita Property Tax Collection
City 2004-05 2005-06 2006-07 Average for 3 Years
Delhi 476 326 313 369
Bangalore 496 538 704 581
Greater Mumbai 1116 1197 1334 1217
Chennai 468 478 500 482
Kolkata 520 515 616 550
Hyderabad 384 393 443 407
Ahmedabad 408 475 535 474
Surat 597 510 504 535
Pune 553 743 811 707
Nagpur 275 328 313 306
Jaipur 33 58 36 42
Lucknow 117 129 139 128
Kanpur 96 96 108 100
Visakhapatnam 314 271 302 296
Patna 25 36 25 29
Vadodara 327 311 305 314
Rajkot 209 184 115 168
Faridabad 210 187 195 197
Bhopal 69 81 97 83
Indore 239 259 277 259
Jabalpur 86 149 145 127
Nashik 300 286 310 299
Amritsar 57 57 61 58
Ludhiana 208 230 241 227
Varanasi 44 51 86 61
Agra 39 32 51 41
Allahabad 82 90 86 86
Meerut 53 53 50 52
Vijaywada 267 271 310 283
Bhubaneswar 56 94 106 86
Dhanbad 53 45 40 46
Kochi 318 312 322 317
Madurai 249 278 291 272
Coimbatore 427 485 614 509
Asansol 80 81 87 83
Durgapur 59 99 161 107
All India 442 445 486 458
77
Annex Table 6: Municipal Finances of the Sample Municipal Corporations, 2006-07
City Total
Property
Tax
collection
(Rs. crore)
Other
Taxes 06-
07 (Rs.
crore)
Revenue
Receipts
(Non Tax)
(Rs. crore)
State
transfers
on
Revenue
account
(Rs. crore)
Total
Municipal
Revenue
Income
(Rs. crore)
Total
Municipal
Revenue
Expenditu
re (Rs.
crore)
Property
Tax as a
Percent of
Municipal
Income
Other
Taxes as a
Percent of
Municipal
Income
Non- Tax
as a
Percent of
Municipal
Income
State Transfer to
revenue Account
Tax as a Percent
of Municipal
Income
Property Tax as a
Percent of
Municipal
Revenue
Expenditure
Delhi 406 596 347 895 2245 2490 18 27 15 40 16
Bangalore 347 64 92 152 655 1141 53 10 14 23 30
Greater Mumbai 1756 3492 2106 250 7604 7199 23 46 28 3 24
Chennai 231 64 67 33 630 622 37 10 11 5 37
Kolkata 288 17 321 426 1051 987 27 2 31 41 29
Hyderabad 177 171 154 4 507 372 35 34 30 1 48
Ahmedabad 222 719 84 138 1163 779 19 62 7 12 29
Surat 182 460 78 83 802 515 23 57 10 10 35
Pune 262 479 354 58 1154 656 23 42 31 5 40
Nagpur 72 247 29 37 385 315 19 64 8 10 23
Jaipur 11 NA 70 106 187 149 6 NA 38 57 7
Lucknow 35 2 9 89 135 117 26 2 7 66 30
Kanpur 32 10 9 120 170 137 19 6 5 70 23
Visakhapatnam 35 12 99 50 197 134 18 6 51 25 26
Patna 4 11 1 23 40 50 11 27 3 58 9
Vadodara 50 235 21 35 340 244 15 69 6 10 20
Bhopal 17 20 26 67 129 157 13 15 20 52 11
Indore 49 1 11 117 178 294 27 1 6 66 17
Jabalpur 16 19 8 39 83 85 19 23 10 47 18
Nashik 43 300 50 9 402 237 11 75 12 2 18
Amritsar 7 38 63 NA 108 113 7 35 58 NA 6
Ludhiana 39 62 53 146 299 185 13 21 18 49 21
Varanasi 10 1 4 37 53 61 20 2 8 71 17
Agra 8 1 8 49 66 61 12 2 12 74 13
Allahabad 10 1 3 30 44 75 22 3 7 67 13
Meerut 6 1 2 38 48 27 13 2 5 80 24
Vijaywada 32 7 33 28 99 89 32 7 34 28 35
Bhubaneswar 9 2 6 4 20 74 43 10 28 20 12
Dhanbad 1 NA NA 10 11 2 8 3 NA 89 56
78
Kochi 23 24 7 9 62 64 37 38 11 14 36
Madurai 27 3 30 34 93 146 29 3 32 36 18
Coimbatore 61 3 22 46 132 260 46 2 16 35 23
Asansol 6 0 6 8 20 15 29 0 29 42 37
Durgapur 9 0 5 8 22 19 39 2 23 37 46
Total for
Sample ULBs
4481 7063 4178 3179 19136 16863 23 37 22 17 27
Note: * Property Tax collections comprises of Current Collection and Arrear Collection for the respective year for the concerned ULBs. ** Municipal Income (Revenue) comprises of Own
Source Revenue Income and State Government Transfers to Revenue Account for the respective ULBs. NA= Data not available.
Source: Data as provided by the respective Municipal Corporations during the visit to the same for the NIPFP project- Assessing the Untapped
Property Tax Potential.
79
Letter from Ministry of Finance Regarding Central Government
Properties
80
