Property tax reforms in Bangalore-India

1
Property tax reforms in Bangalore-India

• June 23, 2003
• Mr. Vasanth Rao

shyvas_at_hotmail.com
2
The context

• No major fiscal institution has been criticised
  at such length and with such vigor, yet no fiscal
  institution has changed so little Dick Netzer
  (1966)

3
The challenge addressed

• The City Corporation of Bangalore in India has
  nearly doubled property tax revenues in 3 years
  since 2000 through a scheme widely welcomed by
  citizens (over 70 voluntary compliance)

4
The need to augment Municipal revenue
Urban population growing faster than rural
population Growth rate 1991-2001 Urban
-31.2 Rural-17.9 Urban population 285
million (2001) Proportion to total population
-27.8 Contribution of urban areas to GDP-
55 Municipal revenue - 0.6 of the GDP
5
Revenue of the Centre, State and Municipalities
Level of Govt. Total - Rs. Billion (US bn) Rs. per Capita (US / capita)
Centre 833.2 (18) 986.8 (21.5)
State 484.6 (10.5) 573.9 (12.5)
Municipalities 39.0 (0.9) 205.3 (4.5)
6
The problem of declining revenues

• Very nature of the tax base
• The annual rental value
• Provincialization of taxes
• Typically take away buoyant ones
• States prefer transferred revenue model
• local fiscal base weakened
• amount not commensurate with earlier
  realisations
• Bangalore clubbed with other municipalities in
  the State
• lack of flexibility

7
The solution arose through decentralization

• The 74th constitutional amendment (1992) gave a
  constitutional status to the urban local
  governments- to make them effective institutions
  of self-government
• The local govt. yet to experience the feel
  of this legislation
• However, mid 90s saw a spurt of enthusiasm in
  property tax reforms.

8
Revenue of the Centre, State and Municipalities
The average annual property tax in Bangalore City
prior to the year 2000 was 25 (Residential) and
Non- Residential 40 Therefore the resentment
among the property owners and the city council
over the property tax seems disproportionate to
the revenue burden imposed. Emotions run high
when property tax reforms are on the table
9
Why this resentment ?

• First Visible tax
• Assessment is judgmental
• The levy is on accrued income and not realised
  income
• Administrative costs are high
• Citizen do not see perceived benefit- inadequate
  civic services Why should I pay?

10
Genesis of the problem

• Municipal laws in India adopted the rental value
  of properties as the base.
• Annual Rental value for property tax is arrived
  on
• The actual rent where it is actually let
• Where it is not let, by artificially method of
  valuation- the expected rent
• If both not available then valuation based on
  capital value from which annual value is arrived
  by applying suitable percentage.
• In Bangalore the rate for capital valuation
  is 6

11
Genesis of problem

• Other related problems like in any other
  developing countries-
• a) Property identification
• b) Record keeping
• c) Valuation
• d) Collection

12
The Bangalore City Corporation experiment
13
Legal amendments take time

• Any amendment to the municipal Act requires
• the City Council to approve when tabled
• approval of the State Assembly while in session
• if Assembly approves then Corporation has to call
  for objections 30 days time
• After meeting the objections adequately, final
  draft of amendment to sent to Government
• Government to issues final Notification after
  which it becomes an Act. - - - The process takes
  2 years..
• The sequence perhaps explains why amendments/
  revisions were not attempted for 3 decades

14
Tackling the issue differently

• Environment conducive for property tax reform
  New Govt. a chosen team assigned to head civic
  bodies-Citizen expectation heightened
• Needed to do dramatic change within 3 months
• Chose to change the method of assessment rather
  than go to City Council or Government for any
  amendment
• Chose to revise rental rates for different
  areas-this was legally within the Commissioners
  powers

15
Best practices studied

• Guidance from international experts- took cue
  from their experiences

16
Prescription for effective administration Dr.
William Dillinger, Dr. Roy Bahl, Dr. Roy Kelly,
Richard Almy

• Tax Base TR CVR VRCL
• Tax Rate - Could not tinker - Tax rate-
  Increase in tax rate would draw protest. Would
  require legislation
• CVR Coverage Ratio Only 50 -60 in the
  cadastral -so if one did not do much, but paid
  attention to the coverage it could increase
  revenue.
• CL Collection Ratio 50-60 this could
  improve by mere administrative measures
• VR Valuation Ratio If the coverage
  Collection ratio reached a saturation point
  increase the tax buoyancy halts. So one had to do
  revise valuation

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Possibilities

• Application of the prescription Tax Base
• TR Tax Rate Could not
  tinker
• CVR Coverage Ratio Yes could improve
• VR Valuation Ratio Could do-
  tricky
• CL Collection Ratio Yes could
  improve

18
The road to reform

• To hybridize the theories-synergize for public
  acceptability.
• Evolved a mix of area-based and capital value
  and assigned rental rates
• Packaging the scheme

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An optional self assessed scheme

• The optional self assessment scheme (SAS)
• Though called selfassessment in the actual
  practice implementation it was self reporting
  of data
• Taxpayers responsibility to identify their
• - location of property
• - type of structure
• - extent of built-up area
• - use-residential/commercial
• - depreciation
• and apply schedule of value for the location to
  arrive at the rental value. On the rental value
  to calculate the tax rate and pay the tax at any
  of the designated banks

20
The SAS provisions

• Specified rateable value across the city-
  valid for 5 years (certainty)
• Appeal provision made available (appeal
  mechanism)
• Maximum and minimum cap fixed (safeguard
  politically wise)
• 5 random scrutiny (Enforcement)
• Commissioner to provide citizen with
  clarification on
• the scheme (Citizen interface)

21
Location classification under SAS

• Location
• Used Karnataka Land Registration rates as basis
  for zone classification. (6 land value bands
  evolved to form 6 zones- A Zone refers to land
  category value rather than to a continuous area
• (Value in Rupees)
• gt 4000
• 3000-4000
• 2000-3000
• 1000-2000
• 1000 -500 and
  
• lt 500

22
Beyond a one size fit all approach

• Category of building Class of property
• PWD guidelines for cost of current construction.
• Due to revision not made for 3 decades
  cost of construction was not
• ascertainable. Hence PWDs rate for
  current construction cost of a
• livable house was adopted as the base.
• Total 16 classification made
• 5 different class of residential properties-
  politically sensitive
• 6 general commercial properties
• 5 different basis evolved for wedding halls, star
  hotels,
• theatres, industries, hospitals

23
Towards rateable value

• Rental rates
• - rental rates factored for different areas
• - rate based on Mass appraisal system
• - over 4000 cases analyzed ( simple
  mathematical model
• followed)

24
The essential parameters in SAS

• Non-Residential
• Residential

Offices, Restaurants, Clinics, etc.
Usage
Star hotels, Theatres, Wedding hall Industries,
Hospitals.
25
SAS tax in 3 easy steps for residential properties

• Area X Applicable rate X 10 T1
• T1 Applicable depreciation T2
• T2 X 20 Property tax
• 34 cess additionally payable

26
Packaging SAS for the masses
Marketing the SAS concept
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The SAS spirit

• The goals were straightforward
• To get property owners to voluntary declare their
  property tax liability and make payment within
  set time to avail the benefit of the optional
  scheme.
• The scheme was made optional to overcome any
  legal challenge.
• Those who chose to stay out of the scheme would
  be assessed by the assessor after visit to the
  property- the assessment yardstick would more or
  less be the same

28
Evaluation of the scheme

• To evaluate the success the obvious yardstick
  are
• Revenue yield
• Collection ratio
• Compliance cost
• Tax payer service
• Citizen response

29
Evaluation of the scheme

• Revenue yield

Year Revenue Collected Amount in Percent Crores IAssessed Properties IAssessed Properties Property Tax Collections per property
Amount in Crs. Percentage increase Number Percent Increase
1995-96 49.66 - 30,393 - 1637
1996-97 60.46 21.7 338,178 11.5 1788
1997-98 85.80 41.9 353,618 4.6 2426
1998-99 98.43 14.7 380,956 7.7 2584
1999-00 118.00 19.9 388,983 2.1 3034
2000-01 157.50 33.4 404,500 4.0 3894
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Evaluation of the scheme

• revenue yield

Collected Rs. 90 Crores by June 2000 1999 same
period collected Rs. 20 Crores
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Revenue yield
Self Assessement Scheme (SAS)

• Av. taxes went up 30-50, but citizens loved it !

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Evaluation of the scheme

• the collection ratio

Year Demand Collection Percentage of collection
1995-96 106.28 49.66 46.72
1996-97 133.10 60.46 45.42
1997-98 161.21 85.80 53.22
1998-99 179.26 98.42 54.90
1999-00 185.00 118.00 63.78
2000-01 199.00 157.50 79.14
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Evaluation of the scheme

• compliance cost
• Most citizen paid 2.5 times more tax then they
  did previously
• They did so if only to eliminate the inspector
  raj
• Payment at the banks felicitated distancing the
  taxpayer and the tax payee.
• Within a short time there was not only revenue
  realization but also economic efficiency-
  Corporations credibility heightened.

34
Evaluation of the scheme

• Citizen response
• Overwhelming support from citizen-press
  pro-active and supportive of the scheme.
• 90 of the residential 60 Commercial
  properties opted for the scheme
• The High Court upheld the scheme that is not
  injurious to public needs nor affects their
  rights
• Directed Corporation to consider similar such
  schemes for sanction of building plans and for
  registering new property

35
Back office computerization

• Specialized property tax computer program
  developed.
• 72,000 apparent mistakes on record notices
  issued in Sept 2001detected by computer check
• Collected Rs. 5 Crs out of Rs 6 Crs detected
• Property tax Database created. Is the corner
  stone in the direction of introducing capital
  value system at a later date.

36
Issues Concerns

• At the threshold Will the initial success of
  the new system continue to work and keep the tax
  buoyant?
• Yes - if the elasticity is maintained- this
  requires
• - periodic updating of index values
• - Increase coverage-new properties
  brought
• to book
• - Collection efficiency

37
Issues Concerns

• No if enforcement is not put to place SAS will
  see a natural death
• If the self-assessment returns are not audited
  then non-compliance will increase.
• If new properties are not enumerated revenue will
  not grow
• If no investment is made in training staff in
  assessment techniques Corporation cannot switch
  over to a capital value assessment in future.

38
Way ahead

• To capitalize on the initial gains
• Investing time in
• Build a cadastral forecast of revenue possible
  and tax rate can be set.
• To physically inspect the properties in the next
  2 years and prepare a tax map. ( Do-able since
  each ward is about 2.5 sq. kilometers and about
  3500 properties)

39
Way ahead

• To develop independent agency to evaluate the
  index values
• Creation of a central valuation unit
• Re-structuring of property tax administration-
  create cadre of good assessors
• To create different user charges for services
  rather than collect cess in addition to Property
  tax the visibility of the tax reduces

40
Way ahead

• If these cautions are taken care and put to
  practice then this system can show the way
  that the good local tax is getting the job
  done.