PROPERTY TAX REFORMS

1
PROPERTY TAX REFORMS
2
New Property Tax System

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

3
Structure of presentation

• The present system
• Limitations of the present system
• Proposed system
• Results of data analysis of TIIS
• Conclusions

4
The Current System

• Tax 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

5
Methods of determining rent earning capacity

• 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

6
Components and Rates of Property Taxes
Percentages of Rateable Value
7
Demerits of Rent based system

• Lack 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.)

8
Catalysts to reform process

• ltThe property tax can be efficient, equitable
  means of financing municipal services in
  developing countries, but in most countries it
  needs reform.
• - WORLD DEVELOPMENT REPORT
• ltGOI issued Guidelines for Property Tax
• Reforms, Min. of Urban Affairs and Employment,
  1997.

9
PROPERTY TAX REFORMS IN OTHER STATES/CITIES
STATE CITY LEGAL REFORMS EFFECTS REMARKS
Andhra Pradesh All Municipal Corporations Hyderabad ?From reasonable rent to area based system. Self assessment introduced. Property Tax Collection 1998-99Rs.569 m. 2000-01Rs.1008 m. ?upper cap.of 100increase only. ?Non 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 ?tax 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.
10
Percentage of Property Tax to the total Revenue
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
11
Capital Value System -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

12
Merits of the Proposed System

• Buoyancy
• 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

13
Highlights 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.

14
Advantages of the new system

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

15
Developing 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

The TISS Exercise
16
Sample used for Analysis

• Properties of all ages and of all types of use
  and construction selected as sample
• Proposed model includes Govt. tax collected by
  MCGM, but excludes Water and Sewerage taxes,
  since they are not uniformly applicable in each
  case

17
The Proposed Model
1

• 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).

Components of Property Tax
18
Construction category
Construction Category Construction Type 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
19
User Category
User Category Broad 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
20
Estimation of weights
Construction categorization Construction categorization Construction categorization Construction categorization Construction categorization Construction categorization Construction categorization Construction categorization Construction categorization
C1 C1 C2 C2 C2 C3 C3
0.5 0.5 0.6 0.6 0.6 1 1
User categorization User categorization User categorization User categorization User categorization User categorization User categorization User categorization User categorization
U1 U2 U2 U3 U4 U4
1 2 2 3 1.5 1.5
21
Age Category
Age category Description Weight
A1 Properties constructed before 1940 0.8
A2 Properties constructed between 1941 to 1985 0.9
A3 Properties constructed after 1985 1.0
22
Formula for Determining Tax

• Formula 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)

23
Zonewise incidence of tax
Rs. In crores
Zones Current Demand as on Oct.2000 of total demand New demand without cap New demand with cap increase 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
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Issues for Consideration

• Implementation Issues
• ? Capping for increase and floor for
  decrease
• ? Amendments to MMC Act, 1888
• ? Amendments to related Acts eg.
• - Mah.Tax on Buildings (with larger residenti
  al premises) (re-enacted Act, 1979.
• - Mah. Education and Employment Guarantee
  (Cess) Act, 1962
• - MHADA Act

25
Computing Tax rate for Neutrality

• Estimation of tax rate at which new tax equals
  old tax this is only a starting point, not an
  objective of reforms
• Tax Rate
• Existing Tax Demand
• (Capital Value Area C U A)
• Neutrality only at aggregate tax collection
• No neutrality at individual user category level

26
Results 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

27
Distribution of sample properties
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
28
Changes in tax paid by user categories
Figures in Column 3 are weighted mean of tax paid
in that category
29
Change 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
30
Change in tax paid by age category
Figures in Column 3 are weighted mean of tax paid
in that category
31
Ward wise change in tax
Ward 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
32
Issues for Consideration

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

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PROPERTY TAX REFORMS
34
Amendments required to the Act

• Certain sections of the Mumbai Municipal
  Corporation Act of 1888 may need to be amended to
  incorporate the reforms
• Some of the sections to be modified
• Section 128, Section 140, Section 143(1),
  Section 144(b), Section 146, Section 149, Section
  152(1), Section 154(1), Section 155, Section
  156(b), Section 162(1), Section 162(2), Section
  163(1), Section 166(1), Section 167(1), Section
  169, Section 170, Section 174 to 179, Section 180
  to 190, Section 195E(1), Section 195G(1), Section
  198(1), 198(1a), 198(2), 198(3), 198(4), Section
  200(1) and 200(2), Section 202, Section 203,
  Section 206, Section 207(a), Section 208, Section
  209, Section 210, Section 211
• Suitable amendments to State Education
  Employment Guarantee Cess, M.T.O.B. Act, Repair
  Cess Act required

35
Amendments to the MMC Act, 1888

• Section 140
• This section states that these taxes shall be
  levied and called property taxes
• Water tax, Additional water tax,Sewerage
  tax, General tax, Education cess, Street tax,
  Tree cess. Instead of additional water tax and
  additional sewerage tax, Water Benefit tax and
  Sewerage Benefit tax are currently charged.
  Excluding the Water tax and the Sewerage tax, all
  the above components should be clubbed together
  and should now be termed as Composite Property
  tax.
• Section 143(1)
• This section states that the General tax shall
  be levied in respect of buildings and lands in
  Greater Mumbai except
• Buildings and lands or portion thereof
  exclusively occupied for public worship or
  charitable purposes
• Buildings and lands vesting in the Government
  used solely for public purposes and not used or
  intended to be used for the purpose of profit or
  in the Corporation
• Such buildings and lands belonging to any
  Diplomatic or Consular Mission of a foreign state
  as the Government may by general or special order
  specify in this behalf.
• Post amendment, the exemptions should be
  continued. However, since these properties are
  subject to levy of service charges and are paying
  24 of the total taxes payable by a normal
  property, the same exemption should be continued
  and these properties should now be made to pay
  24 of the Composite Property tax.

36
Amendments to the MMC Act, 1888

• Section 144(b)
• This section deals with concessions in the rate
  of property tax for SRA/SRD rehab portions and
  low-income-group housing schemes of MHADA, MCGM,
  Central Government, etc. This should be further
  amended to propertied covered under D.C. Rules
  33(6), 33(7), 33(8), 33(9), Census huts, slums,
  properties that are assessed at nominal rates by
  administrative orders such as milk booths,
  advertisement hoardings for beautifying the city
  on the Western Express Highway from Bandra to
  Santacruz, and any such property that, according
  to the Municipal Commissioner requires such
  concession.
• Section 146
• This section decides the primary responsibility
  for the payment of property taxes. This should be
  maintained as is, with the addition of provisions
  for empowering the Municipal Commissioner to
  recover the taxes from the occupiers of the hut
  or slums. The members of co-operative housing
  society should also be made liable for payment
  jointly or severally.
• Section 149
• This section provides that notice to be given to
  the Municipal Commissioner of all the transfers
  of titles of persons primarily liable to the
  payment of property taxes. The same should be
  continued with the addition of provisions for
  empowering the Municipal Commissioner to levy
  fine for non-compliance and charge transfer fees
  for updating Municipal records.

37
Amendments to the MMC Act, 1888

• Section 152(1)
• This section provides that notice should be given
  to the Municipal Commissioner of the erection of
  a new building. This section should further
  provide for self-assessment returns to be
  submitted to the Municipal Commissioner.
• Section 154(1)
• This section details how to determine the ratable
  value of buildings and lands in Greater Mumbai.
  This is the measure of taxation at present.
  Since the tax base is now being shifted from
  ratable value to capital value, necessary
  amendments or rewording should be made to account
  for the change.
• Section 155
• This section provides for calling information or
  returns from owners or occupiers of premises and
  to enter premises for inspection for fixation of
  ratable value. This section should be retained
  with the reference to ratable value being
  changed to capital value.
• Section 156(b)
• This section provides for the Municipal
  Commissioner maintaining a book called the
  Assessment Book in which shall be entered every
  year
• b)The ratable value of each such building and
  land determined in accordance with the forgoing
  section of the Act.
• This sub-clause (b) should be amended to read as
  capital value in lieu of ratable value.

38
Amendments to the MMC Act, 1888

• Section 162(1)
• This section specifies that the time for filing
  complaints against fixation of ratable value
  should be publicly announced. This section should
  be retained with the reference to ratable value
  being changed to capital value.
• Section 162(2)
• This section provides for issue of special notice
  in certain cases where the Assessment Book
  requires amendment with respect to ratable value.
  This section should be retained with the
  reference to ratable value being changed to
  capital value.
• Section 163(1)
• This section specifies the time and manner of
  filing complaints against fixation of ratable
  value. This section should be retained with the
  reference to ratable value being changed to
  capital value.
• Section 166(1)
• This section states that when all complaints have
  been disposed off, the ward Assessment Book
  shall be authenticated by the Municipal
  Commissioner, who shall certify, under his
  signature, that except in cases, if any, in which
  amendments have been made to the ratable values
  entered in the said book. This section should be
  retained with the reference to ratable value
  being changed to capital value.

39
Amendments to the MMC Act, 1888

• Section 167(1)
• This section states that the Municipal
  Commissioner may amend the Assessment Book during
  the official year. This section empowers the
  Municipal Commissioner to increase or reduce the
  amount of ratable value along with other details
  mentioned in the Assessment Book. This section
  should be retained with the reference to ratable
  value being changed to capital value.
• Section 169
• This section empowers the Municipal Commissioner
  to frame rules for levy of Water taxes and
  charges. The sub-clause (i) of the clause (1)
  states that the charges for the levy of water
  tax and water benefit tax as a percentage of the
  ratable value. Under the proposed system, the
  properties that receive water supply without
  meter measurement will be subjected to additional
  tax to account for the water taxes currently
  levied. This section shall have to be amended
  suitably to govern the proposed additional tax.
• Section 170
• This section empowers the Municipal Commissioner
  to frame rules for levy of Sewerage taxes and
  charges. The sub-clause (i) of the clause (1)
  states that the charges for the levy of water
  tax and water benefit tax as a percentage of the
  ratable value. Under the proposed system, the
  properties that receive water supply without
  meter measurement will be subjected to additional
  tax to account for the sewerage taxes currently
  levied. This section shall therefore have to be
  amended suitably to govern the proposed
  additional tax.

40
Amendments to the MMC Act, 1888

• Section 174 to 179
• These sections deal with the refund of property
  taxes on account of vacancy. These sections will
  have to be deleted. However, they will be
  accounted for in the rules being formulated for
  the new property tax system.
• Section 180 to 190
• Should be deleted in view of the fact that the
  Government is paying Road Grant in lieu of
  Vehicle Tax.
• Section 195E(1)
• This section deals with the levy of Education
  cess. Since it is proposed to levy a consolidated
  tax, this section should be repealed.
• Section 195G(1)
• This section deals with the levy of Street tax.
  Since it is proposed to levy a consolidated tax,
  this section should be repealed.
• Section 198(1), 198(1a), 198(2), 198(3), 198(4)
• This section deals with the levy of Vehicle tax.
  Since the Government now pays a Road Grant in
  lieu of Vehicle tax, this section should be
  repealed.

41
Amendments to the MMC Act, 1888

• Section 200(1) and 200(2)
• This section deals with the service of bills for
  taxes such as property tax, tax on vehicles and
  animals other than specified in the subsection
  (2) and (3) of Section 198. Since it is proposed
  to levy a consolidated tax, the word any that
  appears before the words property tax should be
  deleted. The words property tax should be
  changed to composite tax. Since the government
  now pays a Road Grant in lieu of Vehicle tax, the
  words tax on vehicles and animals, other than
  vehicles and animals referred to in subsection
  (2) and (3) of Section 198, should be deleted.
• Section 202
• This section deals with the service of notice of
  demand if the Municipal Commissioner receives no
  payment within 15 days from the date of service
  of the bill. This section is to be suitably
  amended, empowering the MCGM to charge a process
  fee after expiry of the period of 15 days from
  the date of service of the bill.
• Section 203
• This section empowers the Municipal Commissioner
  to issue distress and attachment warrant after
  expiry of 15 days from the date of service of the
  notice of demand. This section should be amended
  suitably to empower the Municipal Commissioner to
  issue distress and attachment warrant after
  expiry of 30 days from the date of service of
  bill.

42
Amendments to the MMC Act, 1888

• Section 206
• This section deals with the sale of property. All
  subsections should be retained with the addition
  of a subsection permitting the Municipal
  Commissioner to purchase immovable property put
  up for sale at nominal value of Re.1/- subject to
  sanction of Improvement Committee where no bidder
  comes forward to purchase the property.
• Section 207(a)
• This section provides for levying penalty not
  exceeding 20 for non-payment of bills until
  after three months from the date of service of
  notice. This section should be suitable amended
  to empower the Municipal Commissioner to levy of
  penalty to the extent of 20 in addition to
  charging interest at a certain rate from the date
  of expiry of the bill period, till the date of
  payment.
• Section 208
• The section deals with fees for the cost of
  recovery. This is to be retained entirely.
  However, the subsection (A)(1) should be repealed
  since the Government now pays a Road Grant in
  lieu of Vehicle tax. The subsection (2) of
  Section 208 should be retained.
• Section 209
• This section fixes the liability of payment of
  property taxes on the occupier of the premises.
  The subsection (3) should be removed so as to
  enable the MCGM to recover arrears from the
  occupiers.

43
Amendments to the MMC Act, 1888

• Section 210
• This section deals with summary proceedings
  against persons about to leave Greater Mumbai
  limits for non-payment of Vehicle tax and
  Property taxes. Since the government now pays a
  Road Grant in lieu of Vehicle tax, reference to
  Tax on Vehicles and Animals should be removed.
• Section 211
• This section deals with suing persons for
  defaults and arrears of Property taxes or the Tax
  on Vehicles and Animals. Since the government
  now pays a Road Grant in lieu of Vehicle tax,
  reference to Tax on Vehicles and Animals should
  be removed.