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Mumbai defies property tax reforms

After Mumbai's recent municipal elections, the Shiv Sena-led saffron alliance has expressed its intention of shelving all property tax reforms and continuing with its ratable value system, reports Gigil Varghese.

india Updated: Feb 10, 2007 00:24 IST

New Delhi, Bangalore, Kolkata and even smaller cities like Patna, Hyderabad and Ahmedabad are being swept by progressive property tax reforms. Yet the commercial capital of the country continues in the vice grip of the past and has defied all attempts to move to a simpler and less corrupt way of calculating property taxes.

After Mumbai's recent municipal elections, the Shiv Sena-led saffron alliance has expressed its intention of shelving all property tax reforms and continuing with its ratable value system. This has created much disquiet.

Mumbai still follows the rateable value-based system introduced way back in 1888 by the Bombay Municipal Corporation (BMC) Act, wherein the property tax is calculated on the basis of the rent it is likely to earn. Earlier, this system was followed by all other cities too.

In areas where the Rent Control Act is not applicable, residential properties and commercial properties are charged a steep 84 per cent and 114.5 per cent respectively of the rent it is likely to earn. Under this system, a landlord has no incentive to put his property up for rent. In fact, if it is commercial property, he may land up paying out of his pocket at the end of the financial year! Besides, assessment of what 'ratable value' should be is left to the subjective judgment of the municipal corporation's army of assessors. A sure guarantee to a burgeoning system of corruption!

In New Delhi, Bangalore, Kolkata, Hyderabad, Patna and Ahmedabad property tax is calculated by fixing a price for per unit value of the carpet area. Patna was the first to introduce this system.

In New Delhi, the unit-based system of collecting property tax was implemented in 2004. This reform has been tagged as citizen-friendly, transparent and easy to calculate. The tax for each zone of the city is fixed and the assessee has to merely multiply the 'zonal value' with the carpet area of his property. Again, different weights – in diminishing order – are given to a property based on whether it is wholly rented, partly rented, or entirely for the landlord's self-use.

Under the new unit system the concept of self-assessment has been introduced whereby the onus for calculating the tax and filing returns is on the owner or property occupier.  

This unit-based system has incidentally bagged a United Nations award for progressive taxation.

"It is time Mumbai too switches to this system instead of the capital value-based system being proposed by the BMC," said Rajendra Mehta, president of the Mumbai Property Lessors Association, which has been pushing for this system of calculating tax in Mumbai as well.

The capital value-based system of collecting property tax levies a percentage of tax on the market value of the property as prescribed by the Stamp Duty department.

A proposal by the BMC to the state government seeks an amendment to the 1888 BMC Act to introduce an alternative method of calculating property taxes.

This will be in addition to the prevailing 'ratable value' method. The alternate system being the capital value-based system, will be where a percentage of the capital value will be taxed.

But Mumbai's Additional Municipal Commissioner Manu Kumar Srivastava reiterated: "We are proposing switching to the capital-value based system as suggested by a study jointly conducted by the Tata Institute for Social Sciences (TISS) and the University of Mumbai."

TISS had estimated that the switch to the capital value-based system would improve the collection by up to 200 per cent.

Senior property lawyer Divyakant Mehta said: "A civic body is supposed to charge property tax for the services it provides like water, sewage and roads. It should not claim a percentage of profit earned by the landlord or tax the wealth of the citizen."

Talking of more successful alternatives, Mehta said: "The unit-based system has worked wonderfully in Delhi and we should just follow it. It also helps to check the steep increase in property taxes. To bring the city at par with other metros, there needs to be reforms and a switch-over to the unit-value based system."

Property experts seem to prefer the unit-based system. Since both the capital and rateable value system are subject to fluctuations, the best method would be to switch to the unit-based system, says Nanik Rupani of the Indian Merchant Chambers, echoing the view of property owners in the city. Rupani added that politicians and civic officials had promised a switch after the recent civic election.

The tenants associations in Mumbai are expectedly favouring the old ratable value system that favours old buildings covered by the Bombay Rent Act. "We are opposed to the framing of property taxes on capital values. We also demand that the old property taxes be continued for the old property sector," said Manohar Samant, president of the Federation of Tenants Association.