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Property tax reforms in Bangalore-India: 

Property tax reforms in Bangalore-India June 23, 2003 Mr. Vasanth Rao* *

The context: 

The context “No major fiscal institution has been criticised at such length and with such vigor, yet no fiscal institution has changed so little” – Dick Netzer (1966)

The challenge addressed: 

The challenge addressed The City Corporation of Bangalore in India has nearly doubled property tax revenues in 3 years since 2000 through a scheme widely welcomed by citizens (over 70% voluntary compliance)

The need to augment Municipal revenue: 

The need to augment Municipal revenue Urban population growing faster than rural population Growth rate 1991-2001 Urban -31.2% Rural-17.9% Urban population – 285 million (2001) Proportion to total population -27.8% Contribution of urban areas to GDP- 55% Municipal revenue - 0.6% of the GDP

Revenue of the Centre, State and Municipalities: 

Revenue of the Centre, State and Municipalities

The problem of declining revenues: 

The problem of declining revenues Very nature of the tax base The annual rental value Provincialization of taxes Typically ‘take away’ buoyant ones States prefer transferred revenue model local fiscal base weakened amount not commensurate with earlier realisations Bangalore ‘clubbed’ with other municipalities in the State lack of flexibility

The solution arose through decentralization: 

The solution arose through decentralization The 74th constitutional amendment (1992) gave a constitutional status to the urban local governments- to make them effective institutions of self-government – The local govt. yet to experience the feel of this legislation However, mid 90s saw a spurt of enthusiasm in property tax reforms.

Revenue of the Centre, State and Municipalities: 

Revenue of the Centre, State and Municipalities The average annual property tax in Bangalore City prior to the year 2000 was $25 (Residential) and Non- Residential $40 Therefore the resentment among the property owners and the city council over the property tax seems disproportionate to the revenue burden imposed. Emotions run high when property tax reforms are on the table

Why this resentment ?: 

Why this resentment ? First Visible tax Assessment is judgmental The levy is on accrued income and not realised income Administrative costs are high Citizen do not see perceived benefit- inadequate civic services –Why should I pay?

Genesis of the problem…: 

Genesis of the problem… Municipal laws in India adopted the rental value of properties as the base. Annual Rental value for property tax is arrived on: The actual rent where it is actually let Where it is not let, by artificially method of valuation- the expected rent If both not available then valuation based on capital value from which annual value is arrived by applying suitable percentage. In Bangalore the rate for capital valuation is 6%

…Genesis of problem: 

…Genesis of problem Other related problems like in any other developing countries- a) Property identification b) Record keeping c) Valuation d) Collection


The Bangalore City Corporation experiment

Legal amendments take time: 

Legal amendments take time Any amendment to the municipal Act requires: the City Council to approve when tabled approval of the State Assembly while in session if Assembly approves then Corporation has to call for objections – 30 days time After meeting the objections adequately, final draft of amendment to sent to Government Government to issues final Notification after which it becomes an Act. - - - The process takes 2 years….. The sequence perhaps explains why amendments/ revisions were not attempted for 3 decades

Tackling the issue differently: 

Tackling the issue differently Environment conducive for property tax reform: New Govt. a chosen team assigned to head civic bodies-Citizen expectation heightened Needed to do dramatic change within 3 months Chose to change the method of assessment rather than go to City Council or Government for any amendment Chose to revise rental rates for different areas-this was legally within the Commissioner’s powers

Best practices studied: 

Best practices studied Guidance from international experts- took cue from their experiences

Prescription for effective administration Dr. William Dillinger, Dr. Roy Bahl, Dr. Roy Kelly, Richard Almy: 

Prescription for effective administration Dr. William Dillinger, Dr. Roy Bahl, Dr. Roy Kelly, Richard Almy Tax Base = TR* CVR* VR*CL Tax Rate - Could not tinker - Tax rate- Increase in tax rate would draw protest. Would require legislation CVR Coverage Ratio Only 50% -60% in the cadastral -so if one did not do much, but paid attention to the coverage it could increase revenue. CL Collection Ratio – 50%-60% this could improve by mere administrative measures VR Valuation Ratio If the coverage & Collection ratio reached a saturation point increase the tax buoyancy halts. So one had to do revise valuation


Possibilities: Application of the prescription Tax Base TR Tax Rate Could not tinker CVR Coverage Ratio Yes could improve VR Valuation Ratio Could do- tricky CL Collection Ratio Yes could improve

The road to reform: 

The road to reform To hybridize the theories-synergize for public acceptability. Evolved a mix of area-based and capital value and assigned rental rates Packaging the scheme

An optional self assessed scheme: 

An optional self assessed scheme The optional self –assessment scheme (SAS) Though called self–assessment in the actual practice & implementation it was self reporting of data Taxpayer’s responsibility to identify their: - location of property - type of structure - extent of built-up area - use-residential/commercial - depreciation and apply schedule of value for the location to arrive at the rental value. On the rental value to calculate the tax rate and pay the tax at any of the designated banks

The SAS provisions: 

The SAS provisions Specified rateable value across the city- valid for 5 years (certainty) Appeal provision made available (appeal mechanism) Maximum and minimum cap fixed (safeguard + politically wise) 5% random scrutiny (Enforcement) Commissioner to provide citizen with clarification on the scheme (Citizen interface)

Location classification under SAS: 

Location classification under SAS Location Used Karnataka Land Registration rates as basis for zone classification. (6 land value bands evolved to form 6 zones- A Zone refers to land category value rather than to a continuous area: (Value in Rupees) > 4000 3000-4000 2000-3000 1000-2000 1000 -500 and < 500

Beyond a one size fit all approach: 

Beyond a one size fit all approach Category of building & Class of property PWD guidelines for cost of current construction. Due to revision not made for 3 decades cost of construction was not ascertainable. Hence PWD’s rate for current construction cost of a livable house was adopted as the base. Total 16 classification made: 5 different class of residential properties- politically sensitive 6 general commercial properties 5 different basis evolved for wedding halls, star hotels, theatres, industries, hospitals…

Towards rateable value: 

Towards rateable value Rental rates: - rental rates factored for different areas - rate based on Mass appraisal system - over 4000 cases analyzed ( simple mathematical model followed)

The essential parameters in SAS: 

The essential parameters in SAS Usage Non-Residential Residential Offices, Restaurants, Clinics, etc. Star hotels, Theatres, Wedding hall Industries, Hospitals.

SAS tax in 3 easy steps for residential properties: 

SAS tax in 3 easy steps for residential properties Area * X Applicable rate ** X 10 = T1 T1 – Applicable depreciation = T2 T2 X 20% = Property tax + 34% cess additionally payable

Packaging SAS for the masses: 

Packaging SAS for the masses Marketing the SAS concept

The SAS spirit: 

The SAS spirit The goals were straightforward : To get property owners to voluntary declare their property tax liability and make payment within set time to avail the benefit of the optional scheme. The scheme was made optional to overcome any legal challenge. Those who chose to stay out of the scheme would be assessed by the assessor after visit to the property- the assessment yardstick would more or less be the same…

Evaluation of the scheme:: 

Evaluation of the scheme: To evaluate the success the obvious yardstick are: Revenue yield Collection ratio Compliance cost Tax payer service Citizen response

Evaluation of the scheme:: 

Evaluation of the scheme: Revenue yield …

Evaluation of the scheme:: 

Evaluation of the scheme: –revenue yield … Collected Rs. 90 Crores by June 2000 1999 same period collected Rs. 20 Crores

Revenue yield : 

Revenue yield Av. taxes went up 30-50%, but citizens loved it ! Self Assessement Scheme (SAS)

Evaluation of the scheme:: 

Evaluation of the scheme: … the collection ratio:

Evaluation of the scheme:: 

Evaluation of the scheme: … compliance cost: Most citizen paid 2.5 times more tax then they did previously They did so if only to eliminate the inspector raj Payment at the banks felicitated distancing the taxpayer and the tax payee. Within a short time there was not only revenue realization but also economic efficiency- Corporation’s credibility heightened.

Evaluation of the scheme:: 

Evaluation of the scheme: …Citizen response : Overwhelming support from citizen-press pro-active and supportive of the scheme. 90% of the residential & 60% Commercial properties opted for the scheme The High Court upheld the scheme that is not injurious to public needs nor affects their rights Directed Corporation to consider similar such schemes for sanction of building plans and for registering new property

Back office computerization: 

Back office computerization Specialized property tax computer program developed. 72,000 apparent ‘mistakes on record’ notices issued in Sept 2001detected by computer check Collected Rs. 5 Crs out of Rs 6 Crs detected Property tax Database created. Is the corner stone in the direction of introducing capital value system at a later date.

Issues & Concerns: 

Issues & Concerns At the threshold : Will the initial success of the new system continue to work and keep the tax buoyant? Yes - if the elasticity is maintained- this requires - periodic updating of index values - Increase coverage-new properties brought to book - Collection efficiency

Issues & Concerns: : 

Issues & Concerns: No – if enforcement is not put to place SAS will see a natural death If the self-assessment returns are not audited then non-compliance will increase. If new properties are not enumerated revenue will not grow If no investment is made in training staff in assessment techniques Corporation cannot switch over to a capital value assessment in future.

Way ahead:: 

Way ahead: To capitalize on the initial gains Investing time in: Build a cadastral –forecast of revenue possible and tax rate can be set. To physically inspect the properties in the next 2 years and prepare a tax map. ( Do-able since each ward is about 2.5 sq. kilometers and about 3500 properties)

Way ahead: 

Way ahead To develop independent agency to evaluate the index values Creation of a central valuation unit Re-structuring of property tax administration- create cadre of good assessors To create different user charges for services rather than collect cess in addition to Property tax– the visibility of the tax reduces

Way ahead:: 

Way ahead: If these cautions are taken care and put to practice then this system can show the way that the “good” local tax is getting the job done.

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