Reforms in Fiscal and Monetary Policies: The Road Ahead. Reforms in Property Taxation in India: Where Do We Stand? By

Transcription

1 Foundation for Public Economics and Policy Research, Delhi International Seminar on Reforms in Fiscal and Monetary Policies: The Road Ahead December 9, 2006 Presentation on Reforms in Property Taxation in India: Where Do We Stand? By Gautam Naresh & Ajay K Halen National Institute of Public Finance & Policy,New Delhi TELE: ; ; ; ; ; Fax: : naresh@nipfp.org.in gautamnaresh@gmail.com Gautam Naresh 1

2 Property Tax And Scope For Reform: Reasons for Reform Nature of Reform Preconditions for Reform Gautam Naresh 2

3 Reasons for Reform The main stated reasons for reform have been 1. to simplify the tax system, 2. to raise more revenues from property taxes, and 3. to remove inequities in the tax system. Gautam Naresh 3

4 Nature of Reform focused on changes to the assessment base move to market value administrative reforms to improve the way in which properties are assessed with a view to achieving uniformity in assessment. improvements to collection and enforcement Property tax reform in India focused on assessment system in some municipal bodies. It is switching over to area-based system slowly. However, some other experimentation is also on. Gautam Naresh 4

5 Precondition for Reform Assessment base: Availability of technical expertise. Existence of a cadastre, A land registration system, The capacity of local government, and A solid administrative infrastructure. Political will is needed to ensure that the reform is implemented. Gautam Naresh 5

6 Finally Tax reform is as much or more a political as it is a technical exercise. The inherent characteristics of land and property taxes make this dictum especially applicable with respect to property tax reform. Setting up and administering a decent property tax is a complex and expensive effort. Gautam Naresh 6

7 Finally Reform may be designed To collect more revenues by changing the tax base or improving collection and enforcement. Or, the goal could be to simplify the tax system by combining several taxes or by improving tax administration. Or, it is to improve the fairness of the tax system by introducing a uniform assessment system. Internationally, the experience shows that politics of successful property tax reform are not encouraging. Such reform is seldom easy, usually difficult technically, and often not too rewarding in either revenue or political terms. Gautam Naresh 7

8 Generalization about property tax policy Ten generalizations, however, can be helpful in formulating tax reform: 1. Simplicity as much as possible. Minimum exemptions and uncomplicated rate structures. Reform should emphasize improving the general property tax administration rather than adding special features to affect resource allocation or income distribution. 2. The property tax needs to be viewed as a system, and reforms need to be coordinated by all parties involved in structuring and administering the property tax. Decisions about assessment and collection practices, exemption policy, and rate structure design may be the responsibility of different offices but must not be made independently. 3. In general, a flat rate property tax on all real estate is not likely to be regressive in either the short or long run. Gautam Naresh 8

9 Generalization about property tax policy 4. The distribution of property tax burdens will be more progressive if the preferential treatment granted to owner-occupants occupants is eliminated. 5. The exemption of low-value properties or, better yet, granting all taxpayers a deduction from assessed value will make the property tax more progressive, favor low- income housing development, and ease property tax collection problems. The revenue costs will be small. 6. On balance, it is preferable to tax land more heavily than improvements. Therefore, if increased revenues are to be raised from an existing capital value tax, it is worth considering raising the tax rate only for land, rather than for land and buildings alike. Gautam Naresh 9

10 Generalization about property tax policy 7. If a special tax is to be levied on vacant urban land to speed up its development, this tax instrument should be explicitly linked to a land use development plan rather than applied indiscriminately to all vacant property in the metropolitan area. 8. A property transfer tax is likely to interfere with the efficient operation of urban land markets and should be replaced by more effective administration, and possibly a higher rate, for the general property tax. 9. A land value increment tax is not likely to be effectively administered in developing countries. Efforts to raise property tax revenues would do better to focus on improving the administration of existing property tax systems. 10. The four facets of property tax administration, identification of o properties, record keeping, assessment, and collection-must all be improved to make the property tax more productive. Improving collection efficiency alone will increase revenues in the short run but will not provide the broader base necessary for long-run growth. Gautam Naresh 10

11 Property Tax Reforms in Municipal Corporation of Delhi Gautam Naresh 11

12 OLD SYSTEM Based on rateable value linked to annual rent reasonably expected Self Occupied Rented Residential Commercial Annual Rent Cost of land Market value of land at the time of at the time of purchase commencement of construction + + Construction cost Construction cost Tax rate Residential 20 % of Rateable Value Tax rate Non Residential 30 % of Rateable Value Gautam Naresh 12

13 Defects Wide variation between similarly placed properties. Incidence of tax in old regular colonies lower than in new unauthorized colonies Assessment can be subjective Scope for collusion by owner Discretion at lower level leading to corruption Long term tenancies - freezing of valuations Harassment by inspectors Excessive litigation - loss of revenue. Gautam Naresh 13

14 PROPERTY NO. RATEABLE VALUE CATEGORY TAX 259, SECTOR A, VASANT KUNJ 18,000 MIG , SECTOR A, VASANT KUNJ 1,02,000 MIG 19,400 Gautam Naresh 14

15 CATEGORY A ADDRESS CURRENT DEMAND COVERED AREA (SQ FT) UNIT AREA TAX ( PER SQ FT) 90, ANAND LOK , ANAND LOK , ANAND LOK , ANAND LOK Gautam Naresh 15

16 ADDRESS CATEGORY A CURRENT DEMAND COVERED AREA (SQ FT) UNIT AREA TAX ( PER SQ FT) 90, ANAND LOK , ANAND LOK , ANAND LOK CATEGORY G D 913, ASHOK NAGAR D 1852, ASHOK NAGAR D 1634, ASHOK NAGAR Gautam Naresh 16

17 MCD Switches to New Tax Regime After 12 years of debate, the MCD has finally decided to adopt the new system of assessing property tax through the Unit Area Method. This comes into effect from April 1, It is part of the urban reforms undertaken by the MCD on the direction of the Urban Development Ministry. The switchover has been debated since There were two committees, one under the late Congress leader, Jag Pravesh Chandra and another under the BJP leader, Mr VK Malhotra, set up to adopt the UAM. The MCD also had held a series of seminars on UAM system during The groundwork for implementing the system was started only a couple of years ago. The Expert Committee was set up under Mr K Dharmrajan. It is claimed to have taken least time in implementation compared to other cities in India. Gautam Naresh 17

18 Components of the New System of Assessment Total covered area of the property (Plinth-open) Unit area value per square metre (UAV) Multiplicative factors Concerns addressed Exemptions Concessions Rebates Rent control properties Walled city Unauthorized colonies Resettlement colonies Urban villages Self-assessment system Payment system GIS Mapping Hardship redressal mechanism Amendments in the Act Gautam Naresh 18

19 Area of the property Total covered area of the property Minus defined open areas Gautam Naresh 19

20 Unit Area Value Computed on the basis of Colony category Type of structure Age of construction Use of property Occupancy factor for each a multiplying factor has been given Gautam Naresh 20

21 Categorization of Colonies A list of 1,986 Colonies/ Localities/ Areas have been finalized along with a list of urbanised villages Colonies Geo-coded and Plotted on Digital Map Colonies Classified Into 7 Categories From A to G Residual Category H For Rural Villages Gautam Naresh 21

22 Basis of Classification 1. Capital Value Of Land 2. Prevailing Rental Values 3. Age of the Colony 4. Physical Infrastructure 5. Social Infrastructure 6. Proximity to Commercial Centres 7. Road on which the Colony is Located 8. Type of settlement 9. Economic Status of Occupants 10. Location Each of these parameters were graded either A, B or C Grade Scales converted to a Point Scale (A=10,B = 6,C= 2) Gautam Naresh 22

23 Classification Matrix prepared based on the above factors giving Grade Scales Finally categorization of colonies/areas in descending order from A to G was done as follows: Category A: 80 And Above Category B: 70 to 79 Category C: 60 to 69 Category D: 50 to 59 Category E: 40 to 49 Category F: 30 to 39 Category G: Less than 30 Category H: Rural villages Urban villages placed two levels below category of neighbouring colony Residential properties in Urban Villages in Category G Rural villages will be included in a separate category lower than G, i.e., H Gautam Naresh 23

24 Multiplicative Factors Multiplicative Factors are: 1. Structure factor (SF) 2. Age factor (AF) 3. Occupancy factor (OF) 4. Use factor (UF) Gautam Naresh 24

25 Structure Factors Pucca - with load bearing walls / roof & semi pucca - with temporary roof 1.0 Semi pucca - with temporary roof 0.7 Kuccha 0.5 Classification as per census definition Age Factors Built 2000 and after 1.0 Built between Built between Built between Built between Built prior to Gautam Naresh 25

26 Occupancy Factors 1. Self occupied Tenanted for any use 2.0 Use Factors Residential - 1 Public purpose - 1 Public utility - 2 Industries, recreation, club - 3 Business, restaurants, hotels up to 2 star star and above hotels/towers/hoarding - 10 Gautam Naresh 26

27 Category-wise Unit Area Value 1. Category A: Rs 630 per metre 2. Category B: Rs 500 per metre 3. Category C: Rs 400 per metre 4. Category D: Rs 320 per metre 5. Category E: Rs 270 per metre 6. Category F: Rs 230 per metre 7. Category G: Rs 200 per metre 8. Category H: Rs 100 per metre Gautam Naresh 27

28 Rate Structure Is Decided by the Corporation Residential properties 10 % for category A to E 6 % FOR category F to H Non-residential properties 15 % Three star & above hotels/ towers/ hoardings 20 % Gautam Naresh 28

29 Tax Calculation Tax = Unit Area Value (UAV) X Various factor multipliers x Covered area x Rate of tax Minus rebates as admissible This calculation is capable of self-assessment Gautam Naresh 29

30 Advantages Similarly placed properties - same unit tax No subjectivity in assessment No discretionary power in individual cases Information needed cannot be suppressed Simple, capable of self-assessment Inspector not involved in assessment Gautam Naresh 30

31 Concerns Addressed 1. Exemptions I Exclusive Agricultural Use & Heritage Buildings I Religious organizations excluding commercially used space I Original inhabitants of Urban and Rural villages for Residential Self Occupied I Government Properties I Municipal Properties which are in self-use 2. Concessions Senior Citizens Women-owned residential properties Age of the property Type of Structure viz. Pucca, Semi Pucca, and Kuchcha Group Housing Societies and Colonies for maintaining internal services 3. Rent Control Properties De-linking rent from property tax Onus of tax on occupier in such cases Gautam Naresh 31

32 4. Walled City Areas Concessions for very old properties Onus on occupier for rent control properties 5..Resettlement Colonies All resettlement colonies have been placed in the lowest category No additional factor for tenanted properties No tax until title transferred 6. Urban Villages Categorized two categories below adjoining colonies UAV for Residential properties in all Urban villages to be same as for category G colonies Exemptions for original inhabitant Gautam Naresh 32

33 7. Unauthorized Slums Only service charge at flat rate per dwelling CBO s to be utilized for collection Proceeds to be used for service in that area 8. Hardship Redressal Mechanisms Properties assessed under present system continue to pay same tax until revised system implemented Transition period of 3 years to shift to new level of tax (where revised tax more than 50% of tax paid) Anomalies and Hardships Committee to examine hardship cases Gautam Naresh 33

34 Improved Tax Administration Based on Self- Assessment System Payment through banks & internet Payment in quarterly instalments Rebate for advance payment Provision for refund if any Transparency of tax information Interest for delayed payment Penalty for non filing of returns, wrong information, non payment tribunal for tax appeals Municipal valuation committee revision every 3 years Gautam Naresh 34

35 Mapping of City Information System Aerial photography & gis maps Complete survey and preparation of database Allocation of a unique property index code (PIC) Computerized maintenance of records Gautam Naresh 35

36 Estimation of Covered Area, Identification & Plotting of Colonies, Mapping of Colony Boundaries, Calculation of Open Areas, Computation of Covered Area Colony Area Open Area Total Covered Area Zone Ward Name Ward No Locality Name Type Sq km Sq km Sq km Gautam Naresh 36 Central Defence Colony 4 Andrews Ganj A

37 Amendments to the DMC Act Section 2 - Amendments Addition of New Definitions Section Substitution and Addition Building Tax and Vacant Land Tax Property Tax = Tax Rate X Annual Value Rate of tax Min 6 %, Max 20% Graduated scale if needed Rebate for senior citizens and women Section Substitution and Addition : Exemptions Agricultural purpose Lal Dora Area Original Owner Public Worship Burial and cremation grounds Public Charity Corporation buildings not let out ( Government buildings will be exempted, but pay service charge, as at present) Gautam Naresh 37

38 Section Substitution and Addition Classification of properties into groups for base unit area value Factors for changing unit area value Process for notification, objections finalization Annual value = Unit Area Value X Covered Space Existing tax to continue until revised Revision of unit area value every 3 years Indexation of Property Tax Municipal valuation committee Hardship and anomalies committee Section Amendment Liability of tax primarily on owner Liability on occupier in certain cases (for example rent control properties) Gautam Naresh 38

39 Section 123A - 123D: New Sections Submission of returns Self assessment and payment Revision of assessment Power of Commissioner regarding assessment Section 124: Substitution Assessment information to be maintained and made available to the public Section 152: Amendment Higher tax to be graduated over three year period Section : Amendments Appellate Tribunal Section 327: Amendment Unique premise number for every property Gautam Naresh 39

40 Gautam Naresh 40