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Vol. XXIX No. 21 , February 16-29, 2020

Time to End the Property Tax Mess

by A Special Correspondent

The Property tax situation in Chennai is an example of how decisions put off for political convenience complicate issues and render them intractable. The rates were not revised for twenty years. When, finally, the government raises it – working out to about a 3 per cent annual increase over the twenty years – there is public outcry over the “large” increase. This increase might still be insufficient to cover the actual cost escalation over the twenty years. Collection efficiency being just about 75 per cent, the proposed rate increase might also not fully translate into revenue.

A recent announcement by the Minister of “rollback of the property tax hike in urban local bodies”, as reported in the papers, conflicts with another report that a Committee would examine the representations and that old rates would prevail till the report is received. This has caused much confusion. Some areas are collecting at old rates and some others insisting on new rates. If it is a rollback, it is a retrograde step, as things are bound to go from bad to worse without adequate funds. The public groups have themselves said that they were “not against the revision but that it should be … affordable commensurate with various services provided”.

Still, after fifteen months, concerns of taxpayers have not been addressed, explained and settled. Currently, recovery ­being only 40 per cent of the cost of the existing poor service, the government should have acted with utmost urgency to resolve issues and start getting money into the till. Instead of acting with urgency, it has taken a year to appoint a Committee “to examine representations”. This move is tactically inadvisable, as it raises hope of a rate reduction when it can hardly be afforded nor is expected by the public. Moving in the next few months into the fore-shadow of the next state election, the government may not have the political nerve to confirm the rate hike announced sixteen months ago. The Committee appointment is perhaps meant to delay matters till after the election in 2021. Do not be surprised if one-upmanship tempts the opposition party to offer reduction of rates as an election lollipop.

The issues themselves are not so complicated as to need a special Committee. The government could well have ­resolved them and gone ahead by softening the hike with some changes that do not seriously affect the projected revenue.
One concern was that the rate hike was too large at one go. A hasty promise that the ­increase would not exceed 50 per cent has ­muddied the issue. To keep this promise and to secure the intended ­revenue, government could have ­announced 50 per cent increase for year one and ­increases, thereafter, by 10 per cent every half year till the new rate is reached. Distinction ­between owner occupancy of the property and tenant occupancy is an avoidable nicety ­giving room for tenants claiming to be of the owner’s family. The differentiation is conceptually wrong because the tax is the price for services given irrespective of whether the property is lived in or not and of who lives there, the owner or the tenant.

Collection efficiency is as low as 75 per cent in Chennai and 56 per cent in the Districts. In effect, in Chennai three ­assessees are paying for the fourth and in Districts, each is paying for another. Free riders get away with it as there is no way of individualised withholding of service for non-payment. To make up for lower collection, if rates are raised, it amounts to punishing the honest taxpayer! There must be a way of making non-payment unattractive. For example, when properties are sold, a no-arrear certificate from the Corporation authority should be insisted upon as a condition for registering the sale. Electricity lends itself to be individually withheld; under some arrangement between the Corporation and the TNEB this perhaps can be used to enforce timely property tax payment.

Citizens should realise that it is in their best interests to pay ­taxes promptly and then ­demand service. How the authorities maint­ained service all these years, without revising the rate, is no management miracle. It is just that they either did not deliver service or it was shoddy. If good service is extended public may not mind paying, but upon actually getting it as there is a trust deficit. After paying, they are not sure they are getting what they have paid for. Closer study might show that hesitation to accept higher tax rates arise out of two factors – one, people have lost trust in government agencies to deliver results as promised and in time. This is true of not just property tax but generally of governance and its reliability to deliver. Property tax is an ideal opportunity to remove this trust deficit. This tax is specific to water, drainage, lighting and scavenging services (the last mentioned is for collection of solid waste but referred to in records by the old expression). It lends itself to a visible linkage of tax, action and benefit. With substantial increase in annual revenue with the new rates, the authorities must spell out a plan of how, in specifics, the funds will be utilised, target dates for each module of the plan and the dates by which each zone would see and feel the benefit.

Compromises on rates and stringency of collection ­measures to overcome public resistance will only take us back to sub-standard service, ­unwillingness to pay and more of poor service. As the time-worn cliché goes – in economics there is no free lunch. After convincing the Public that there is a case for adequate cost recovery for a good standard of service, and after resolving grievances, it is time that the government proves that it can create a modern design, high quality of infra structure in quick time. When the larger gush of funds begins, its impact must be seen to be growing every day – Here is your Tax at Work! We shall deliver It shortly…(Date)!

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