Property taxation needs structural reform

A robust property tax system is vital for India’s cities. Property tax is not just the most important own revenue source for India’s municipal bodies, it is also critical to bridge the gap in urban investment, as such investment depends on municipal creditworthiness. However, the property tax performance of India’s municipal bodies has been poor — India’s cumulative property tax was 0.15-0.2% of its GDP, whereas it was 0.6% in middle-income countries and 0.3% in low-income countries. Policy efforts have sought to improve the property tax performance of India’s municipal bodies through technology and process-based reforms recommended by successive Finance Commissions and national schemes such as the Jawaharlal Nehru National Urban Renewal Mission and the Atal Mission for Rejuvenation and Urban Transformation. Yet, tax outcomes remain sub-optimal. Why?

Two recent studies offer insights — a working paper on Chennai’s property tax by Nobel Laureate Esther Duflo and co-authors, and this writer’s research on Bengaluru, Pune and Ghaziabad’s property tax. Both studies found that technology and process-based reforms will keep yielding sub-optimal results unless backed by structural reforms. Firstly, Duflo and co-authors’ research in Chennai found that municipal human resources are a critical determinant of property tax outcomes. It also finds that a municipality’s own tax assessors achieve far better tax outcomes compared to assessors from outsourced firms. The research conducted across Bengaluru, Pune and Ghaziabad finds that in addition to the issue of municipal human resource deficits, two other structural issues — irregularity in the conduct of elections and poor financial reporting practices — also impact tax outcomes.

Stages of property tax

There are three life stages of property tax — enumeration (identification of properties and maintenance of property records along with property details), property valuation and tax assessment, and tax billing and collection.

Technology has been a popular policy solution for improving enumeration. GIS-based mapping using satellite imagery and drones have been increasingly deployed to identify properties. However, such mapping exercises need to be accompanied by physical inspections conducted by municipal tax assessors; they also need to be repeated at regular intervals. But a perennial shortage of municipal staff, lack of requisite skills, and inadequate capacity building plague India’s municipalities. While human resource outsourcing can be a substitute, its efficiency is limited, as municipal assessors leverage institutional memory in a way that outsourced assessors cannot.

For valuation, the most common policy recommendation has been the capital valuation process, wherein a property is valued as per its stamp duty-linked ‘circle rate’ which is set and revised by the State revenue department at regular intervals. But most municipal bodies follow a valuation method wherein the ‘base rate’ is defined in rupees per sq ft per month, which is set by the municipality. Hence, tax buoyancy is determined by revisions to this base rate. But such revisions are infrequent compared to revisions in the stamp duty-linked circle rate. It was found that ‘base rate’ revisions did not take place across Bengaluru, Pune and Ghaziabad when there were no elected municipal councils. The link between municipal elections and tax performance is clear, at least for these three corporations. As delayed municipal elections are common, so is infrequent ‘base rate’ revision and lack of tax buoyancy.

Finally, for tax collections to be robust, collection efficiency needs to be strong. While extant recommendations include the adoption of both online collection as well as outsourcing the collection to external vendors, efficiency remains poor. Even more concerning is the difficulty in arriving at credible collection efficiency estimates due to the absence of properly maintained financial accounts.

To sum up, technology and process-based reforms are not enough for improving tax outcomes. Structural reforms encompassing more human resources, timely elections, and publicly available financial data play very important roles. It is high time that policy interventions broaden their focus to structural reforms for all aspects of urban governance and finance, including property tax.

Debarpita Roy is Lead-Research at the Centre for Public Policy on Housing and Habitat, NIUA, New Delhi. The views are personal.