The Brihanmumbai Municipal Corporation (BMC) is currently exploring the possibilities of reforming its present property tax system based on rateable value to a capital-value based system.
BMC is taking up the exercise of revamping the system because the current system is surrounded by a number of repeatedly highlighted controversies.
At present, the property tax is being calculated as a percentage of the rateable value which is derived from rent and the gross annual rent as of today stands at 10 per cent. The taxes are very high and to top it all, the BMC has recently raised the rateable value of each property by six to eight times.
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The tremors of the decision are already being felt in the Nariman Point area where the BMC has served notices to 23 top buildings. Now, owners and tenants of these buildings will have to pay an astronomical amount by way of property taxes from the coming year.
According to housing experts, this move will force many companies to leave Maharashtra for other states and this process has already begun.
The current system poses problems both for the tax payers as well as for the administration. Following all these problems and agitation among the tenants and property owners, it has now forced BMC to rework its property tax system.
S G Kunte, the joint municipal commissioner of BMC, said, "We are aware of the problems. We do want to change the way we have been calculating the property taxes. We have already begun an exercise whereby we conducted a study along with Tata Institute of Social Sciences (TISS) and have now found that the capital-value based system is a good system to calculate property taxes."
Explaining the demerits of the current system, Kunte said, "As per the rent-based system, there is lack of buoyancy and infringement of rent due to the Rent Control Act. Secondly, there is also lack of transparency as the rent payers are ignorant of the methods of calculations. Thirdly, there is also lack of equitability in this case, the older buildings have lower incidence of tax as compared to the new buildings in the same area and the rents are not periodically updated. All these discrepancies in the present system have to be removed."
The study by TISS shows that the capital-value system has many advantages such as self assessment and a formula-based valuation. This system also leads to greater flexibility in tax administration and provides for better control over revenue.
The discretion of the assessor can also be reduced to the minimum and the basis of taxation will become more transparent. Lastly, the re-assessment in keeping with the market trends is possible under this system.
The BMC is also trying to bring some categorisation on the basis of construction types, user types and age-wise categorisation of buildings for determining the tax rates.
According to Prof Ajit Karnik of TISS, "Even if this model is introduced, there will be neutrality of revenue maintained. The amount of tax collected in the new system will be the same as in the old system."
The results of the data analysis show that out of 2,50,000 properties, a sample size of 97,593 was studied. The study showed a revenue neutral tax rate of 0.001875 per cent under the capital value system.
The focus under the new system is on bringing out re-distribution of tax liability. The changes in the tax paid by the user categories show that for the user category 2 (residential properties U2), under which there were 64,247 properties, the tax paid under the old system is Rs 20,689.77 and the tax paid under the new system will be Rs 20,759.56, thereby, showing a change of 0.34 per cent. Similarly, for U3 and U4 categories, the change in tax structure is that of 28.6 per cent and 3.18 per cent respectively.
The highest percentage changes are in the user U6 and U7 categories which comprise four star hotels and offices. Five star hotels shows change to the extent of 70.13 per cent and 70.70 per cent respectively.
The overall change across the sample size of 97,593 properties shows that there is a change of -0.01 per cent between the tax paid under the old system and the tax paid as per the new system.
The scenario is slightly different in the properties categorised as per age. The properties under A1 category - (build prior to 1940 ), which have been paying very low taxes, will now be paying slightly higher taxes as per the new system. Last year, the BMC collected property taxes to the tune of Rs 450 crore.
The Corporation has been seeing an average increase of 7-8 per cent every year in the collection of revenues through property taxes. With the introduction of the new system, they aim to see at least a 10 per cent increase in revenues.
The BMC, at present, is in consultation with its various officials and expects to arrive at consensus in the next two months.
"We want to evolve a system which is accepted and workable and once we arrive at a broad consensus on this, we shall present it to the state government," said K C Srivastava, municipal commissioner, Municipal Corporation of Greater Mumbai.
BMC is expected to present it before the government by this October. But, there is one problem and it is: if the new system has to be brought in, the State government will have to amend certain sections of the 1888 BMC Act. A proposal to do so has already been put forth before the State government by the BMC and they are still awaiting the results.