Mumbai's Property taxes to shift to a Capital Value based system

It has taken ten long years since the idea was first formally mooted, but if all goes well, the property tax system in Mumbai will, finally, be placed on a rational and logical basis.The Maharashtra legislature, within the current monsoon session, is likely to amend the Brihanmumbai Municipal Corporation Act 1888 so as to shift the basis of calculation of property taxes from the present ratable value system to one based on the capital value of the property.
The world over, there are two systems of calculating property taxes. One based on the ratable value – the rent that the property is likely to get – and second on capital value of the property. Experts point out that per se, one is as good as the other.The problem in Mumbai’s case was outdated laws like the Rent Control Act were severely distorting the market as far as rents on properties were concerned. Under the Rent Control Act, rents, in large swathes of South Mumbai, especially in old buildings were frozen at the 1940s level. Now if the rent is officially frozen as per law, the BMC could hardly charge a higher property tax. As a result Mumbai had this crazy distortion where properties in South Mumbai which were probably worth several times properties in the suburbs, were being levied a pittance as property tax. On the other hand, suburban properties were being charged – at times – a property tax that was 115% of the ratable value (i.e the rent the property was likely to get).Not only was the system patently unjust, BMC’s finances were also suffering,as it earned a pittance as tax from its most expensive properties. The first move to address this imbalance was attempted about ten years ago, when Mumbai University and Tata Institute of Social Sciences, after a study proposed shifting the basis of property tax computations on a capital value basis. The Ready Reckoner was chosen as basis of the capital value. The formula worked out by these two institutions assigned weightages to the age of the property, area, its usages, type of construction, location etc and gave rebates based on these criteria. The proposal, while completely rational in its thinking drew a storm of protest, as residents of old buildings feared their property taxes going up several times. Politicians of various hues got involved and the move faced opposition at every stage of the legislative process. But after a lot of going back and forth, the joint select committee of the Maharashtra legislature, is believed to have recommended a system that may satisfy all parties. According to these recommendations, flats up to 500 square feet carpet area will not see any hike in property tax for the first five years when the capital value-based system comes into force in Mumbai. In the subsequent five years, they may face a hike but this cannot be more than 40 per cent of the tax in the preceding years.Similarly there is also a carrot being offered as far as penalty on late payment of property taxes is concerned. Presently a 20% penalty is imposed in case of late payment of taxes. The amendment proposes that a levy of one per cent on the tax payable will be levied for every month delayed. If the tax liability is Rs one lakh, and there is a six month delay in payment then the penalty would be 6% of one lakh.Another interesting feature would be that all properties, whether self-occupied, rented or leave and license, would be assessed at the same rate. According to reliable sources, the model created is a revenue
neutral one with the objective to move towards a more rational system of assessment of taxes. Under this system, the rate of tax will be 0.45% of the capital value of the property per annum.
The formula for assessment of tax as per the capital based system of tax will be: Rate of tax multiplied by capital value of the property [which is as per the ready reckoner rates] x area of the building x usage of the building and type of construction and age of the building. Depending on the age of the building and type of construction [permanent, semi-permanent, medium, commercial), the property can get rebates.As against a total of about 300,000 properties in Mumbai, BMC has collected data on about 180,000 properties.Before implementing, the Corporation can make changes in the rate or capital value. Though the model proposes the same rate of taxation for residential and commercial properties, the corporation can have a different opinion on the taxation for different classes of users.Given the fact that the proposals have been approved by the Joint Select Committee, consisting of members from the government as well as the opposition, the final assent to the bill seems like a shoo in. But there are always many a slip between the cup and the lip, so keep your fingers crossed.