Under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM), all municipal corporations are mandated to switch to a capital value-based property tax regime by December 2012, as one of the conditions for financial assistance through the scheme.

CAPITAL GAINS FOR ULBs

In Mumbai, the Standing Committee of the Brihanmumbai Municipal Corporation (BMC) recently approved the new property tax regime. The proposal is yet to be approved by the general body. However, it has already created an uproar and a PIL has also been filed against it.

At this point, the issue may be Mumbai-centric but eventually it would be a guiding example for all the urban civic bodies. In a long run, it would also concern every housing society and office complex in India.

There are around 14,22,812 residential and about 3,77,000 commercial properties in greater Mumbai. The average annual earnings from property tax is around R2,800 crore, the second highest source of revenue for BMC.

LB should collect at least 85 per cent of the property tax. (Most ULBs are inefficient on this count, which is why 85 per cent is seen as an acceptable target.) BMC’s record, however, is a dismal 55 per cent.

On the other hand, buildings — mainly in suburbs — built in the last few decades were not under the rent Act and had higher rental value so BMC could tax them higher. This created a disparity.

Under the new capital value system, the tax will now be calculated based on the market value as per the ready reckoner rates for all the properties across the city. The capital value usually considers criteria such as age, type, category, location etc for the property. So, higher the market value, higher the property tax. This system will be applicable to all old and new structures in the island city as well as the suburbs. The new regime will allow the tax to vary with the fluctuations in the market value of the property.

However, there are some interesting provisions. One, the properties admeasuring less than 500 sq. ft carpet area will not be levied tax under the new regime till 2015. Secondly, the property tax under the new system will be charged retrospectively from April 1, 2010. The new rates will be constant and in force until 2015 when the revision will be due. The revision is capped at 40 per cent of the prevailing rate slab. The present hike in the tax rate will not be more than the 100 per cent of the current rate while those who will enjoy the reduction will get the refund of the additional tax paid during last two years (from 2010 onwards) with interest.

The Impact

The civic administration claims that about 54 per cent of the total 12.22 lakh properties will not face any increase in the tax as they are smaller than 500 sq. ft carpet area. Around 27 per cent of this number would enjoy reduction in tax ranging from 30-60 per cent while only 19 per cent will have to shell out more in the range of 20-100 per cent. However, the increased tax can be paid in three installments up to March 31, 2013.

According to Additional Municipal Commissioner Rajiv Jalota, “Since rents were frozen, we had to keep increasing the tax rates owing to which new buildings had to pay exorbitant property tax. Now the rates for the new buildings will reduce to as much as half in many cases across the city. However, the increase in taxes for old buildings in island city will be marginal. The system will rationalise the taxes levied in the city.”

However, many suburbs will benefit while several areas in island city will feel the brunt. The commercial spaces across the city are worst hit as they might have to pay three times the current tax.

“The new system will usher more transparency and better compliance. The number of disputes will reduce greatly since one can compute his own tax.” (See box for an illustration)

BMC has indicated a uniform tax rate of 34.8 per cent for all residential properties irrespective of the location. However, the other factors will create the variations. BMC claims to have made the process transparent as it will make capital value of the properties available on its website. The civic body expects to get additional revenue of R300-400 crore under the new regime.

The objections

Several objections have been raised on this move:

Hike should be only after regular revisions happening periodically, and not suddenly.

The tax should be on carpet area and not built-up area.

New buildings will be just pencil box structures to avoid high tax on decorative features.

The retrospective implementation would be burdensome.

Including super built up area in chargeable area is not justified.

According to Rajkumar Sharma, coordinator of AGNI, an NGO, the new system aims at protecting the interest of the developers as it tries to include super built up areas as well in the tax calculation.

A public interest litigation (PIL) has been filed against BMC in the Bombay High court, which states that:

It is the duty of the BMC to implement the mandatory reforms such as mapping properties using a Geographical Information System (GIS) to have a full record of properties and bring them under the tax net. The income can increase without changing the present tax structure. However, BMC has yet to complete mapping of properties.

Exempting properties below 500 sq. ft would mean that owners of larger property owners would subsidise smaller and unauthorised property owners. Around 2.75 lakh properties would be singled out for a hike to the tune of 100 per cent.

Next month, the proposal would be tabled before the general body of BMC for approval and the PIL would come up for the hearing. However, if sources are to be believed, considering the objections the ruling party in BMC might rollback the proposal. Nevertheless, the issue has thrown significant light on an important policy concerning urban governance and real estate.