A Strategic Approach to Enhance Property Tax Revenues in India
By Dr Ravikant Joshi and Ram Khandelwal
More than one-third of India’s population lives in our cities that contribute nearly two-thirds of India’s GDP. In recent times, these engines of economic growth took a hard hit by the pandemic. Delhi, Pune, and Bengaluru contribute 3% of India’s population have seen 13% of total COVID19 cases in India. In response to the COVID19 crisis recovery, Prime Minister Narendra Modi announced the Aatma Nirbhar Bharat Abhiyan. The economic relief package focuses on making India self-reliant through financial assistance and governance reforms.
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Why do Indian cities need to become self-reliant (#aatmanirbhar)?
Indian cities have significant urban infrastructure gaps. As per the High-Powered Expert Committee (HPEC) Report, the investment need for urban infrastructure is about Rs. 39.2 lakh crore (at 2009-10 prices) for the 2011-2031 period to meet the basic requirements. Further, it proposed to increase investment in urban infrastructure from 0.7% of GDP in 2011-12 to 1.1% by 2031-32.
As per the World Bank Discussion Paper on Property Taxation in India, the contribution of the property tax in GDP in India (0.15%) is very low as compared to high-income (1.1%) and middle-income countries (0.6%). Indian cities (Rs. 1,019/capita) have the lowest per capita property tax as compared to Latin American and the Caribbean cities (Rs. 5,362/capita), African cities (Rs. 2,246/capita) and South East Asian cities (Rs. 1,424/capita). As per ICRIER Report on State of Municipal Finance in India, the property tax is the most significant income stream in Indian cities comprising 60% of municipal tax revenue. The property tax to GDP for India is 0.15% as against 2.47% in the US; 3.3% in Hong Kong; 0.5% in the Philippines and Malaysia (Ahluwalia et. al., 2019). Further, the own revenue share of ULBs is down from 50% in FY13 to 43% in FY18. It reflects the higher dependency of ULBs on fiscal transfers and low growth in own incomes.
Under the Aatma Nirbhar Bharat Abhiyan, the Ministry of Finance has allowed increasing the borrowing limit of States by 0.25% of GDP subject to urban local body reforms. The States will have to notify floor rates of (a) property tax in ULBs which are in consonance with the prevailing circle rates, (b) user charges in respect of the provision of water-supply, drainage, and sewerage which reflect current costs/past inflation. The States will have to put in place a system of periodic increases in floor rates of property tax and user charges in line with a price increase.
The Department for Promotion of Industry and Internal Trade has mandated ULBs to digitize and publish property tax payment dues online in the public domain under the ease of doing business (EODB). As per business reforms action plan (BRAP) framework, the States shall design and implement an online system that will have the facility to auto-calculate the levy, so that property owners have clarity about their tax liability and the time taken to file returns reduces and the tax compliance increases.
Cities like Ahmedabad, Pune, and Indore which have implemented property tax reforms have received higher credit ratings and have been successful in raising municipal bonds. Interestingly, all three cities rank amongst the top 10 cities in Ease of Living Index 2020 and Municipal Performance Index 2020.
India has 4,000+ statutory cities. As per Vinod Kothari Consultants, only 12 cities and 3 state-pooled bonds have made 34 municipal bond issuances. As per CRISIL ratings, of the 94 cities assigned a credit rating till December 2017, only 16 cities secured ratings above A (CRISIL, 2019).
How can Indian cities become self-reliant (#aatmanirbhar)?
In order to improve the financial capacity of the municipal bodies, the ULBs must implement property tax reforms. The World Bank Property Tax Diagnostics Manual suggests that the cities shall begin with tax administrative reforms followed by the tax policy reforms.
In the Indian context, M Govinda Rao pointed out that many municipalities have simply not updated their property tax registers and many properties are simply not included in the tax base. The GOI flagship JnNURM program gave a policy push through property tax administrative reforms. It assigned mandatory ULB reform to improve property tax coverage to 85% and collection efficiency to 90% of the total properties.
As per the NIUA Report on Urban Reforms in Indian Cities, the Vishakhapatnam Municipal Corporation (VMC) doubled its property tax from Rs 77 crore in 2010–11 to Rs 169 crore in 2013–14. The VMC mapped 352,000 properties using GIS, a property survey, and unique property identifiers and added 50,000 new properties and 47,000 vacant land parcels to its property register. Improved assessment enabled it to generate real-time demand and collection statements for property tax.
The 2nd Administrative Reforms Commission estimated that only 60%–70% percent of properties in urban areas were actually assessed. In FY 2018, the property tax revenue in India was in the tune with Rs. 25,000 crores equivalent to 0.15% of national GDP. The authors estimate that by increasing coverage from 60% to 100%, property tax realization could increase up to Rs. 40,000 crores. This can be done without much increase in revision in property tax assessment rates and methods.
The World Bank Discussion Paper on Property Taxation in India suggests that “GIS mapping should be done in all urban cities and towns to create base maps and accurately assess the number of properties. They should be assigned with unique IDs. A preliminary digital assessment of properties should be done to account for underassessed ones. A digital database of all properties should be created to help prevent manual errors that encumber physical record maintenance and to make the process of data management simpler and more transparent. Follow-up visits as a part of door-to-door surveys are often necessary to identify property owners, particularly where single buildings located in crowded, narrow streets may house several properties.”
The Indian administration system is well equipped with the requisite skills and resources to carry out door-to-door surveys for census operations. The house numbering is one of the key elements of the census operations. The process is well-defined, time-bound, and authenticate. Such a carpet-bombing approach has the potential to carry out one-time property enumeration across the country. However, such property enumeration has not been mainstreamed and integrated with property tax for enumeration purposes.
India lacks a robust addressing system that hinders property tax management as well. Adding, deleting, merging, and updating property records have been a daunting task for ULBs for decades. However, with technology advancements, digital street addressing systems and artificial intelligence-based drone mapping techniques are opening up new possibilities. Such ideas have been tested in cities like New Delhi, Bhopal, Bhubaneswar, Sagar amongst others.
As per the Print, the working Group of Ministers (GoM) on employment generation and skill development have suggested ‘One Nation, One Address’, akin to an Aadhaar number, for every property. It is likely to cost Rs. 1,125 crores to implement 'One Nation, One Address'.
We estimate that only through property tax administrative reforms, such costs can be recovered within the first year of the operation. The ‘One Nation, One Address’ program must be designed to integrate property enumeration with property tax management.
It could use a 3C approach – centralized solution architecture for property mapping and street addressing; collaborated and coordinated efforts within government departments; and connected technology using the internet of things, machine learning, and artificial intelligence.
1. Dr. Ravikant Joshi is an Urban Finance and Management specialist and has worked in India and abroad. He is a former chief accounts officer of Vadodara Municipal Corporation with over 35 years of experience. He has worked as a short-term consultant (STC) for the World Bank, ADB, USAID, DFID, UN Habitat, CLGF, CEE, Janaagraha, and other organizations on urban issues. He was a Chair Professor for Urban Management in Saint Joseph College of Business Administration, Bangalore. He is a visiting faculty at NIUA, HSMI, ASCI, YASHADA, CEPT, and other institutes of national repute. Email: firstname.lastname@example.org
2. Ram Khandelwal is the Founder of Urban Innovation Lab. He’s an urban planner with 10+ years of experience in consultancy, research, and teaching in the urban sector. He has worked with MNCs like PwC, IPE Global, Yes Bank, ICF International, and CRISIL. He has worked for clients such as World Bank, ADB, UNIDO, EU, FCO, DFID, AfD, HCL Foundation amongst others. He is a visiting faculty at SPA Delhi and taking courses on smart cities. Email: email@example.com
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The views expressed in this article are those of the authors. They do not purport to reflect the opinions or views of the Urban Innovation Lab.