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Anomaly in urban tax
Deccan herald, March 05 2008

Former member of The Planning Commision, G Thimmiah, argues that the state is not authorized to levy CVS.

For the purposes of levying urban property tax, the Bruhat Bangalore Mahanagara Palike (BBMP) is reported to have switched over from rental value to capital value of the urban property. This switch over has rightly been opposed in some quarters.

BBMP Commissioner S Subramanya, however, has gone ahead issuing an order to collect the urban property tax in BBMP areas based onthe capital value of buildings from April 1, 2008.

The former Mayor P R Ramesh, does not want the BBMP to impose undue burden on the property owners in Bangalore city. But Subramanya, being hard-pressed for revenue to undertake urban infrastructure projects and to provide basic urban civic facilities, has gone on raising the rates of fees on several BBMP services and also has decided to make the property owners in Bangalore city to share a portion of the sharp increase in the capital value of urban property.

Objection
Curiously, the urban development department has raised an objection to the decision of BBMP to switch over from rental value to capital value base of property tax without first getting the rental value based Self Assessment System evaluated by an expert body and without effecting proper amendment to the Karnataka Municipal Act. But all these authorities have either not cared to examine the constitutional status of a capital value based urban property tax or simply ignored it with a “who cares attitude.”

The power to tax urban property was conceived in the Government of India Act of 1935. As per the Act, the basis of property tax was understood to be rental value of property following the Anglo-Saxon tradition. When the Constitution was drafted, most part of the division of tax powers was copied from the 1935 Act.

Accordingly, in the Seventh Schedule of the Constitution, under the Union List, Item 86 clearly mentions that “taxes on the capital value of the assets exclusive of agricultural land, of individuals and companies, taxes on the capital of the companies” are reserved for the central government. Exercising this power, the central government has been levying wealth tax on property of individuals and some property of companies.

Under the State List, Item 49 gives powers to the state governments to levy “taxes on lands and buildings” and Item 61 gives the powers to levy “capitation taxes.”

Thus state government entrusted the power to levy tax on buildings to municipalities. But the basis of such a tax cannot be capital value as it is reserved for the central government under Item 86 of the Union List. This constitutional lapse cannot be ignored by the people of Karnataka. Before any amendment to an existing legislation is mooted, the law department is consulted. How did the law department permit this lapse?

Solution
The BBMP might have justified the switch over from rental value base to capital value base of property tax on the ground that many other countries are levying such a tax. That is blatantly a stupid justification because, the constitutional division of tax powers differ from country to country. India being a former British colony, it copied into 1935 Act what was prevailing in England.

The central government has not delegated nor empowered the state or municipal authorities to levy property tax based on capital value. That would have meant levying two wealth taxes which would have been disastrous.

Therefore, the BBMP cannot levy property tax based on capital value as it would amount to levying municipal wealth tax.

Taxation of capital value is entirely reserved for the central government. The former Mayor should file a suit in the high court requesting them to quash the BBMP tax notification on the ground of usurping constitutional power. The BBMP should explore alternative ways of raising revenue.

Probably the department of urban development may constitute an expert committee to explore all possible ways of augmenting the revenues of the urban local bodies in Karnataka.

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Property tax: Capital value system mandated by law
Deccan Herald, March 10, 2008.
BBMP, Commissioner, S SUBRAMANIAN, responds to G Thimmaiah's article.
This is in response to Anomaly in urban tax (DH,March 5) by G Thimmaiah, former member, Planning Commission, wherein he has stated that the Centre has not empowered the states to levy property tax based on capital value.
Thimmaiah has stated that it is a tax on the capital value of the assets of the individual and therefore falls within the scope of Entry 86 of List I of Seventh Schedule of the Constitution and not under Entry 49 of List II of the Seventh Schedule and therefore, the state legislature has no competence to enact legislation. He has also said that the tax levied is on the “income” derived from the immovable property of an individual and therefore, would fall within the scope of Entry 82 of List I of Seventh Schedule of the Constitution, thus taking it outside the state government’s purview.

These observations are not what are contemplated under the Constitution. The Constitution makes a clear distinction between what matters fall under Entry 86, 82 and 49. Entry 86 is a tax on the capital value of the assets and is leviable by the Centre under List I. The entry reads: “Taxes on the capital value of assets, exclusive of agricultural lands of individuals and companies taxes on the capital value of companies”. Entry 82 is a tax on income and is leviable by the Centre. The entry reads “Taxes on Income other than agricultural income” of List I of Seventh Schedule. Entry 49 is a tax on property and is leviable by the state government under List II of Seventh Schedule. The entry reads “Taxes on land and buildings”. It is this Entry that provides power to the state government to levy tax on property, which includes component of land and building. The choice of design for property tax is constitutionally valid if state government legislates tax property tax based on the annual or rental value of the property, the capital value of the property, a tax based on land or site only and excluding buildings and a combination the above three methods.

Capital value and rental value reflect the valuation of the property, though derived differently. Under the annual rental value system, the valuation of the property for assessment is based on the estimated or notional rental value and under capital value system the tax base is the market value of the property.
Prior to the amendment of the Karnataka Municipal Corporations Act 1976, property tax was levied on the basis of the annual rent that the property would fetch. The basis for computation was later shifted through an amendment from rental to “Taxable Capital Value”. The expression “Capital Value” used in the Act is not however the cost of construction of building or its market value as a wealth. It is a working expression, which may roughly be said to be the taxable value of the building. The expression “Capital value” came up for interpretation before the Apex Court in DG Gouse & Co, (Agents) Pvt, Ltd, Vs State of Kerala reported in AIR 1980 SC 271 wherein the court observed: “The expression ‘capital value’ used in the Act is not however the cost of construction of the building or its market value as a wealth. It is a convenient or a working expression which may roughly be said to be taxable value of the building and the state legislature was competent to select that as the basis for assessing the building tax”.

Section 102 of the KMC Act provides for the method of assessment of property tax. Under this section, the taxable capital value of the building is assessed together with its land. An important distinction is to be borne in mind between assessing the property value for the purpose of property tax and assessing property value that an informed and willing buyer pays a willing seller in a competitive market. In an actual sale or purchase of properties, the parties are seriously guided by the actual prevailing market rates. This level of accuracy of valuation is not required in the case of property tax assessment.

For the purpose of valuation of land and building the rates prescribed under Section 45 B of the Karnataka Stamp Act 1957 and the public works department respectively are adopted. The valuation by these departments does not reflect the actual market value, but a valuation based on a mass appraisal method. Therefore, by this simple adoption of these valuation principles the property tax assessment will have an objective base. Further, the assessment of property depends on the location of the property and the various attributes of the buildings such as type of construction, nature of use and such other criteria.

The amendment to the KMC Act was challenged before the Karnataka High Court, which upheld the constitutional validity of assessing property under capital value system.

Today, Bangalore citizens have no choice of paying the property tax by any method other than capital value system for the simple reason that this system is mandated under the legislation. Secondly, Bangalore Mahanagara Palike became BBMP with five of its new zones already following the capital value system in the assessment of property tax for over three years.When such is the position, continuing with the ARV system is a serious lapse and is questionable.

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Apart from all the objections others have voiced, I wonder just how legally justifiable this move is, considering that we have no government in place in the State, elections are imminent and any new programmes or projects announced at such a time are normally thrown out by the Election Commission. 

Remember what happened with Sakrama?  Another ill-considered move by BBMP. the corruption-ridden monolith, grasping desperately to lay hands on more money since all project funds are usually misused.  This is not the first time that the citizen has been brought into the cross-hairs of the government's trigger to subsidise corrupt practices and systems.

Has anyone filed a PiL against  CVS that anyone knows of?  Otherwise some of us could pitch in perhaps?

Regards,

Betashe

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That is a very good point. The govt's internal pipes through which the money flows is leaky. instead plugging those leaks, or better yet, upgrading to better pipes, they want to tap more into the source. check out this article in the Deccan Herald.

Bloreans find CVS taxing(Deccan Herald)
Mr Thomas, a pensioner who was paying Rs 5,000 as property tax till now, will have to shell out more than Rs 17,000 under the new capital value system (CVS) because the valuation is based not on the rental value and the type of construction but on the market and guidance values of the property.

B K Goyal, who runs a 500 sq feet machinery shop on Silver Jubilee Park Road by paying a rent of Rs 3,500, is worried that if the tax for the shop is calculated under CVS, then his owner might increase the rent since the latter would have to pay a higher tax to the BBMP.

These are just two examples of how CVS has become a cause of concern for citizens.

Though BBMP officials assure that the average rise in the rate of tax would range between 30 and 60 per cent depending on the area and property dimension, citizens are worried that the new system would burden them so much that they may have to stop paying the tax.

“All pensioners and elderly persons like me whose only income is the pension, will eventually have to leave the City and go. And moreover, under CVS I do not have the facility of paying in instalments as under the old Self Assessment Scheme (SAS) of property tax, which was based on the annual rental value (ARV) of a building,” Mr Thomas said.

“A sudden abnormal hike will definitely burden the citizens. BBMP has neither consulted the public nor released any handbook on the scheme so far. When it could spend more than a crore on publicising Sakrama, why did it not publicise CVS?” Mr Goyal asked. The BBMP, which is introducing CVS from April 1, has fixed the rate at 0.25 per cent of the capital value for residential self-occupied buildings and 0.5 per cent for rented residential buildings. The rate for industrial and commercial properties has been fixed at one per cent and two per cent of the capital value respectively. For vacant sites, it has been fixed at 0.2 per cent.

While citizens feel that this is sure to increase their tax by more than five to six times, BBMP Additional Commissioner (Finance) Sandip Dash told Deccan Herald this was a misconception. “CVS will definitely affect people, who were either under-paying or were evading tax so far,” he said.

There will be a steep hike in the tax rates for properties in Koramangala, Jayanagar 4th Block and surrounding areas with IT connectivity because the guidance value here has gone up considerably, he added.

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sorry for the delay in posting this. was sitting it for a while. useless now, but nevertheless a pointer to some thinking on this issue. [flickr-photo:id=2329452758,size=o]

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