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CONTENTS Intro Property tax Why PT ? Components and important aspects of PT Application of the rental value base Inadequacies in the rental value base Corrective measures on the rental value base Alternative methods of valuation for pt The capital value system: The site value system The area detail or area-based system The composite area-linked system Why PT reforms? Case study Surat city References 2


INTRO Discussion on how to improve financial viability of local governments streamline the flow of funds to them parameters of state control over local governments. The 73rd and 74th Constitutional Amendment Acts, 1992 and Article 280(3) have altered the fiscal devolution system and framework between states and municipalities. Under the new fiscal devolution system, every five years, each state government is required to set up a finance commission to review the financial position of local governments. 3


PROPERTY TAX Property taxes have been levied by local governments since ancient times. These taxes constitute local bodies’ most important autonomous revenue source, especially for urban governments. Jurists define the term property as a title or ownership conferred by law in respect of tangible goods or things to a person. Because the state gives rights to owners of property for its exclusive use, enjoyment, possession, and disposal, the government can legitimately tax such properties. 4

Why PT ?:

Why PT ? As observed by McCluskey (1999), “The property tax is a unique mechanism for local revenue generation. The primary store of accumulated wealth in both developed and developing countries is in real estate. Such property is visible, immobile, and a clear indication of one form of wealth. The property tax is thus difficult non- distortionary , to avoid or to shift and if well administered can represent a and highly efficient fiscal tool.” PT is a space-specific tax and not subject to constant fluctuations in its returns therefore it can be a very reliable revenue source for local governments. 5

Components and Important Aspects of PT:

Components and Important Aspects of PT Tax base Rate Coverage A tax collection system 1 . Tax Base: The valuation of land and buildings is the base for PT. The choice of a PT base whether annual rental value or capital value or standardized area base tends to relate to social and political processes or concerns. Consequently, one can observe different countries adopting different bases for PT assessment, there is a definite preference for the capital value base of PT. A municipal body may select a particular base for PT, but “it should also be kept in mind that the purpose of property valuation is only to arrive at the relative value of properties at a given time. 6

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2. Tax Rate: There is no one way to factor the correct rate for PT. Concentrating on the proper valuation of property to avoid underestimation of the tax base and to levy tax at lower rates seems a better practice than to have high tax rates and a narrow tax base. 3. Tax Coverage: Coverage is another very important component of any tax. There should be an attempt to bring each and every property onto the PT books. Tax coverage was conventionally achieved through field survey by tax inspectors, but recent innovations such as the use of geographic information systems (GISs) and information technologies for tax mapping and self-reporting from property owners. 7

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4 . Tax Collection System: Although the tax collection system is obviously a very important component of any tax system, I t is the most inefficient aspect of PT in developing countries. The tax collection system consists of an enforcement mechanism, stringent recovery provisions, and penalty provisions, which are weak in developing countries. 8


APPLICATION OF THE RENTAL VALUE BASE Historically the PT system in India has used the concept of annual rentable value (ARV). The basis of taxation is derived from the British system of taxing rentals in a free market. Most relevant legislation defines ARV as the rent at which the property might reasonably be expected to be let from year to year after allowances for certain deductions (such as cost of repairs, insurance, and so on). Service taxes are often levied also; along with PT; these service taxes include taxes for water, sewerage, street lighting, and so forth. Most urban local governments do not have any guidelines for capturing the prevailing market rent, In countries with reasonable rent as the base, PT rates have become largely discretionary, and this situation has often led to corruption. 9

Inadequacies in the Rental Value Base::

Inadequacies in the Rental Value Base: Policy and Administrative Constraints: An assessor’s subjective judgment in deriving ARV can lead to gross variations in tax assessments on the same premises for identical use, between old and new buildings on the same street, or for buildings in the same vicinity having the same land use ARV. Such discretion often leads to undervaluation of properties, creating a fiscal gap and revenue loss that increase over time. There is often an absence of reliable data on the rental market. In the absence of such data, rent estimation has become discretionary. 10

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2 . Legal Constraints: The provisions in the rent control laws for fixing fair or standard rent levels have depressing effects on the determination of the ARV 3. Behavioral Constraints: Lack of proper attitude of assessors toward assessment and corruption among assessment officers also cause problems. 11

Corrective Measures on the Rental Value Base:

Corrective Measures on the Rental Value Base 1 . Removing the ARV from Standard Rent The ARV assessment could be removed from standard rent through amendments to the rent control laws or the municipal acts. This would result in increased revenues as well as more efficient functioning of the property market and use of land. 2. Changes in Rent Control Laws Rent control laws are very stringent in the fixation of standard or fair rent. Though these laws differ from country to country, a few basic reforms are needed for all rent control laws. Most countries’ legislation calculates standard rent with respect to a fixed base year. This base year should be modified, and standard rent should be linked to market rent to redefine the base. Rent control laws also need to allow periodic increases in standard rent. 12

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3 . Alternate Valuation Bases Alternative valuation bases include replacement of the ARV by capital value, site value, and an area detail system. There are only a few practical alternatives to the existing ARV method. Various studies have, however, suggested ways of widening the PT base, such as taxation of plant and machinery, full taxation of government- and owner-occupied properties, taxation of vacant land, and substitution of “reasonable” rent by actual rent. 13


ALTERNATIVE METHODS OF VALUATION FOR PT The Capital Value System: The capital value–based assessment is applied to the current sale price of a property . Properties incapable of producing rent are to be taxed on a cost or profit basis that resembles capital value. SEVERAL MERITS: A capital value–based tax system is the most revenue productive system. It can help to preserve the merits of an area-based system in a transparent manner. Valuation of land and buildings can be undertaken separately, allowing optimum use of land through an inclination in favor of construction. Variation in value because of usage can be taken care of through rate differentials. The valuation rolls can show the value of unimproved land and that of improvements separately. 14

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The main difficulty in adopting capital value as a base for PT is the widespread underreporting of property transactions. This is due to the high incidence of a variety of taxes on property by all levels of government, as well as the widespread use of “black money” in such transactions. 15

The Site Value System:

The Site Value System Site value–based assessment is a variant of capital value–based assessment, but it is applied only to land.   The use of site value–based assessment suffers from the same drawbacks as capital value based assessment. Site value assessment can be effective in planned locations with designated uses for permissible floor-area construction. In old cities, adoption of the site value system of assessment could prove punitive to property owners residing in high value zones. Use of the site value system of assessment is practical only in new towns with zoning and development controls, not in towns and cities that have had spontaneous growth. 16

The Area Detail or Area-Based System:

The Area Detail or Area-Based System An area-based tax system is devised to overcome the problems of the rental value based system. The area detail system is basically a presumptive taxation of holdings in terms of their zone and structural characteristics. It implies classification of homogeneous land value zones in a city and taxing land and buildings in terms of a few factors that appear to be the main determinants of their value for example, location, land use, type of construction, and age of buildings. Although the area detail system is supposedly a tax on the physical attributes of a property. 17

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It has helped local governments to increase their fiscal health; drawbacks, Lack of Clarity about the Nature of the Base Lack of Transparency Rigidity The usual formula for assessing area-based PT as under PT = (rate) x (area in square feet) x (f1 x f2 x f3 x f4) The value of property can be derived as a discrete function of five or six attributes 18

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PT to be levied should take into account the level of services provided to the properties as well as their physical characteristics. The unit area value of different groups can be determined with respect to location, structural characteristics of buildings, year of construction, prevailing market values or rents of lands and buildings in the locality. The Composite Area-Linked System 19

Why PT Reforms?:

Why PT Reforms? PT reform is a global phenomenon because urbanization is increasing, thus the scope, volume, and complexity of urban services that must be provided by local governments is increasing. Fiscal needs of local governments are increasing. Because PT is the mainstay of local public finance and the only real local and productive tax source, reforms are inevitable. The objective of PT reforms should not only be to increase PT revenues, but also to lead to improvement in equity, transparency, simplicity, reduction of arbitrariness, and minimization of compliance and collection costs. 20

These reforms should include:

Property enumeration and mapping Records management Public information Revenue collection Incentives and penalties Self-assessment Periodic updating of valuation. These reforms should include 21

Case study Surat city:

Case study Surat city PROPERTY-TAX STRUCTURE April 01, 2010 onwards Area Based Property Tax System Formula for calculation of Property tax   Property Tax = R X M X A Where, R   stands for the Annual  Rate M  for the product of various factors  = { (Factor 1) X (Factor 2) X ( Factor 3) X (Factor 4) } A  stands for the area of the property Annual Rate (A) For Residential Properties : Per square meter per annum – Rs. 10 For other properties : Per square meter per annum – Rs. 21 22

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Area of the Property (A) The area of property under assessment depends upon the carpet area of the property. While calculating carpet area, whole area except area of the external as well as internal wall will be considered. Factors affecting the property tax: (A)   Factor - 1 :  Factor depending upon the location (B)   Factor - 2 :   Factor depending upon the duration of the year wise construction of property (C)   Factor - 3 :   Factor depending upon the kind in case of residential property and use in case of Non-residential property. (D)   Factor - 4 :  Factor depending upon usage person/entity 23

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Education Cess  General Tax Percentage (%) of General Tax Residential Property Non-Residential Property 200 to 500 5% 10% 501 to 3000 10% 20% 3001 & above 15% 30% Minimum Tax Calculation Sr. No. Residential Property Non-Residential Property Area (Sqmt) Minimum Tax Area ( Sqmt) Minimum Tax Water Zone Non-water Zone Water Zone Non-water Zone 1 < 25 60 36 < 15 540 459 2 25 to 50 120 72 15 to 30 660 561 3 > 50 180 108 > 30 780 663 24

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User Charges Area (in Sq.Mt.) Residential Property Non-Residential Property (Except Industrial-A Property)* Water + Drainage Solid Waste Water + Drainage Solid Waste* Up to 15 180 240 270 240 16 to 25 270 240 405 240 26 to 50 360 240 540 240 51 to 100 540 240 900 300 100 to 200 720 240 1200 300 Above 200 900 240 1500 300 * Solid Waste is Rs. 600/- per Annum for Industrial-A Property. 25

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ARREARS Rents, collection, tax which are still left, not paid or remaining by the owner due to any reason in previous year transferred to current year. 26

Frequently asked questions:

Frequently asked questions Q-1 What are the base reference documents applicable to Property taxes? Which are the relevant and applicable laws and circulars and their amendments from time to time? A-1 The corporation is governed by the Bombay Provincial Municipal Corporation Act 1949; as such it is an autonomous body, but refers to the state government on a need basis and at the centre level it falls in the Ministry of Urban Development. Matters related to Property Tax are covered in chapters 1, 8, 11 including clause 409 of the BPMC Act 1949. 27

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Q-2 What are the Compulsory registers/documents to be maintained by the corporation in relation to ptax? A-2 Assessment book for the past few years is maintained with the Zonal Assessment & Recovery Office and can be viewed by any taxpayer during specified time period. These assessment books are kept open for the property holder every year in the month of April and the notice regarding this is published in the news papers in April. Within 15 days of publishing of such notice in the news paper, any tax payer can raise the objection regarding the assessment by submitting Vandha Application to Appellate officer. Q-3  How is Property defined and what all could be liable to Property Tax? A-3 Each property is defined by the unique Tenement Number e.g. 01A-01-0001-0-001. Property tax shall be levied in respect of all buildings and lands in the city except… 28

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Q-4 Do open plots invite taxes? A-4 Yes, they do invite taxes. As per BPMC Act the span of property tax is not only limited to buildings, even the land falling under the jurisdiction of the corporation is covered in it. Q-5 What are the components of Property Tax? A-5 Components of Property tax are as under [Section-129] [a] General Tax, [b] Water Tax, [c] Water Charge, [d] Conservancy Tax and [e] Betterment charges. Q-6 When does a property get listed out from assessment? A-6 In the unfortunate case of fire, earthquake or such other calamity due to which the property remains unoccupiable or vanishes entirely. The residual open plot is still liable for these taxes. 29

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References February 2002. “Property Tax Reform Options and Issues.” Paper presented at the National Seminar on Reforming the Property Tax, United Nations Development Program and National Institute of Urban Affairs, Bangalore - India Bagachi Soumen (2003), ‘Politics and Economics of Property Taxation’, Paper presented at the 3rd International Convention of Asia Scholars organised by the National University of Singapore, August 19-22, 2003. Dillinger, William (1991), Urban Property Tax Reform: recommendations and guidelines, Washington DC: World Bank Ravindra A. and Vasanth Rao (2003), ‘Reforming the Property Tax’, Study Report, National Institute of Urban Affairs. New Delhi: UNDP Book: Municipal finance in the metropolitan cities of India, JAI BHAGWAN SURAT MUNICIPAL CORPORATION LINKS 30

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