15th Finance Commission Challenge of Growth in Property Tax: An Assessment of Selected Smart Cities

Introduction

It is expected that in the next two decades under Viksit Bharat@2047, India\'s economic growth will improve manifold through an improved pace of urbanization to meet the demand of the projected increased urban population which may reach 600 million by 2031. This increased infrastructure would require a lot of expenditure on its maintenance which needs to be met by municipalities from their limited internal revenue (Awasthi et al., 2021). Due to limited own-source revenue, Indian cities are largely dependent on grants from the Central and State governments to meet their revenue expenditure needs (Reserve Bank of India, 2022).

Article 243X of the Indian Constitution provides a mechanism whereby the center transfers funds to the state for its cities in the form of grants-in-aid as Grants and Transfers. To ensure financial robustness and promote the development of cities, finance commissions often allocate grants to states based on various factors such as area, population, and specific conditions aimed at encouraging urban development. The 14th FC provided that 20% of the funds would be given to cities as performance grants, provided they meet additional conditions such as increasing their own revenue and publishing audited AFS.

The Smart City, AMRUT, and AMRUT 2.0 guidelines emphasize the need for municipalities to enhance their own-source revenue generation to service debt raised from the open market through municipal bonds (MoHUA, 2015). Property tax is a potential source of revenue generation by municipal/local governments, especially in developing countries, because it is economically efficient, easy to enforce, and difficult to avoid (Rosengard, 2012; Bahl and Martinez-Vazquez, 2007). This could be one of the reasons that most of the Government of India Guidelines in the past and present focus on the augmentation of only property taxes of cities (Kumar & Goel, 2023).

The objective to be achieved through this study is to assess the preparedness of selected smart cities to meet the challenges posed by the 15th Finance Commission regarding the growth in property tax collection through the analysis of selected smart cities\' property tax collection in the past three years from 2021-22 to 2023-24.

Conditions by Finance Commissions: Genesis

Finance commissions are constitutionally empowered bodies as per Article 280 of The Indian Constitution. The FC recommendations cover three main aspects: vertical devolution which identifies State\'s share in the divisible pool of central taxes; horizontal devolution which allocates resources among states based on fiscal need and capacity, and grant-in-aid (Wasdani, 2016).

Lately, the recommendations of the 15th FC have highlighted the need for a revolution in the area of municipal financial management to augment municipal finance by making growth in property tax as a mandatory criteria and providing a timeline for the submission of published annual accounts. Operational guidelines for the implementation of recommendations on Urban Local Bodies grants, as detailed in Chapter 7 of the Fifteenth Finance Commission Report states that from 2023-24 onwards, collection of Property taxes shall increase in tandem with the growth rate of the state\'s own GSDP over the most recent five years.

Analysis

70% of the Indian Urban Local Bodies (ULBs) have reported an increase in the collection of property tax in 2022-23 as compared to the fiscal year 2021-22. However, in the coming years after 2022-23, (ULBs) that can meet the conditions set by the 15th Finance Commission (15FC) for property tax collection growth exceeding the Gross State Domestic Product (GSDP) growth rate will be limited. This limitation would arise primarily because many ULBs achieved this condition in 2022-23 through one-time measures, such as one-time settlement or amnesty schemes for arrear collection, rather than through institutional changes like transitioning to capital value-based systems.

The structural change in property tax valuation implemented by states like Jharkhand, transitioning from the Annual Rental Value (ARV) method to the Capital Value method based on circle rates through notification of separate floor rates for residential and non-residential properties, represents a significant reform aimed at improving the accuracy, transparency, and efficiency of property tax assessment and collection.

In this section, the author aims to analyze the trends in the collection of property tax for ten selected smart cities. Based on the analysis, it\'s evident that 9 selected cities out of 10 (Bhilai) were able to meet the 15th Finance Commission (FC) conditions for growth in Property Tax in the fiscal year 2022-23, compared to FY 2021-22. However, in the fiscal year 2023-24, apart from Udaipur and Ranchi, none of the cities were able to achieve the collection target set by the 15th Finance Commission (FC).

Conclusion

Through this paper, the author aims to emphasize the necessity for adopting sustainable options to transition the method of property tax valuation to guidance value or circle rates, as mandated by the 15th Finance Commission (FC) and AMRUT 2.0 along with other measures required to improve assessment and reduce underassessment for growth in the collection of property tax.

• Migration to capital value Method: The method of property tax assessment in Jharkhand and Rajasthan has been linked to circle rates. This will help Urban Local Bodies (ULBs) in these states to potentially avoid issues in meeting the conditions of property tax growth set by the 15th Finance Commission (15FC).
• PPP based Revenue sharing Model: The Public Private Partnership (PPP)-based revenue-sharing model with Project Management Units (PMUs) represents a commendable initiative by the Government of Jharkhand to address the challenges posed by limited skilled staff and the issue of the 3Us (unassessed, under-assessed, and unpaid properties).
• Professionals Engagement: The state or city shall engage professionals covering Urban Planner, Chartered Accountants etc. to enable the State/City to implement interventions relating to 3Us.
• GIS mapping: Implementing GIS mapping of households can be a significant reform measure for states to improve property tax assessment and collection.
• Integration with State Departments and other utilities: Integrating the property tax database with other relevant departmental databases and utilities may be imperative to enhance assessment accuracy and subsequently improve property tax collection.