Municipal Taxes in India

In India municipal corporations or urban local bodies (ULB’s) levy two types of taxes viz. Property tax and Professional tax.  Property tax is an annual amount paid by a land owner to the municipal corporation of his/her area. The municipal corporation assesses and imposes the property tax annually or semi annually. The amount is generally based on construction, area, property size etc. It also compromises lighting tax, water tax and drainage tax.  Property tax is the most important tax levied by ULB’s in India; most cities are greatly dependent on property tax revenue for their budget.

Professional tax is levied by state government or municipalities under Article 276 of constitution, which provides for levy of tax on trade, profession and employment. The constitution has fixed the ceiling of Rs. 2500 per taxpayer per year. For some cities like Chennai, Hyderabad, Surat professional tax is the important source of income after property tax.

Collection and Appropriation of Municipal Taxes

The collection and appropriation of municipal tax is not uniform all over India. Different states and cities have different rates of taxes and performance level. Such as in collection of property taxes, Bangalore is taken as benchmark .The following factors are responsible for better performance in Bangalore

• Optimal progressivity in tax rates,
• Better living conditions, Better service delivery and
• Stable property market,

In another parameters such as own revenue as a percent of total expenditure Mumbai tops the list, while Dehradun and Kanpur have lowest share. In terms of transparency and accountability Hyderabad has highest degree and in terms of per capita capital expenditure  Mumbai, Pune, Kanpur have spent more than the rest of ULB’s while Patna, Ranchi and Bhubaneshwar have lagged behind.   The collected amount from these taxes are mainly used for public services like maintenance of roads, construction of schools, buildings, sanitation, garbage collection etc.

Are state assemblies competent to scrap taxes?

The 74th constitutional amendment act of 1992 empowers the state legislature to authorize the ULBs to levy, collect and appropriate taxes, duties, tolls and fees and  also it can unauthorized to do so. This means state legislature can also scrap such taxes.  Further, there is no need to seek parliament approval (as in case of Delhi) to revise or scrap such taxes.

Pros and cons of scrapping municipal tax

Any state government in India are unlikely to scrap such taxes. There are around 4000 municipalities in India with aggregate revenue of less then Rs. 1 trillion including grants from central and state government and major portion of this revenue is raised by municipal taxes. It is estimated that urban India needs Rs.3 trillion every year for capital expenditure besides revenue expenses. In this circumstance scrapping municipal taxes would prove disastrous on financially constrained ULB’s as well as state government further increasing the stress on ULB’s and increasing burden on state and central government to allocate more funds to ULB’s.

However such a move would reduce the burden of property tax and professional tax on people and corporate making Indian cities more competitive for setting up industries and generating employment, but this would be short lived because due to less financial resources it would be difficult for ULB’s to provide basic services such as water, sewage, and other basic service without which in living urban cities would be in peril.