Enhancing Property Tax

Executive Summary

Cities are important for India’s economic growth and need adequate investment for the provision of services and the development and maintenance of infrastructure. But urban local bodies (ULBs) governing cities are plagued by poor finances and subpar investment. Property tax has a key role to play in both. It is the most important source of own revenue for ULBs and impacts their creditworthiness. However, property tax across India as a percentage of India’s Gross Domestic Product (GDP) has remained stagnant at 0.15 per cent of GDP for many decades, whereas it makes up 0.3 per cent of GDP in low-income countries and 0.6 per cent of GDP in middle-income countries. Million-plus cities are among the most important economic centres of India and its states, and have experienced significant real estate development in recent years. The expected robust property tax performance by the municipal corporations of million-plus cities is important not only for these cities, but also sets an example for smaller cities to follow.

The property tax system and administration encompass three stages: enumeration—identification of properties and maintenance of property records along with details; valuation and assessment; and billing and collection. There is a rich body of extant literature and policy discourse on the challenges associated with each stage, emphasising (i) technology-based mapping and Geographic Information System (GIS) surveys for bringing more properties into the tax net, (ii) regular revisions to the valuation base rate in case of area-based method as well as the adoption of capital value method for up-to-date valuations, and (iii) the need for embracing technology and robust enforcement mechanisms for enhancing collection efficiency, i.e., the share of the tax demand which is eventually collected. Yet, overall property tax levels have remained stagnant at 0.15 per cent of GDP. Given this context and the important role played by million-plus cities in India’s economic growth, this study explores:

• How has property tax performed recently in India’s million-plus cities?
• What does an examination of their property tax system and administration reveal in terms of the issues and how to address them?

Property Tax Performance in Million-Plus Cities (2012–2013 to 2022–2023)

An analysis of 24 major municipal corporations reveals a complex picture. While property tax grew nominally, the analysis finds:

• Nominal growth masks decline in real terms: Many municipal corporations failed to achieve real per capita property tax growth, eroding their capacity to fund essential services.
• Lagging economic growth: Property tax has not kept pace with state GDP growth in many municipal corporations.
• But it continues to be important: Despite these shortcomings, property tax remains a critical revenue pillar for the municipal corporations.

Examination of Property Tax System and Administration

This study analyses Bruhat Bengaluru Mahanagara Palike (BBMP), Pune Municipal Corporation (PMC), and Ghaziabad Nagar Nigam (GNN)—three corporations with markedly different per capita property tax revenues—across the stages of enumeration, valuation and assessment, and billing and collection. Appendix 5 provides a quick understanding of the key findings and recommendations.

Enumeration: The three municipal corporations employ a hybrid approach for identifying and maintaining a record of properties and their details—combining GIS-based mapping, physical inspections, self-assessment data, and cross-verification of data with other departments and agencies. Key findings:

• GIS mapping delivers significant gains: One-time technology-driven GIS mapping interventions significantly expanded property coverage across all three municipal corporations, validating the policy emphasis on technology-led mapping.
• Physical inspections are indispensable: Despite technological advances, on-ground inspections by municipal assessors prove critical. Without them, coverage gaps and data quality issues persist—an aspect often overlooked in technology-centric policy thrusts.
• Human resources are the missing piece: Given widespread human resources challenges in municipal corporations, physical inspections warrant greater research and policy attention as an essential complement to technology.

Valuation and Assessment: Property valuation for property tax purposes in India’s municipal corporations is estimated using methods falling into two categories: area-based method—formula-based method using a per sq ft per month “base rate” (rent or unit area basis) based on location and other factors; and capital value method—linked to the stamp duty’s guidance value. The three municipal corporations follow variants of the area-based valuation method. Key findings:

• Capital value is theoretically superior but faces resistance: While capital value is recommended for better tax buoyancy, BBMP’s experience highlights real-world obstacles to adoption due to pushback from citizens and the State government.
• Regular base rate revisions sustain buoyancy: Timely incremental revisions of the area-based “base rate” are essential to revenue growth. PMC’s experience proves this—revisions every three to four years have driven tax buoyancy. Three enabling conditions support successful revisions: legal provision (present in all three), an elected municipal council, and citizen receptivity.
• Assessment governance requires strengthening: Robust cross-verification of self-declared property details and independent quasi-judicial bodies (property tax boards and appellate authorities) are needed for accurate tax assessment and quicker dispute resolution.

Billing and Collection: The advent of IT has made both billing and collection easier. Key findings:

• Collection efficiency declines despite rising collections: While property tax collections increased, collection efficiency hasn’t increased across all three municipal corporations. As a result, arrears have been rising.
• BBMP’s arrears decline but there are serious data concerns: BBMP’s arrears appear to have declined on the back of aggressive enforcement. However, the absence of financial statements and data on tax write-offs limits confidence in conclusions. This transparency gap is a serious concern.
• A new framework for measuring collection efficiency: This study contributes a novel methodology using publicly available financial statements prepared following accrual-based accounting methods to estimate collection efficiency. Existing literature has depended on municipal corporations to voluntarily share detailed data on the demand, collection, and balance (DCB) of property taxes. But in the absence of such data, this new framework can be used.

Recommendations for Enhancing Property Tax

The study reinforces existing research and policy discourse on property tax, particularly the importance of technology-based mapping for enumeration, legal provisions mandating regular updates of base value rates to sustain buoyancy, and stricter enforcement to improve collection. It also makes the important discovery that timely municipal elections are necessary for enabling revisions of base value rates and, therefore, for maintaining tax buoyancy.

Reporting and Transparency

• Municipal corporations should publish, preferably as part of their annual budgets, disaggregated data on property tax demand and collection. This should include current demand, arrears demand, and the corresponding collection efficiencies for each. Greater transparency will enhance accountability within municipal corporations and foster stronger civic awareness among citizens.
• Given the centrality of regular base value revisions to tax buoyancy, municipal corporations’ annual budgets should clearly state whether a revision was undertaken in the previous year, the magnitude of the change, and the criteria or methodology used.
• Municipal corporations’ access to grants from Atal Mission for Rejuvenation and Urban Transformation (AMRUT), Swachh Bharat Mission (SBM), the Central Finance Commission, and State government schemes can be made conditional on adherence to such reporting and transparency practices.

Arrears Management

For effective arrears management, the existing provisions in Municipal Corporation Acts and property tax rules on attachment of properties and other assets should be backed by a state-level property tax arrears management policy. Such a policy should set out standard operating guidelines for all municipal corporations, with clearly defined responsibilities for show-cause procedures, recovery, attachment, and foreclosure of properties. It should also lay down clear principles for the design and use of amnesty schemes to ensure they are appropriate, consistent, and are not misused.

Keywords: Property Tax, Municipal Finance, Urban Finance, Urban Governance, Viksit Bharat, Cities