1IRW

PROPERTY TAX REFORMSPROPERTY TAX REFORMS

New Property Tax SystemNew Property Tax System

Changing from a Rent-based system to a Capital Value-based System of

assessment

4IRW

The Current SystemThe Current SystemTax calculated as a percentage of Rateable Value

Rateable value is derived from Rent (Gross Annual Rent – 10%)

Assessment of tax requires estimation of reasonable rent or rent earning capability of properties

Rent earning capability is estimated as follows: Rented properties: on actual rent earned Owner occupied properties: expected rent derived by

applying Residential Letting Rates prescribed for the locality Purpose built properties, such as cinema houses, race

course or stadiums etc: income of these entities taken as basis for deriving reasonable rent

5IRW

Methods of determining rent earning Methods of determining rent earning capacitycapacity

RLR Method

Rent fetching capacity of properties in a locality identified 128 such locality ‘Pockets’ identified on ‘rent influencing factor’ basis

Contractor Test Method

Rent derived as a certain percentage of land cost and construction cost

Full House Capacity Method Assess cinema/drama theatres at the time of first

assessment.

Receipt Basis Method

Average Receipts of three preceding years excluding Entertainment Tax in case of old cinema/drama theatres

Income Basis Method Profit of the tenant is taken as the base for determining the

reasonable rent

6IRW

Components and Rates of Property Components and Rates of Property TaxesTaxes

Percentages of Rateable Value

7IRW

Demerits of Rent based systemDemerits of Rent based systemLack of buoyancy

Infringement of rent due to Rent Control Act Adverse effects of Legal pronouncements

Lack of transparency Ratepayers are ignorant of the methods of calculations Calculations are complex

Lack of equitability Old buildings have lower incidence of tax as compared

to new buildings in the same area

As the rents are not periodically updated, this asymmetry gets aggravated over the years

Arbitrary nature Only court can change measure of tax determined by

the Investigating Officer(R.V.)

Catalysts to reform processCatalysts to reform process

<“The property tax can be efficient, equitable means of financing municipal services in developing countries, but in most countries it needs reform.”

- WORLD DEVELOPMENT REPORT<GOI issued “Guidelines for Property TaxReforms”, Min. of Urban Affairs and Employment, 1997.

9IRW

PROPERTY TAX REFORMS PROPERTY TAX REFORMS IN OTHER STATES/CITIESIN OTHER STATES/CITIES

STATE CITY LEGALREFORMS

EFFECTS REMARKS

AndhraPradesh

All Municipal Corporations Hyderabad

٠From ’reasonable rent’ to area based system.’

Self assessment introduced.’

Property Tax Collection1998-99–Rs.569 m.2000-01–Rs.1008 m.

٠upper cap.of 100%increase only.٠Non residential properties on actual rent basis

Gujarat Ahmedabad BPMC Act amended in 1999 - area based method.” Delinked from RCA

Karnataka Bangalore Capital value as basis of assessment.Self assessment was introduced.

Collection increased from Rs.1180 m to Rs.1570 m. About 60% of tax payers opted for SAS.

Cap.of 250% of existing ٠tax rate 0.3% to 0.6% of capital value.

Bihar Patna Assessment Rules, 1993.’area based method’.-Not completely delinked from RCA

Revenue increased by 2.5 times as against expected 4-5 times.

- SC upheld these rules on the basis of being reasonable, simple and transparent.

10IRW

Percentage of Property Tax to the total Percentage of Property Tax to the total Revenue IncomeRevenue Income

Year Revenue Income (Budget A,B and E)

(Rs.in crores)

Property

Taxes Collection

(Rs.in crores)

% of Property Taxes to Revenue Income

1998-1999

1836.66 337.74 18.39%

1999-2000

2057.89 381.62 18.54%

2000-2001

2599.41 454.37 17.48%

2001-2002

2705.85 514.60 19.02%

2002-2003

3237.10 597.35 18.45%

11IRW

Capital Value System -Capital Value System -Advantages Advantages

Formula based valuation possible; with simplification, self assessment is possible

Greater flexibility in tax administration; provides better control over revenue

Discretion of assessor can be reduced to a minimum; the basis of taxation is transparent to all

Re-assessment in keeping with the market trends is possible

12IRW

Merits of the Proposed SystemMerits of the Proposed SystemBuoyancy

Linked with market value

Equitability Similar structures will have similar tax liability

Transparency Figures can be cross-checked easily

Simplicity Tax payer can calculate his own liability

Minimize litigation

Greater control over revenue for Corporation

13IRW

Highlights of the Proposed SystemHighlights of the Proposed System

Move over from the rent based system to capital value based system for determining tax base

Carpet area in use and Stamp Duty rates derived from the ready reckoner will be the primary basis for computing the capital value. Thus, Capital Value will be determined by location and type of construction.

Tax liability calculated by multiplying capital value with the tax rate applicable for the current user.

14IRW

Advantages of the new systemAdvantages of the new system

Property value given by independent agency-IGRTax liability is determined by verifiable physical attributesTax system need not depend on honesty of the tax-payer and is not vulnerable to discretion of the assessors

15IRW

Developing the Capital Value ModelDeveloping the Capital Value Model

97,593 properties out of 2,51,212 analyzed to identify characteristics that determine tax

Weights of property characteristics deduced from current system

Individual tax liabilities derived by applying the formula

Th

e T

ISS

Exerc

ise

Th

e T

ISS

Exerc

ise

17IRW

The Proposed ModelThe Proposed Model

Tax Base Market value (as per Stamp Duty ready reckoner)

Carpet Area in Square Feet Construction type segregated into 3

categories Age type segregated into 3 categories

Rate of Tax Determined by the Corporation for each

type of user,(segregated into 4 categories).

1

Com

pone

nts

of P

rope

rty

Tax

Com

pone

nts

of P

rope

rty

Tax

18IRW

Construction categoryConstruction categoryConstructio

nCategory

ConstructionType

Weight

C1 Vacant land/land under construction

0.5

C2 Semi permanent structure/chawls

0.6

C3 RCC structures with or without lift

and bungalows

1.0

19IRW

User CategoryUser CategoryUser

CategoryBroad user type Weight

U1 Residential/Charitable 1

U2 Industrial/Factories

2

U3 Shops/Offices 3

U4 Hotels (4 star or lower) and

offices/Hotels (5 star plus)

4

21IRW

Age CategoryAge CategoryAge

categoryDescription Weight

A1 Properties constructed before 1940

0.8

A2 Properties constructed between 1941 to 1985

0.9

A3 Properties constructed after 1985 1.0

22IRW

Formula for Determining TaxFormula for Determining TaxFormula: T = [(MV * Area * C * A) * (r * U)]Where

T = Tax liability

MV = Market Value per Square Foot of property (derived from Stamp Duty ready reckoner for taxation purposes only)

Area = Carpet Area of property

C = Construction category Weight

A = Age factor Weight

U = User category Weight

r = Rate of Tax (To be decided by the MCGM)

23IRW

Zonewise incidence of taxZonewise incidence of tax Rs. In crores Rs. In crores

Zones Current Demand

as on Oct.200

0

% of total

demand

New demand without

cap

New demand

with cap

% increas

e without

cap

% increase with

cap

City 219 29.40 963 328 340 49.77

W.Sub. 399 53.55 449 433 12.54 8.52

E.Sub. 127 17.05 158 135 24.40 6.30

Total 745 100.00

1570 896 110.71

20.27

Issues for ConsiderationIssues for ConsiderationImplementation Issues

▪ Capping for increase and floor for decrease

▪ Amendments to MMC Act, 1888 ▪ Amendments to related Acts eg.

- Mah.Tax on Buildings (with largerresidential premises) (re-

enacted Act, 1979.- Mah. Education and Employment

Guarantee (Cess) Act, 1962- MHADA Act

26IRW

Results of data analysisResults of data analysis

Sample size: 97,593 out of 2,50,000 properties

Revenue neutral tax rate of 0.1875% of capital value

The focus is on bringing out redistribution of tax liability

27IRW

Distribution of sample Distribution of sample propertiesproperties

User category

Number of properties

Percent of total

Total carpet area (in sq. meter)

Percent of total

Annual property

tax (in Rs. Crores)

Percent of total

U2 64,247 65.8% 2,39,70,912 69.2% 132.92 67%

U3 11,738 12% 70,46,827 20.3% 36.52 18.6%

U4 19,410 19.9% 16,50,524 4.8% 8.58 4.4%

U5 1,704 1.8% 6,56,422 1.9% 5.71 2.9%

U6 426 0.4% 8,80,007 2.5% 8.05 4.1%

U7 68 0.1% 4,35,204 1.3% 4.73 2.4%

TOTAL 97,593 100% 3,46,39,896 100% 196.51 (100%

28IRW

Changes in tax paid by user Changes in tax paid by user categoriescategories

User Category

Number of Properties

Avg. Tax Paid under Old

System

Avg. Tax to be paid under New

System

Increase / Decrease in

Tax

Percent Change

U2 64,247 Rs. 20,689.77 Rs. 20,759.56 Rs. 69.79 0.34%

U3 11,738 Rs. 31,113.20 Rs. 22,216.31 -Rs. 8,896.89 -28.60%

U4 19,410 Rs. 4,418.84 Rs. 4,559.48 Rs. 140.64 3.18%

U5 1,704 Rs. 33,489.67 Rs. 37,664.08 Rs. 4,174.41 12.46%

U6 426 Rs. 188,989.50 Rs. 321,528.80 Rs. 132,539.30 70.13%

U7 68 Rs. 695,061.50 Rs. 1,186,489.00 Rs. 491,427.50 70.70%

Total 97,593 Rs. 20,135.38 Rs. 20,133.07 -Rs. 2.31 -0.01%

Figures in Column 3 are weighted mean of tax paid in that category

29IRW

Change in tax paid by ChawlsChange in tax paid by Chawls

User Cate gory

No. of

users

Tax paid under Old

system

Tax to be paid under

New system

+/- in Tax to be paid

after change to

New system

(+ / -) %

U2 6060 7556.756 7832.502 275.746 3.649

U3 362 25678.757 21069.125 -4609.632 -17.951

U4 1055 9755.898 9423.761 -332.137 -3.404

U5 140 17342.686 18118.491 775.805 4.473

U6 10 15464.000 19210.398 3746.398 24.227

U7 4 25899.000 49044.101 23145.101 89.367

TOTAL 7631 8919.796 8905.638 -14.338 -0.161

30IRW

Change in tax paid by age categoryChange in tax paid by age category

Age Category

Number of Properties

Avg. Tax Paid under Old

System

Avg. Tax to be paid under New

System

Increase / Decrease in

Tax

Percent Change

A1 3,072 Rs. 13,951.97 Rs. 26,506.38 Rs. 12,554.41 89.98%

A2 8,842 Rs. 17,583.80 Rs. 24,358.98 Rs. 6,775.18 38.53%

A3 23,941 Rs. 15,216.10 Rs. 26,178.76 Rs. 10,962.66 72.05%

A4 32,287 Rs. 18,268.99 Rs. 18,185.01 -Rs. 83.98 -0.46%

A5 29,451 Rs. 27,591.47 Rs. 15,420.59 -Rs. 12,170.88 -44.11%

Total 97,593 Rs. 20,135.38 Rs. 20,133.07 -Rs. 2.31 -0.01%

Figures in Column 3 are weighted mean of tax paid in that category

31IRW

Ward wise change in taxWard wise change in taxWard Increase/Decrease Ward Increase/Decrease

A +181.53% K/W -5.59%

B +15.78% L -64.71%

C +48.28% M/E -51.85%

D +329.71% M/W -49.72%

E +14.05% N -49.83%

F/N +84.88% P/N -51.71%

F/S +0.79% P/S -36.41%

G/N +36.23% R/N -59.17%

G/S +14.95% R/S -53.90%

H/E +9.78% S -68.16%

H/W +11763% T -47.48%

K/E -7.71% Total -0.01%

32IRW

Issues for ConsiderationIssues for Consideration

Implementation Issues Phasing of increase/decrease Quality/Accuracy of Data Computerization Treatment of special categories Self Assessment system Occupier to pay

33IRW

PROPERTY TAX REFORMSPROPERTY TAX REFORMS