Property tax base gets an alternative

Unit area method (UAM) is emerging as an alternative to the rental method as the base to compute property tax (PT). The need for change has emerged from the fact that the conventional administration of rental base valuation is loose and defective and property tax base once determined under rental method becomes inelastic and the rateable value gets frozen at a historical value.

So let us take a look at the brackground and key characteristics of this concept called UAM and also focuses on its feasibility in the context of Delhi. As a result of subsequent interventions by the court of law, the concept of "standard rent" has emerged to define the annual rent that the property can fetch from year-to-year basis.

This led to a series of negative implications on the growth of property tax revenue. The specific impacts that are noticed across the cities in the country are as follows:

(a) Extremely low levels of valuations are prevalent due to long term tenancies particularly in the old city areas which otherwise have relatively high rental and land values.

(b) In large number of such cases collection costs are higher than the revenue yields.

(c) Share of residential properties is higher in the current demand of property tax, being 70 to 80 per cent of such demand, whereas, non- residential properties account for only 20 to 30 per cent.

(d) Gross variation in the tax burden within the same premises for identical use and between the old and new buildings on same street and in same vicinity for same uses.

(e) Inequitable tax burden is also observed in the inner city areas compared to urbanising fringes.

(f) Under valuation is a constant factor and increases over a period of time. The rental based method has been applied under a series of administrative inadequacies and bottlenecks which have resulted in a purely ad hoc and discretionary assessment.

The main flaws in rental valuation are:

Absence of Real Estate Market: Comprising of rental and sale transactions although a powerful pirate market does exist whose proceedings are not made public because of different reasons.

Professional trained valuers are not involved in the assessment process. Scope for excessive use of discretionary powers for individual assessment.

Element of litigation particularly among higher rental value properties is fairly high. As a result of subletting subdivisions, practice of key money (pugri), the use of collusive rent to hide the actual potential is fairly common The inadequacies in the rental value method provided a base for change in the valuation system.

A series of studies conducted on municipal finance gave due attention to this area and broadly came up with the idea that while looking for the option following policy objectives should be kept in mind.

The new system should be legally, politically and administratively feasible and acceptable. It should rationalise the tax burden on residential and non-residential sector.

Inequities in the tax burden on similar use and similar type of properties taken are the element of subjectivity and discretion in the assessment is removed. The system should be cost-effective.

The system should be based on quid-pro-quo and the tax-payer should feel some tangible benefit. The system should cover all property owners with equity in the tax burden.

The UAM largely removes the disparities in assessment of similar properties. The essential idea behind the approach is that the problem of assessment can be circumvented if the tax is assessed in terms of some quantitative measures such as size, area and use.

Under this, there would be a basic tax related to plinth area/carpet area. Thus under this system a building could be classified within few variables. It is also easy for the assessee to file self-assessment accordingly.

Such a system, it was thought, would remove discretion and facilitate computerisation as well as periodical revision. Finally, the main ingredients that have emerged as a pre-requisite to introduce UAM are as follows: Location, type of construction, use of holding and any other suitable parameters.

The Patna Municipal Corporation (PMC) introduced the UAM, as per the notification on 12th August 1993. The amended rules were challenged in the Patna High Court.

Subsequently, upon appeal by the PMC, the Supreme Court upheld the system and observed that the system has been designed with good intentions and should thus continue.

R. Dyes is a journalist based in New Delhi