New property tax rules will boost realty market

The state legislative council on Thursday approved the bill to calculate property tax on capital value instead of the rateable value-based system.

The amendment to the Bombay Municipal Corporation Act, 1888 was pending in the council after it was approved by the joint select committee and thereafter the state assembly.

The decision will benefit people living in flats with a carpet area of 500 square feet. The new system will exempt them from paying property tax for the first five years. In the next five years, there can be a hike, but not more than 40% of the tax in the earlier years.

“The new system will boost the lease market as lessors will have to shell out Rs10-Rs15 a sq ft against the Rs50-Rs70 a sq ft they would shell out as taxes from a total rent of Rs100 a sq ft,” Rajendra Mehta, president of Property Lessors Association, said.

The proposal to switch to the capital value system is based on a study by the Tata Institute for Social Sciences (TISS) and the University of Mumbai. TISS had estimated that the switchover would improve tax collections by almost 200%. Old buildings in the island city, where rents are frozen because of the Rent Control Act, now pay a pittance as property tax though capital values are high.

The commercial property lease market too would get a significant boost. Dr Ernest John, the owner of Ernest building at Nariman Point, said, “It will boost the lease market. The capital value-based system will have a positive impact because it will equalise property tax in the city and suburbs,” he said.

But Karan Sodi, the vice-president (tenant representation) at Jones Lang LaSalle Meghraj, global property consultants, said, “The global recession has increased the vacancy levels in commercial office space to an average 16% from 9% in the past few months. This move will have a negative impact on the city’s marketability as a finance centre because the incremental tax would be pushed on tenants.”

At present, the property tax is collected based on the rateable value system. The tax is calculated based on a hypothetical rent. And rents are frozen at the 1940s under the Maharashtra Rent Control Act. Also, the rateable value of properties covered under the act is low.

Mumbai’s MLAs had opposed the government’s plan of a capital value-based system because they thought it might lead to higher tax liability for people living in the island city.