Why we need better property tax systems

Photo: Aniruddha Chowdhury/Mint

Cities are at the heart of economic growth everywhere. However, in developing economies, limited municipal revenues and resources can severely restrict a city’s ability to finance the infrastructure and services necessary for greater economic activity and better well-being for residents.

In an article published on the Ideas for India portal, Soumyadip Chattopadhyay and Arjun Kumar suggest that even a modest increase in revenue from property tax systems can help Indian city-level municipal governments or urban local bodies (ULBs) expand their tax collections and allow them to invest in their city’s development.

Property tax, which is levied on ownership of any real property, can be a significant source of revenue. However, in India, it is hindered by poor assessment of properties, inefficient collection, and widespread exemptions.

The authors argue that ULBs generally do not have a proper system in place to count the actual number of taxable properties under their jurisdiction.

The authors estimate that, on average, only 37% of property tax is collected. Further, exempted properties in India constitute approximately 10% of the total urban properties and about 11% of the assessed properties.

Because of all this, India lags behind global standards in property tax collections. According to the author’s calculations, India’s property tax collections are roughly 0.2% of India’s gross domestic product, well below the proportion in other countries such as the US and Canada where the proportion is around 3 to 4%.

They suggest that India needs to improve the way cities value properties to expand the tax base while making existing tax collection systems more efficient.

To do this, they recommend digitization of property records and reformed billing and payment systems as potential reforms.