Rapid urbanization in India has increased the demand for quality public services and urban infrastructure facilities. Question of how best to finance the provision of these services features centrally in urban policy-making as Indian cities are among the weakest in the world in terms of access to resources, financial autonomy, and revenue-raising capability.
Tapping the revenue generation potentials of existing municipal taxes is the key to better the delivery of urban services and make the cities livable. Among the municipal taxes, property tax is considered to be economically efficient, easy to enforce and difficult to avoid. However, revenue generation from property tax in India has been abysmally low.
The contribution of property tax to India’s GDP is only 0.15 per cent, lagging well behind the corresponding figure of 1.7 per cent for the advanced market economies. As per the RBI Report on Municipal Finances (2024), the property tax constitutes more than 16 per cent of total revenue and more than 60 per cent of own tax revenue of the Municipal Corporations in India. Per capita property tax collections exhibit wide interstate variations ranging from Rs 63 in Bihar to Rs 1911 in Gujarat in 2017-18. If the cities can bring off a small percentage increase in proceeds from this most buoyant local tax, then that would significantly enhance their revenue.
Understanding the barriers
Any property tax system involves four policy components – determination of tax base, valuation of properties, fixation of tax rate and collection of tax. Accurate and complete identification of taxable properties including the details of ownership and use is an essential first step for realizing full tax potentials. Most Indian cities rely on manual, paper-based systems for enumeration and maintenance of property rolls.
About 63 per cent of the 232 Municipal Corporations surveyed by the Reserve Bank of India in 2024 reported to create the digital property records manually with or without conducting the property survey. About 17 per cent of these Municipal Corporations recorded coverage ratios (ratio of the number of properties paying property tax to estimated number of properties in the urban jurisdiction) of less than 20 per cent. Some of the cities have adopted GIS-based property mapping mostly as one-time exercise.
Infographic related to Property Tax in cities (ETV Bharat) A majority of the Indian states do not have any provision for periodic enumeration in their Municipal Acts. Neither the cities update the property rolls nor do they integrate the GIS or survey data with their existing property tax base.
Property tax valuations theoretically should conform to two basic principles of local taxes – buoyancy reflecting the actual (market) value of the property with little room for discretionary practices and equity requiring people in identical situations to pay the same taxes.
Indian cities employ three valuation methods – first, Annual Rental Value (ARV) calculated on the basis of perceived annual rent; second, Unit Area Value (UAV) based on property structure, usage, age, location, guidance value, etc. and third, Capital Value (CV) calculated on the basis of market rate of properties. In the absence of any credible database on market rental values or capital value of properties, the prevalence of the Rent Control Act capping potential rent increases to a maximum of 25 per cent of the 1948 rents and high discretionary power of the municipal revenue officials, property tax valuation methods compromise with the buoyancy principles of local taxes. A number of property tax exemptions without well-defined criteria violate the equity principle and also contribute to narrowing the tax base as well as lowering the tax revenue generation.
Infographic related to Property Tax in cities (ETV Bharat) Inefficient collection of property tax is another area of concern. This is evident from the non-transparent billing system and irregular collection of property tax in many Indian cities. As per the RBI Report on Municipal Finances (2024), 32.1 per cent of 232 surveyed Municipal Corporations continue the practice of paper-based billing mechanisms and door-to-door distribution of tax bills.
The collection deficiencies are more severe in the smaller cities. The tax bills do not provide details of charges and tax enforcement is weak with no provision for timely intimations of bills and follow-up on unpaid tax. The absence of any penal provision for delayed payments or non-payments of property tax and dispute resolution mechanisms further repress tax compliance. Acute staffing deficits also hamper the tax management system of property tax.
Making the Property Tax Work
Realising the full potential of property tax requires policymakers to decide on what to tax, how to assess property value including exemptions, how to set the tax rate and how to collect the tax. So, any initiatives towards improving the revenue generation from the property tax need to address the tax management system as a whole. Experiences from cities across the world suggest that a well-functioning tax system applies a low tax rate on a broad tax base.
Given the technological advancements, remote sensing and ICT-enabled tools should be used to create property registers along with provisions for regular updation. Raipur Municipal Corporation (RMC) combined drone imaging and mobile app-based door-to-door survey to develop a digital property register, resulting in the addition of about 54,000 new properties and a 74% increase in property tax demand.
However, given the high cost associated with technology adoption, the smaller cities cannot even afford a one-time GIS mapping exercise. This practice also requires capacity building of the existing staff for managing and maintaining the technology-driven property databases. Policies should be framed to avoid ad-hoc exemptions of properties from the tax net.
It is imperative to assess properties based on the factors related to city’s economic activities. Incomplete information on property transactions and imperfect information on the market value of properties even within the same city are very common in India. So, in addition to physical dimensions of properties (e.g., size of land, size of building), valuation can be based on 'guidance value of land' and 'cost of construction' as per the records of the Stamp Duties and Registration Department and Public Works Department of the state governments respectively.
Self-assessment of properties has been successful in some Indian cities in simplifying the complexity of property valuation and reducing the administrative burden. Random checking of the information on self-assessment should be put in place to counter any fraudulent practices. Raising citizen awareness on the specifics of the valuation systems is extremely important for making the changes acceptable at the ground level.
The city governments should be allowed to set the property tax rates. State governments generally provide a broad band of rates to exercise control over municipal taxes. However, there is an urgent need to rethink the 'control', e.g., through provisions of the requirement of state approvals only in case of reduction in tax rate in order to disincentive local politicians from taking populist tax reduction strategies.
It is also important to educate property owners on the benefits of paying property taxes by judicious use of municipal revenue for the provision and maintenance of urban services. The city governments can also involve their citizen at each stage of the design and implementation of property tax reforms. This would not only build confidence and trust amongst the taxpayers but also improve the accountability of the city governments. A central valuation board should be made functional in each state to administer property valuation, updation and supervise the task of city-level collection and enforcement of property tax.
The city government should focus on improving the tax collection system. Automation of billing, digital payment system, the introduction of new modes of tax payments, reminders on non-payment of taxes, identification of tax defaulters, publication of defaulters’ list, initiation of penal actions both in monetary (e.g., fine as a percentage of the tax due) and in non-monetary form (e.g., withholding permission for property development or sale of property), disclosure on neighbors' level of compliance can improve the collection of property tax. Discounts for timely payment of property tax and interest waiver as well as penalty waiver on the outstanding sum are also likely to enhance tax compliance.
The Way Forward
Property tax remains largely untapped in India. Yet, our cities can and should better utilise this tax than what they have done to date. Concerted efforts are needed to better design and implement the reform options. These are both time-consuming and generally involve a large upfront investment. Benefits in terms of improvement in revenue generation and delivery of basic services would materialise only in future. So, the real challenge lies in garnering sustained public and political support for property tax reform measures.
(Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat)
