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 Article Published in The Economic Times  18 December 2002

For a rational property tax system

Dharamrajan Committee's bold endeavour to simplify and create a transparent and equitable property tax system for Delhi has indeed been a laudable objective. But will Municipal Corporation of Delhi (MCD) be able to resolve their internal differences and reconcile the interests of various pressure groups, so that the recommendations can be implemented?

A taxation policy must have a business objective. The new mission statement of MCD could be -"to provide world-class civic and other services to the citizens of Delhi, so as to make it as one of the top-ranking cities in the world". Tax collection system can then be designed to meet the rising expenditures of the municipal machinery for providing quality services. Civic conditions in Delhi are going from bad to worse. If citizens want better-quality services, they must pay for it. There is an urgent need to raise at least Rs 3000 Crores annually (existing annual collection is Rs 700 crores), within next five years.

Deficiencies in the current tax system are many. First of all, tax based on cost of land (on the date of construction) and building is highly discriminatory and irrational in character. This has created large number of disputes with huge unpaid revenues. While same class of taxpayers may be paying different amounts of taxes, tax for a particular property remains the same over the years causing loss of revenue. The system really works on non-inflationary Islamic principles. On sale of property however, the new owner may have to fork out even upto 20 times the original amount of tax. Property transactions in Delhi are also generally undervalued, causing loss of revenue due to faulty assessment system. A couple of hundred crores could easily flow to the kitty, if only old assessments were revised on inflationary value. Then the present system is cumbersome, arbitrary and non-transparent. For example, in the case of revision of tax, notices involving huge amounts are sent on the basis of committee-determined rent criteria, while actual assessment is again done on cost formula. Machinery for redressal of grievances is poor and appellate remedy is either ineffective or beyond the understanding of taxpayers.

Tax system is deficient in other ways too, as unscrupulous tax evaders are able to manipulate the system and withhold payment by deliberately creating disputes. Amnesty schemes dished out every year routinely make the problem even worse. Penalty provisions are virtually non-existent and prosecution machinery is poor. There is also no provision for re-opening the past assessments, to recover taxes evaded.

Therefore the tax system needs an urgent overhaul. The property tax system prevailing in USA ( may provide a useful guide for designing an electronic, simple, transparent and rational system. Taxes can be paid on self-assessment basis through Internet, which will also boost the local Café industry. Tax rates also need to be reasonable without any discretion to the officers. Tax evaders should be dealt with firmly and provisions of interest and penalty (at pre-determined rates) must be incorporated in the MCD act. An effective system for redressal of grievances and an appellate remedy are other requirements of a just system. The Unit Area Method recommended by the Dharamrajan Committee may perhaps meet most of these objectives, provided classification of properties is done properly. A set of criteria including rent or value of the property (as prevailing in Chennai), that can be regularly revised could be the basis of tax assessment. Charitable properties and schools etc must however be dealt with differently. The real problem for MCD lies in collecting taxes from the unauthorized colonies and urban and semi-urban villages. Residents of these colonies must be forced to pay property taxes, as they are using the resources of the city as much as others are. Commercial properties like hotels and petrol stations could be taxed on the basis of their previous year's turnover.

For effective implementation, re-engineering of the organization and their existing jurisdictions, procedures and the processes are also required to be done. Number of offices, tiers of assessment and staff strength can be reduced and powers of assessment delegated to the lowest official. Evasion of taxes can be detected by cross-verification of data from DESU, DDA, and Delhi Jal Board.

Lastly, a proper, but flexible strategy for execution must be architected carefully, so that the din and bustle arising from various quarters can be dealt with skillfully, but firmly. Initially the new scheme must be officer-based, so those transitional problems arising in the course of execution are attended expeditiously. A general amnesty scheme can be launched before migration to the new scheme, so that as many taxpayers can clear their arrears and start with a clean slate. This would also reduce the tax arrears running in to 2000 crores, at present. It may not be possible to design a system, which satisfies every section of propert-owners, but as long as MCD provides better quality services, people will feel satisfied.


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