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Innovations in Local Revenue Mobilization- Bangalore India
1
Property tax reforms in Bangalore-India
June 23, 2003
Mr. Vasanth Rao*
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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.