Insights into Editorial: Cities at crossroads: Starving the municipality
According to a recent study, property tax is grossly under-exploited in India, even though it remains the largest source of revenue for urban local bodies.
Significance of service tax:
Property tax is the single most important source of revenue for municipal corporations and municipalities. It accounts for 30% of “own” municipal revenues in India.
While property tax is levied and collected by the urban local bodies, the state government has the power to design the property tax regime including the tax rates, exemptions and rebates, the tax base, and the basis for the valuation of properties as well as their revaluation every few years to account for rising prices.
What’s the concern now?
However, in recent times political parties vying for power are often tempted to promise a waiver or reduction in the property tax or grant of exemptions in order to win support during election time, thereby creating huge vulnerabilities for municipal finances subsequently. The largest source of revenue for the urban local bodies, therefore, tends to get caught in the wheels of the election cycle. The resulting collapse of municipal services hurts voters, but they do not realise how it is directly linked to the populist decision to cut property tax or house tax as it is commonly called when levied on residential properties.
Various attempts by state governments in this regard:
- The Delhi Chief Minister had recently announced that if the AAP came to power in municipal corporations, the Delhi state government would waive house tax for all residential properties — big or small, rich or poor.
- Rajasthan abolished property tax in February 2007. However, the tax was brought back within six months in a new incarnation as “urban development tax” to recoup the loss of revenue resulting from the property tax abolition, and also to retain access to Jawaharlal Nehru National Urban Renewal Mission (JNNURM) funds for urban infrastructure.
- In Punjab, house tax on self-occupied residential houses, which form the bulk of the properties covered under the tax, was abolished in the late 1990s. In 2006, attracted by the desire to access JNNURM funds to build infrastructure in Amritsar and Ludhiana, the government in Punjab entered into an agreement with the GoI to put in place a reformed property tax regime in these cities but was not able to implement the agreement.
- Property tax was finally introduced in 2013, although following the familiar pattern, property tax rates were cut by almost half and many categories were exempted during the campaign for the general elections in 2014.
- Haryana and Himachal Pradesh have also each had a bash at blowing the budgets of their municipalities by giving major exemptions in their property tax regimes.
What needs to be done now?
- There is need to set up a property tax board in each state which could set out better and more transparent methods of assessment, valuation and collection of the tax, using GIS and other IT tools.
- There is also need to add a municipal finance list in the Constitution which should specify taxes that are exclusively in the domain of the local government.
- Above all, there is need to heed the sage advice of the Fourteenth Finance Commission: “The state government should not provide exemptions to any entity from the tax and non-tax levies that are in the jurisdiction of local bodies. In cases where the grant of such an exemption becomes necessary, the local bodies should be compensated for the loss.” State governments will then not be able to play politics with municipal finances.
- Financial autonomy to set user charges to cover costs of delivering public services is also crucial if we are to see a process of turnaround in the state of service delivery in our cities. In fact, state governments should match increased local revenue effort with larger grants.
The urban local governments have remained hamstrung by the lack of funds and the situation is going from bad to worse. If Indian cities are to deliver a better quality of life and improved investment climate, they need to have business models which are financially and environmentally sustainable.