Property taxation needs structural reform

Why in the News

India’s municipal bodies collect property tax worth only 0.15 to 0.2% of GDP, below the 0.3% raised in low-income countries. Studies of Chennai and of Bengaluru, Pune and Ghaziabad find that technology and process reforms keep falling short unless backed by structural reforms in municipal staffing, elections and financial reporting.

What is property tax, and why does it matter to cities?

1. Property tax: This levy on property owners is the most important own revenue source of India’s municipal bodies. It is like a city’s own salary, unlike grants from the State or Centre.
2. Creditworthiness: Urban investment depends on a city’s creditworthiness, so weak property tax limits how much a municipality can borrow to build.
3. Peer gap: Middle-income countries raise about 0.6% of GDP from property tax, far above India’s level.
4. Past reforms: Successive Finance Commissions, the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) pushed technology and process reforms, with sub-optimal results.
5. The takeaway: A city that cannot collect property tax cannot borrow, so weak taxation turns into weak urban infrastructure.

How does property tax work, and where does it break down?

1. Three stages: Property tax runs through enumeration (identifying properties and keeping their records), valuation and assessment, and billing and collection.
2. Enumeration: Geographic Information System (GIS) mapping with satellite imagery and drones identifies properties. Assessors must still inspect them regularly, but a perennial staff shortage, skill gaps and weak capacity building prevent this.
3. Billing and collection: Online payment and outsourced collection have not lifted the share of tax actually collected. Without properly maintained accounts, even a credible estimate of collection efficiency cannot be made.

What are the circle rate and the base rate?

1. Circle rate: The State revenue department sets this property value for charging stamp duty and revises it regularly. Reformers want property tax levied on it, called capital valuation.
2. Base rate: Most municipal bodies instead value property on a base rate, in rupees per sq ft per month, which the municipality itself sets.
3. Weak buoyancy: Revenue grows only when the base rate is revised, and such revisions are far rarer than circle rate revisions. So tax buoyancy, revenue rising with property values, stays low.

Why have technology and process reforms fallen short?

1. Chennai evidence: A working paper by Nobel laureate Esther Duflo and co-authors finds municipal staff a critical determinant of tax outcomes. A municipality’s own assessors achieve far better results than outsourced ones.
2. Institutional memory: Outsourcing cannot fully replace municipal assessors, who draw on institutional memory that outsiders lack.
3. Elections and revenue: In Bengaluru, Pune and Ghaziabad, base rates were not revised in periods with no elected councils. Since delayed municipal elections are common, so is stagnant property tax revenue.
4. Financial reporting: Poor reporting is the third structural weakness in the three cities, because without proper accounts collection cannot even be measured.

Challenges

1. Vacant posts: Municipal bodies run short of staff. Eg. 42% of municipal posts were vacant in 2022.
2. Delayed polls: States postpone municipal elections. Eg. Bengaluru’s corporation has had no elected council since 2020.
3. Audit lags: Delayed, opaque audits weaken cities’ credibility and cost them performance grants.
4. Limited fiscal autonomy: Cities cannot set their own tax rates or borrow without stringent State approval.

Way Forward

1. Municipal cadre: States should fill assessor posts and build a dedicated municipal administrative service.
2. Timely elections: State Election Commissions should hold municipal polls before councils’ terms expire, as Article 243U requires.
3. Public accounts: Municipal bodies should publish audited accounts and collection data every year.
4. Indexed valuation: States should tie base rate revisions to circle rate changes on a fixed cycle, so revenue tracks property values.

Conclusion

Property tax fails less for want of technology than for want of staff, elected councils and credible accounts. Whether the next round of urban grants rewards cities for timely elections, filled posts and published accounts is the test to watch.

Municipal Finances in India

1. Constitutional basis: Part IXA, inserted by the Constitution (Seventy-fourth Amendment) Act, 1992, governs urban local bodies, and the Twelfth Schedule lists their functions.
2. Own revenue share: Own source revenue covers under 30% of municipal spending on average, against 63% in the USA.
3. Revenue to GDP: Own revenue of Indian urban local bodies is below 1% of GDP, against 6 to 7% in Brazil and South Africa.
4. Collection efficiency: Property tax collection efficiency is only 35 to 40% in Tier-2 and Tier-3 cities.

Matching Previous Year Question

“[2025] Consider the following statements: I. Panchayats at the intermediate level exist in all States. II. To be eligible to be a Member of a Panchayat at the intermediate level, a person should attain the age of thirty years. III. The Chief Minister of a State constitutes a commission to review the financial position of Panchayats at the intermediate levels and to make recommendations regarding the distribution of net proceeds of taxes and duties, leviable by the State, between the State and Panchayats at the intermediate level. Which of the statements given above are not correct? (a) I and II only (b) II and III only (c) I and III only (d) I, II and III ANSWER: (d)”