JOIN USAt a time when most people are facing extreme duress following job losses and income cuts due to the pandemic and lockdown-hit economy, the Karnataka government is set to administer another rude shock by increasing property tax on residential, commercial and industrial units. Property tax will henceforth be calculated not on the basis of unit area value, as it is being done now, but on the capital cost of the building. While the change in the method, which is said to be more ‘scientific’ than the existing one, has been pending, the timing of its implementation is simply not appropriate. An increase in property tax could have a crippling effect on the already beleaguered real estate sector. This could lead to an increase in housing and commercial rents even as Bengaluru is witnessing an exodus of people complaining of, among others, the already unaffordable rents in the city. With large chunks of commercial spaces remaining vacant, absorbing the tax hike will be an additional load on building owners.
Karnataka has been constrained to effect the hike from the next fiscal as this is a precondition imposed by the Centre to permit additional borrowings by the state to meet unforeseen Covid-related expenses. The Karnataka Fiscal Responsibility Act, 2002, mandates that the state’s fiscal deficit should be under 3% of the gross state domestic product (GSDP). The Centre has now permitted states to increase it to 5% for the current year. With the economy going into a tailspin and all sources of revenue virtually drying up, the state may indeed be forced to increase borrowing.
In these difficult times, it would be a tall order for the government to manage the required expenditure without resorting to additional borrowing or increasing the tax burden on citizens. However, it can cushion the impact through financial prudence, like cutting down non-plan expenditure, curbing corruption and plugging leakages in revenue collection. In Bengaluru, 60% of the buildings default on payment of property tax, not to mention other utility charges like power and water. Karnataka’s financial stress can also be mitigated to some extend if the MPs from the state prevail upon the Centre to undo the injustice of the 15th Finance Commission, as a result of which the state lost over Rs 11,000 crore in devolution of funds. The Centre should also release the state’s share of GST revenues and make good the shortfall in it and in other grants. The proposed change in calculating property tax, which will be burdensome on property-owners, should be put on hold at least till 2022-23.