What Ails Property Tax in India? Issues and Directions for Reforms

• Published date: 01 February 2022
• Author: Shibani Mishra,Alok Kumar Mishra,Prerna Panda
• Date: 01 February 2022
• DOI: http://doi.org/10.1002/pa.2299

ACADEMIC PAPER

What Ails Property Tax in India? Issues and Directions for

Reforms

Shibani Mishra

1

| Alok Kumar Mishra

2

| Prerna Panda

1

1

Odisha Public Service Commission,

Berhampur, Odisha, India

2

University of Hyderabad, Hyderabad,

Telangana, India

Correspondence

Alok Kumar Mishra, Associate Professor,

School of Economics, University of Hyderabad,

Gachibowli, Hyderabad-500046, Telangana,

India.

Email: alokmishra@uohyd.ac.in

Property tax is the most important municipal tax in India. Theoretically, property tax

subscribes to efficiency, ability to pay, benefit and equity principles of public finance.

However, it is grossly under-exploited. The reasons why the potential of property tax

is far from being realized include systemic problems and inefficiency in municipal tax

administration. Considering the importance of property tax for municipal autonomy

and its huge unexploited potential, property tax reform in India assumes critical sig-

nificance. This paper attempts to look to theory and international practice, including

innovative initiatives launched by select cities and states in India in the past for

designing and pursuing a robust agenda of property tax reforms. In particular, it criti-

cally examines the property tax performance of two pioneering municipal corpora-

tions: Hyderabad and Bengaluru. We suggest municipal reforms with a focus on user

charges for measurable services, move to capital value-based property tax with land

tax component linked to the market value of land, tax mapping and benchmarking,

addressing tax base, exemptions, coverage, valuation and collection efficiency.

1|INTRODUCTION

Cities drive economic growth by catalyzing agglomeration and net-

work externalities. These externalities are responsible, among other

things, for cities being the engines of growth and structural transfor-

mation. The importance of cities in India can be gauged from the fact

that the contribution of urban areas to GDP rose from 29% in

1950–1951 to 62–63% in 2007. The figure is projected to rise to

about 75% by 2021 (Planning Commission, Government of

India, 2008). 70% of new employment and 85% of public finance will

be generated by cities (McKinsey Global Institute, 2010). Cities will

not be able to perform their fundamental roles as agents of socio-

economic transformation unless they are in a position to finance infra-

structure and civic services needed by firms and households. It is

important to have in place a comprehensive framework addressing

planning, governance and finance simultaneously.

Cities in India are struggling to provide adequate infrastructure

and civic services to the citizens. Prasad and Chary (2014) observe in

their study on the state of urban services that against the service level

benchmark of 100% for water connection in premises, the national

average stood at 53.6%. The figure was as low as 17% in Bihar. While

the benchmark for coverage of toilets was 100%, the national average

was 71.1%. Sewerage network coverage wore a dismal look with the

national average being only 49.5% and a meagre 9.7% in Chhattisgarh.

Only 57.2% of the households had solid waste management (SWM)

coverage. Their study reveals that urban India has a long way to go in

order to achieve proper service delivery. It is the municipalities who

have to shoulder the responsibility of making these services available.

It is estimated that cities will require 9.74 million crores by 2030 to

address their needs (McKinsey Global Institute, 2010). While the

financing requirement is gigantic, the resources available with

municipalities—to meet the cost of salaries, O&M and capital

expenditure- were estimated at less than Rs. 1 lakh crores for the

country as a whole for 2012–2013.

Indian Urban Local Bodies (ULBs) suffer from a “rich city-poor city

government”syndrome. Fiscal dependency is a defining characteristic

of Indian municipalities. They are mostly dependent on the higher

levels of Government. The sources of own revenue of the ULBs are

also limited. Octroi, which was a major source of municipal revenue,

has been phased out. The options of user charges and borrowing have

not been explored properly. Property tax remains the single-most-

important source of “own revenues”of ULBs. The own taxes consti-

tuted only 32% of total municipal revenues nationally in 2012–2013

and property tax accounted for 50% of municipal taxes in 2012–2013

Received: 30 June 2020 Revised: 11 July 2020 Accepted: 17 July 2020

DOI: 10.1002/pa.2299

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https://doi.org/10.1002/pa.2299