Property Taxation in Indian Cities – Application of Unit Area Assessment

Property tax is one of the major fiscal instruments of local governments in urban areas for raising their own revenues. Two popularly used tax bases of property taxes in India are annual rental value of the property and the capital value of the land. Most of the urban local governments use the notional property rental values as the base for assessing property taxes. In the notional property rental method, the tax base becomes stagnant, and an upward adjustment of tax rates is the only way to increase revenues from the property tax (Bagchi 1997, Rao and Ravindra 2002).

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Local governments at the cities are responsible for designing instruments to finance their activities with the 74^th Constitutional Amendment Act (1992). Many urban local governments have initiated reforms to improve the property tax system. The reforms in property tax focus primarily on improving the tax base and the administrative mechanism on of the tax. The municipal governments in a number of Indian cities have adopted the capital value of property method since 2004. In this method, values per unit of land are estimated, and the tax base is the product of this unit value and land area, plus the value of the property determined by some multiplicative factors.  It is highly unlikely that the potential gains of the new method have been fully realised partly because of the absence of a well-functioning real estate market for accurate information on property values and high transaction costs that adversely affect land prices.

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The Kolkata Municipal Corporation (KMC) and Newtown Kolkata Development Authority (NKDA) have adopted recently the Unit Area Method of Property Tax. The urban local bodies of Delhi, Bangalore and Pune also have introduced the capital value system in their property tax assessment. This system is simple and transparent, and property owners can assess their tax and submit the returns. In this system, tax for a particular property is based on the annual value of the property obtained by multiplying unit area value assigned to the localities by the covered area of the property and the multiplicative factors for occupancy, age, structure and use. Multiplicative factors account for the wide heterogeneity among properties within a conceptual block. This system is expected to reduce disparity in assessment of similar properties within the same locality and thereby ensures equity to the taxpayers, efficiency in tax collection, neutrality in resource allocation, and accountability of tax officials. Equity in property taxation is horizontal or vertical. Vertical equity refers that a tax should be progressive in income or wealth. Horizontal equity, on the other hand, refers that taxpayers with equal ability to pay ought to have similar tax burdens.

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References

Bagchi, A. (1997). “Reforming the Property Tax Base: Need for a New Direction.” Economic and Political Weekly, 32(47): 3005-3010

Rao, U.A.V and A. Ravindra, (2002). Reforming the Property Tax, New Delhi: UNDP

Mr. Panchanan Das
Professor, Department of Economics
University of Calcutta