Municipalities Over-Rely On Property Tax For Financing Activities: RBI

The Reserve Bank of India (RBI) said property tax reform and the development of a vibrant municipal bond market may boost the finances of local bodies in India.

Property tax accounts for around half of the total tax collections of municipal corporations, the central bank said in a report of municipal finances.

“Over-reliance on property tax has constrained exploiting other avenues of funding, such as trade licences, entertainment taxes, taxes from mobile towers, solid waste user charges, water charges, and value capture financing,” the report said.

This is the first time the RBI has come up with a detailed report on the state of financial affairs in the country's major municipalities.

It added that property tax amounts to less than 0.5 per cent of GDP with significant inter-state variations.

Many of the larger cities were able to increase property tax collections over 2017-20, according to the RBI.

Among the major cities, Mumbai has the highest property tax collection during three consecutive financial years, starting 2017-18.

North Delhi, South Delhi, New Delhi, and East Delhi ( these have been merged into one municipality in 2022) are among the major cities that were able to increase property tax collections.

In Maharashtra, others include Pune, Nagpur, Thane, and Pimpri-Chinchwad. Chennai, Hyderabad and Kolkata also figure in this list. Bengaluru is, however, missing from the list.

“The potential of property tax needs to be fully leveraged by extending coverage, regularly revising tax rates, improving the assessment system and raising efficiency in tax administration,” the RBI said.

The report also noted that property tax had gained prominence among tax revenue sources as levies such as octroi/local body tax were subsumed in the Goods and Services Tax.

However, property tax collection in India is much lower compared to the OECD countries due to factors such as undervaluation, incomplete registers, policy inadequacy and ineffective administration.