Innovations in Local Revenue Mobilization- Bangalore India 1 Property tax reforms in Bangalore-India...

Innovations in Local Revenue Mobilization- Bangalore India

1

Property tax reforms in Bangalore-India

June 23, 2003

Mr. Vasanth Rao*

* [email protected]


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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)


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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)


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The need to augment Municipal revenue

Urban population growing faster than rural population

Growth rate 1991-2001Urban -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


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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)


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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


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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.


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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


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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?


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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:

a) The actual rent where it is actually let

b) Where it is not let, by artificially method of valuation- the expected rent

c) 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%


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…Genesis of problem

Other related problems like in any other developing countries-

a) Property identification

b) Record keeping

c) Valuation

d) Collection


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The Bangalore City Corporation experiment


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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


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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 Commissioner’s powers


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Best practices studied

Guidance from international experts- took cue from their experiences


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

Tax Base = TR* CVR* VR*CL 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


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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 self–assessment in the actual practice & implementation it was self reporting of data

Taxpayer’s 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


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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)


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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) > 4000

3000-4000 2000-3000 1000-2000 1000 -500 and < 500


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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 PWD’s 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…


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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)


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The essential parameters in SAS

Location Location • 6 zones (Residential + Non- Residential)

• Revenue department classification

ConstructionConstruction• RCC (3 bands of cost of construction – PWD rates)• Tiled / Sheet• Thatched houses

UsageUsage• Non-Residential• Residential

AgeAge • Depreciation as per tableOwnershipOwnership • Self occupied

• Tenanted

Offices, Restaurants, Clinics, etc.

Star hotels, Theatres, Wedding hallIndustries, Hospitals.


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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


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Packaging SAS for the masses

Marketing the SAS concept

Brochure

Newspaper FAQs

Road shows

Payment clinics

Advertisements


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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…


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Evaluation of the scheme:

To evaluate the success the obvious yardstick are:

Revenue yield Collection ratio Compliance cost Tax payer service Citizen response


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Evaluation of the scheme: Revenue yield …

Year Revenue

Collected

Amount in Percent Crores

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

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

Self AssessementScheme (SAS)

36.1 40.9 44.9 43.753.9

60.5

85.998.2

118

157

175

195

91-92 92-93 93-94 94-95 95-96 96-97 97-98 98-99 99-00 '00-01' '01-02' '02'-03'0

50

100

150

200Rs. crores


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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- Corporation’s credibility heightened.


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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


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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.


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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


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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.


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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)


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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


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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.

Innovations in Local Revenue Mobilization- Bangalore India 1 Property tax reforms in Bangalore-India...

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