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Under the new system, residents of old buildings are likely to be charged a higher amount, while those residing in not so old constructions may not be affected much
The Brihanmumbai Municipal Corporation's (BMC) switch from a property tax system based on rateable value to a property tax structure calculated on the capital value has received mixed reactions, since property taxes may go up for residents of old buildings, but remain about the same or even come down for flat owners in new buildings.
The new property tax system was drafted by a three-member committee appointed by the BMC. The members were MD Sukhtankar, former municipal commissioner, Roshan Namwati, a valuation expert, and DN Chaudhari, state law commission president. The new system was announced on 1st April 2010, but has not been enforced as the tax rate has not been fixed yet.
The BMC has put up a copy of the draft rules on its website (http://www.mcgm.gov.in/irj/portalapps/com.mcgm.aaboutus_
overview/docs/DraftRulesFixingCapitalValueLandsBuildings_E.pdf) and has invited citizens to submit their objections and suggestions by 30th November. Copies of the rules have also been made available at local ward offices.
In the rateable value-based system, the property tax was calculated on the basis of the rent which any rental property is likely to generate and for self-occupied properties it is based on a notional value. But, under the capital value-based system, the property tax is to be calculated based on the market value of the property. There are several factors like flat area, age of building, usage of land and type of construction that is also considered. To determine the market value, the BMC has adopted the rates from the stamp duty ready reckoner with slight variations. Once the market value is decided, it will remain constant for a period of five years, while the tax rate will be decided every year.
Under the new capital value-based system property taxes are likely to go up in south Mumbai, while residents in the suburbs may get some relief from the current property tax levels.
According to Ashutosh Limaye, local director, Strategic Consulting, Jones Lang LaSalle India, the property tax system is only being rationalised. "In south Mumbai, owners have been enjoying low property tax for a long time though property prices were high. Now, under the capital value system, the tax would be rationalised. People, who are living in the suburbs, have been paying higher property tax despite their property value being lower than South Mumbai properties," Mr Limaye told Moneylife.
Taxes in old buildings in the island city have not changed much due to the Rent Control Act, whereas most buildings in the suburbs do not come under the Rent Control Act and pay hefty taxes despite the capital value being lower than that for properties in the city. It has been reported that the capital value tax will not be more than twice the rateable value tax, and will not decrease to less than half the existing tax on the rateable value system.
"This is a welcome move by the BMC after ten years. Rented property will now have a better future," Santosh Kumar, author of the Stamp Duty Ready Reckoner & Market Value of Flats in Mumbai, told Moneylife. He explained that under the rateable value system, tax for rented property was charged on the amount of the rent payable, but if the property was self-occupied one would have to pay tax on a notional rent fixed by the BMC. "Owners in the elite South Mumbai areas who had given their properties on rent were opposing the old tax system as they were required to pay more tax on their property. Under the new system, the tax will be almost the same whether the property is given on rent or self-occupied. The only thing that is not clear yet is what the rate of tax will be," Mr Kumar said.
Residents, who live in a flat that is less than 500 square feet (sq ft), will have to pay the existing property tax rate for five years and this will be charged annually. "Another thing in the new system is that those people who are paying very less will also be benefited, because their taxes will continue according to the old tax rates if their area is up to 500 sq ft," Mr Kumar said.
Mr Kumar felt that people were opposed to the new system primarily due to ignorance. "They do not know what the new system is. Only because some media reports and vested interests have given the impression that taxes will shoot up, that is not right," he said.
Raj Purohit, members of the Maharashtra Legislative Assembly representing Colaba in South Mumbai, is critical of the new structure. "Instead of increasing property taxes in South Mumbai, property taxes in the suburbs could have been reduced. The capital value-based system is hypothetical. Even if a building is valued at Rs100 crore, it may not fetch a rent of even Rs10,000. The issue has attracted more attention after the hue and cry from residents in the suburbs," Mr Purohit said.
Mr Purohit, who is also president of the Mumbai Tenants Association, told Moneylife, "There are many people in the island whose property value is in millions of rupees but their economic condition is poor; how will they pay such a huge tax? This system will bring imbalance in the city and it will also hamper commercial property investments as corporate offices will prefer other cities like Bangalore, Delhi or other major cities in the wake of higher property taxes."
The BMC has already issued the property tax bill for the first half of the year according to the rate under the old system as the new system was not ready to be implemented. The bill for the second half would likely be issued in December and if there is any change in the rate, the difference for the first half would be adjusted in this second bill, Mr Kumar explained.