Understanding starvation of municipalities with property tax in India

According to a recent study, property tax is grossly under-exploited in India, even though it remains the largest source of revenue for urban local bodies.The point is to worry is that when politicians across party lines play politics with the finances of our cities, especially since the current sources of revenue of municipalities in India are grossly inadequate for discharging their constitutional mandate of delivering public services?

The most recent threat to municipal finances came in the just concluded municipal elections in Delhi. The Delhi Chief Minister announced that if the AAP came to power in municipal corporations, the Delhi state government would waive house tax for all residential properties — big or small, rich or poor. It is a separate matter that he can fulfill this promise only if the Government of India (GoI) approves this move.

The current sources of revenue of municipalities in India are grossly inadequate for discharging the constitutional mandate of delivering public services, The most recent threat to municipal finances came in the just concluded municipal elections in Delhi

The Delhi Chief Minister announced that if the AAP came to power in municipal corporations, the Delhi state government would waive house tax for all residential properties — big or small, rich or poor

Significance of service tax

• Property tax is the single most important source of revenue for municipal corporations and municipalities. It accounts for 30% of “own” municipal revenues in India.

• While property tax is levied and collected by the urban local bodies, the state government has the power to design the property tax regime including the tax rates, exemptions and rebates, the tax base, and the basis for the valuation of properties as well as their revaluation every few years to account for rising prices.

What’s the concern now?

• However, in recent times political parties vying for power are often tempted to promise a waiver or reduction in the property tax or grant of exemptions in order to win support during election time, thereby creating huge vulnerabilities for municipal finances subsequently.

• The largest source of revenue for the urban local bodies, therefore, tends to get caught in the wheels of the election cycle. The resulting collapse of municipal services hurts voters, but they do not realise how it is directly linked to the populist decision to cut property tax or house tax as it is commonly called when levied on residential properties.

Background

Property tax has a deep rooted history in India, finding a mention in epics like Manu Smriti and Arthasastra, which spoke about different tax measures in place at that time. Kings would levy a small tax on farmers and landowners, which would be used to enhance the treasury of a kingdom.

The advent of the British brought in a more streamlined process, with land revenue forming a major chunk of the British treasury. They devised a system of centralization with respect to land tax, appointing individuals to collect tax on behalf of the crown. This gave birth to tax collectors and a formal tax collection system in the country.

Types of property

Property, in India is classified into four categories, which help the government estimate tax based on certain criteria. The different property divisions in the country are mentioned below.

• Land – in its most basic form, without any construction or improvement.

• Improvements made to land - this includes immovable manmade creations like buildings and godowns.

• Personal property – This includes movable man made objects like cranes, cars or buses.

• Intangible property

Present state of property tax

Property tax in India is to be paid on “real property”, which includes land and improvements on land, with the government appraising the monetary value of each such property and assessing the tax in proportion to its value. It is the duty of the municipality of a particular area to do this assessment and determine the property tax, which can be paid either on an annual or semi-annual basis.

This tax amount is used to develop local amenities including road repairs, maintenance of parks and public schools, etc. Property tax varies from location to location and can be different in different cities and municipalities.Tax deductions against income from property

Section 24 is titled as “Deductions from income from house property”. ‘Income from house property’ is applicable in the following cases:

• If you are renting out your house(s), then the rent received will be considered as part of your income

• If you have more than 1 house, then the Net Annual Value of the houses, except the house you are living in, will be considered as your income.

• If you own only 1 house and you are living in it, the income from house property will be considered as NIL. Any income derived from rent and annual value of additional houses, will be subject to tax after deductions made under Section 24.

Deductions under Section 24

There are 2 types of deductions under Section 24 of the

Income Tax Act:

• Standard deduction: This is an exemption allowed to every taxpayer, where a sum equal to 30% of the net annual value does not come under the tax limit. This is not applicable if you are occupying the only house you own.

• Interest on loan: If you have taken a home loan for purchase, construction or renovation of the house, whatever interest you pay on the principal amount of the loan is exempted from tax payment.

The sub-clauses in this category are:

• If the loan has been taken for a self-occupied property, then you can claim exemptions of up to Rs.2 lakh.

• If you took a loan for purchase or construction (not renovation) of a property before actually buying or completing its construction, you can still claim the interest. You can seek deductions on the interest paid before the construction or purchase is completed, in 5 equal instalments, from the year in which the house is bought or the construction is completed.

• If the loan is taken for renovation or reconstruction of a house, you cannot claim tax exemption until the renovation is completed.

To avail this deduction, you need to compute the interest amount you have to pay to the bank or financial institution that you took the loan from, separate from the principal repayment. It does not matter whether you have actually paid the amount to the financier – you can get exemption for the complete annual interest amount.

Exceptions under Section 24

• If the house is not occupied by you, you can claim exemption for the whole interest amount that you are paying, without any upper limit.

• If the house is not occupied by you because you live in another town due to your employment or business,or you live in another property or rented property in the city of your employment, then you can claim tax exemption on interest payment only up to Rs.2 lakh.

• There is no deduction for any brokerage or commission for arranging the loan or tenant.

• You have to buy or complete construction of the house within 3 years of taking the loan for you to be able to claim maximum deduction on the loan interest amount. If the construction or purchase is not complete within 3 years, you will be able to claim only Rs.30,000 instead of Rs.2 lakh.

• You must have an interest certificate for the loan that you are taking.

Computation of income from house property

Understanding income from house property can be tricky. To make it simple, here are a few things to keep in mind:

• Only the Net Annual Value of your house(s) is considered for taxation. Net Annual Value is arrived at when you deduct the municipal taxes paid on the property from the gross annual value of the house. For example, if you are receiving Rs.1.2 lakh as rent annually on a house you have let out, and you are paying Rs.40,000 as municipal taxes, then the Net Annual Value of your house is Rs.80,000, and you have to pay tax only on this amount.

• If your house(s) is lying vacant for any period during the financial year due to lack of tenants, you have to consider only the income received as rent and not compute it against the whole 12 months. For example, if a house yielding Rs.17,000 as rent is vacant for 4 months of the fiscal year, then the gross value of the house will be Rs.1,36,000 (Rs.17,000 * 8). Tax payable on this income will be calculated after deducting the municipal tax amount paid and the standard deduction of 30%.

• If your house(s) is lying vacant and not giving you any income, but you are paying municipal taxes, you can offset this loss against income from other sources – such as your salary or rent from any other property – during the same fiscal. If you are unable to offset the loss in the same year, you can carry forward this loss for up to 8 years.

Property tax online

Property Tax in India can be paid online. Each state or municipal has its own website for online payment of property tax, these sites require the assesse to furnish their Property Tax number or Khatha number or the revenue survey number. Assesses should take note of the following while filing their property taxes online:

1. If the property tax return for the previous year has not been filed, property tax for the current year shall be accompanied with the return and dues, if any for the previous years.

2. Additional Depreciation cannot be claimed for the year 2017-18 and 2018-19 as depreciation can be claimed once in a block period, i.e. from 2016-17 to 2018-19

3. If revised return for any year has been filed, then the return for the current year shall be on the basis of revised return filed.

4. In case if any tax was paid in advance and after adjusting for the tax for the previous years, if there is still a balance, it will be paid back through Cheque or DD after due verification.

5. If property tax is paid in two instalments for the current year, then same form is used for second instalment.

6. 5% rebate on total property tax to be paid could be availed, if you are paying full amount in one instalment.

7. If you are making payment for previous years (arrears payment), payment shall be made after generating challan for each previous year.

8. Right now you can make the payment towards your property tax if you already paid the property tax at least once, by using your SAS BASE APPLICATION NUMBER or PID NUMBER. If you are paying the property tax for the first time kindly wait for a while.

9. If you are a defaulter, system calculate the interest automatically for the defaulted period at the rate of 2% per month.

10. If you are paying through DD or CASH, receipt could be generated instantly. But for the payment through cheques, receipt can be generated only after the realization of the cheque amount.

How to pay property tax online

The internet has made a huge impact on how the world functions, opening new doors and simplifying lives. Paying property tax was considered a huge hassle in the past, but those days are long gone, thanks to the option of paying property tax online. Most municipal corporations provide the option of paying property tax online, streamlining the process and saving valuable time.

Individuals wishing to pay their Property

Tax Online need to follow the following steps:

1. Log onto the official website of their municipality/city corporation.

2. Choose the tab indicating property tax and navigate to the payment option.

3. Choose the right form (either 4 or 5), based on the category under which an individual’s property falls. These forms are used to determine if any changes have been made to a property in question.

4. Choose the assessment year. This is the year for which property tax needs to be calculated and paid. Most corporations provide an option to clear backlogs in property tax payment.

5. Individuals will then be required to fill in their property identification number and any other relevant document pertaining to their property (zone under which it falls, property type, etc.) including the owner’s name.

6. Once all relevant information has been entered, individuals can choose the mode of payment, which could be credit/debit cards or internet banking.

7. Once payment is made individuals can take a print out of the challan for their reference.

Property tax

calculation

Property tax in India depends on the location of a property in question, with taxes varying from state to state. Different civic corporations use different methods to calculate tax, but the general overview of such calculations remains the same and is explained below.

An assessment of the property is first carried out by determining the area it is in, occupancy status (whether it is self-occupied or rented out), type of property (residential, commercial or land), amenities provided (car park, rainwater harvesting, store, etc.), year of construction, type of construction (multi-storied/ single floor/ pukka or kutcha structure, etc.), Floor space index and carpeted square area of the property.

Once these parameters are determined the civic agency can use a formula it deems fit to calculate tax. Different agencies use different formula.

The formula used by Mumbai Municipal

Corporation is given below:

Property tax = base value × built-up area × Age factor × type of building × category of use × floor factor.
The tax on a property will vary according to the factors mentioned above and can be easily computed online, through the official website of the municipal corporation concerned.

Interest on property tax

Late payments towards property tax can attract a fine, generally equivalent to a certain percentage of the amount due. This interest varies from state to state, with some states choosing to waive off such interest and others charging rates from 5% to 20%, depending on their individual policies.

For Example

Some states waived off penalties on property tax while Bangalore decided to slash interest for late payments from 20% to 10%, in a bid to get more people to pay their dues.

Section 80C and property tax

Individuals who purchase a new house can claim deductions under section 80c of the Income Tax Act. Under this clause, deductions can be claimed for stamp duty and registration charges, which could add up to around 10% of the total cost of a house. Deductions claimed under this section are subject to the condition that they do not exceed Rs 1.5 lakh.

Individuals can also claim a deduction towards any other expense during the process of transfer of property. Homeowners should keep in mind that this is applicable only for new residential properties.

Capital Gains Tax on Property

Capital gains tax refers to the tax levied on the profit which is the outcome of a property sale. Capital gains tax can be a major source of wealth drain if not handled smartly. A simple way to handle this is to purchase a new house from the proceeds of a property sale, keeping in mind that such property should be purchased within two years of sale.

Proceeds from a property sale can also be used to construct a house, ensuring that capital gains tax on property doesn’t become too taxing.

Various attempts by state governments in this regard

• The Delhi Chief Minister had recently announced that if the AAP came to power in municipal corporations, the Delhi state government would waive house tax for all residential properties — big or small, rich or poor.

• This is unless an amendment is made in the Delhi Municipal Act, 1957.

• Property tax is one of the main sources of revenue for the three municipal corporations in city. The amount collected is used for paying salary, pensions and other development works in various areas.

• It is not possible to waive property tax from residential properties unless an amendment is made in the Delhi Municipal Corporation Act, 1957, which can be done in the Parliament only,” said former commissioner of unified MCD.

• Till December 2016, the three municipal corporations have collected Rs 1,371 crore as property tax. The amount has been collected from 10.32 lakhs commercial and residential properties in Delhi.

• MCD officials said that the civic bodies are already facing a cash crunch and implementing such a promise would spell more trouble. In January, around 15,000 sanitation workers in south and east Delhi had called a strike for non-payment of salaries. The civic bodies have been constantly trying to bring more and more people under the tax ambit though various schemes to increase the number of tax payers.

• Rajasthan abolished property tax in February 2007. However, the tax was brought back within six months in a new incarnation as “urban development tax” to recoup the loss of revenue resulting from the property tax abolition, and also to retain access to Jawaharlal Nehru National Urban Renewal Mission (JNNURM) funds for urban infrastructure.

• In Punjab, house tax on self-occupied residential houses, which form the bulk of the properties covered under the tax, was abolished in the late 1990s. In 2006, attracted by the desire to access JNNURM funds to build infrastructure in Amritsar and Ludhiana, the government in Punjab entered into an agreement with the GoI to put in place a reformed property tax regime in these cities but was not able to implement the agreement.

• Property tax was finally introduced in 2013, although following the familiar pattern, property tax rates were cut by almost half and many categories were exempted during the campaign for the general elections in 2014.

• Haryana and Himachal Pradesh have also each had a bash at blowing the budgets of their municipalities by giving major exemptions in their property tax regimes.

Under-exploited tax

• Property tax is grossly under-exploited in India, even though it remains the largest source of revenue for urban local bodies

• There is need to set up a property tax board in each state which could set out better and more transparent methods of assessment, valuation and collection of the tax, using GIS and other IT tools

• There is need to add a municipal finance list in the Constitution which should specify taxes that are exclusively in the domain of the local government

• Above all, there is need to heed the advice of the 14th Finance Commission: “The state government should not provide exemptions to any entity from the tax and non-tax levies that are in the jurisdiction of local bodies. In cases where the grant of such an exemption becomes necessary, the local bodies should be compensated for the loss”

From Constitution

• It is 25 years since the 74th Constitutional Amendment mandated that state governments transfer to urban local bodies the responsibility for functions such as urban planning including town planning, regulation of land-use and construction of buildings, roads and bridges, provision of water, sanitation, public health, urban amenities such as public parks, gardens and playgrounds, slum improvement and upgradation, etc.

• A number of these functions have been devolved by the state governments over the past 25 years

• Once transferred, town planning can be used as a major instrument to unlock land value so that the cities can go about the business of land zoning and developing urban infrastructure with the finances raised in the process

State Finance Commissions:

• Devolution to urban local bodies is supposed to be based on the recommendations of state finance commissions (SFCs) set up by the state governments

• SFCs are upposed to spell out the principles for sharing/devolving a part of the revenue of the state governments to municipal bodies, but they have not been able to challenge the state-level political resistance to devolve funds to the urban local bodies

What needs to be done now?

• There is need to set up a property tax board in each state which could set out better and more transparent methods of assessment, valuation and collection of the tax, using GIS and other IT tools.

• There is also need to add a municipal finance list in the Constitution which should specify taxes that are exclusively in the domain of the l al government.

• Above all, there is need to heed the sage advice of the Fourteenth Finance Commission: “The state government should not provide exemptions to any entity from the tax and non-tax levies that are in the jurisdiction of local bodies. In cases where the grant of such an exemption becomes necessary, the local bodies should be compensated for the loss.” State governments will then not be able to play politics with municipal finances.

• Financial autonomy to set user charges to cover costs of delivering public services is also crucial if we are to see a process of turnaround in the state of service delivery in our cities. In fact, state governments should match increased local revenue effort with larger grants.

Conclusion

The urban local governments have remained hamstrung by the lack of funds and the situation is going from bad to worse. If Indian cities are to deliver a better quality of life and improved investment climate, they need to have business models which are financially and environmentally sustainable.

By Gudipati Rajendera Kumar