Property tax: failing to pluck this low-hanging fruit

When funds are desperately needed to wipe out grinding poverty, why has Karnataka failed to pluck the low-hanging fruit of property tax? Karnataka was one of the first few states to implement the Self Assessment Scheme (SAS). It has all the necessary wherewithal — reputed IT companies, competent civil servants and NGOs. Still, why is it lagging behind many states, such as Bihar, West Bengal, Kerala, etc., in the implementation of SAS?

To estimate the true potential of tapping property tax, we can apply the ratio of property tax to GDP. The world average is around 1%, while for developed countries it is around 2-3%, a benchmark Karnataka should aim for. If we apply the more realistic benchmarks, Bengaluru alone should be able to collect some Rs 8,000-12,000 crore per year, Karnataka as a whole Rs 28,000-42,000 crore. The actual property tax collected in 2017-18 in Bengaluru was just Rs. 2,178 crore, far below the potential.

It may be useful to compare the potential versus the actual for another city like Mysuru to illustrate the problem. While the potential revenue for Mysuru is Rs 430-450 crore, actual collection in 2016-17 was Rs 94 crore. Clearly, property tax should be on the state’s agenda.

The above comparison of potential versus actual property tax collected should shock the government, municipalities and NGOs to take up the initiative to close the gap. There have been some efforts in the past. The report “Financing Urban Local Bodies in Karnataka”, prepared by the independent think-tank Vidhi Centre for Legal Policy, highlighted the problem. While the report is comprehensive, with several good recommendations, property tax does not come across as a burning issue.

When clauses concerning property tax in Karnataka Municipal Act are analysed, they clearly show how the act is unfair, inefficient, irrational and poorly drafted.

Despite having access to leading IT companies which provide software to all parts of the world, Karnataka has failed to use their expertise to take the property tax system online, except in the case of Bengaluru. And even for Bengaluru, the enormous potential of digitisation has not been fully utilised.

The way current tax laws are drafted, land holdings in urban areas can get away with low or no taxes. A house owner on a small plot will pay the same tax as one on larger land for a house of the same size if vacant land does not exceed three times the plinth area.

This is because, vacant land around the house is not taxed. In today’s environment, land is the most valuable property. It is valuable because of the infrastructure (water, sewage, roads, parks, etc.,) provided by the government. Thus, it is only fair, as argued by economists from Adam Smith to Milton Friedman, that land owners who are benefitting from government spending should pay their fair share.

Another irrationality is that the tax amount is revised every three years and that too no more than by 15% usually. As a result, a house which was recently built will end up paying far higher taxes than, say, a comparable house (having the same or higher market value) built 10 years ago.

Also, there is no scientific justification for arriving at 15%. If inflation over three years exceeds 15%, why limit the increase to 15%? These are just two obvious anomalies which result in unfair tax treatment.

Laws seem to be so complex that municipal tax authorities give different interpretations of them. Despite SAS being adopted back in 2003, tax authorities were not sure till this year what amount of penalty to collect from those who violate building bylaws. For example, in Mysuru, just till last year, penalty collected was just equal to the actual tax while, in fact, it should have been twice the actual tax. Apartment owners had another rude shock. Some were asked to pay for vacant land surrounding the building on a pro-rata basis. Some were asked to pay only for the covered land.

Poor management system

In this era of computerisation, it is shameful that a tax payer has to fill up two forms every year and then four chalans, all by hand (Bengalureans are lucky, thanks to online payments) and wait for hours, sometimes in the blazing sun. All the data about tax payment is again entered by hand in ledger books. As a result, generating any report to carry out analytical study of property tax collected is impossible. It is a widely recognised reality that people under-report built up areas, undervalue land and buildings, provide wrong information on renting out versus owning property, etc. But today, there is no proper management information system to detect such wrongdoing easily. Thus, the probability of getting caught for cheating is low, and when caught, penalty is not high. There is no formal system to identify cheaters or defaulters despite having access to urban property ownership records. This is one of the reasons for low tax revenues.

When tax authorities file a case for recovery, the judicial system works to the advantage of the defaulters. One would have expected that the tax laws would force the defaulters to pay taxes first and then to approach the court. They are not written that way.

We need to revamp the whole property tax system to make it fair, efficient, rational and easy to understand. If the government does not take such an initiative, then some NGO or an activist lawyer should consider filing a PIL to force the government to establish a high level commission to overhaul the property tax system to pluck the low- hanging fruit.