The Smart Cities initiative represents a tremendous and innovative means for India to avoid the dreaded ‘middle income trap’ – by which nations’ GDP and wages stagnate and they fail to achieve higher levels of growth.
Leaping over the ‘middle income trap’ from the Smart Cities initiative is achievable for two reasons. The first reason is that India’s population is not only growing (1.27 billion population currently), it is also urbanizing rapidly. As much as 32% of the people live in cities, and that figure is set to explode in coming years. Cities are the engine of economic and social development and prosperity. If we are ‘smart’ about development, we can better set up our people to gain good employment with continually value-added contributions to the global economy. India already has a very good track record to create more high value employment opportunities. For instance, Thomson Reuters, has long been an employer in India and today employs close to 9,000 people working in Indian cities.
The government has focused the Smart Cities initiative not only in terms of developing the capacity for job creation, but more specifically on three forms of infrastructure to enable dynamic growth, namely physical, social, and institutional infrastructures. Under this direction, it is not only important for the government to build more roads, bridges and airports, but also more schools, hospitals, and sports facilities, alongside improving the governing institutions to support this development.
A second reason to have confidence in the Smart Cities initiative, and what could be seen as a true differentiating feature of this strategy compared to other countries, is a defined and needed focus on generating recurring, self-sustaining local revenue. The open and competitive Smart Cities initiative requires that winning cities to include a plan to generate revenue to support development in perpetuity — not just from the initial central government funding process.
A clearer and focused approach to generating revenue from property tax is a well-worn pathway to sustaining government revenues for many already developed countries. The Organization of Economic Co-operation and Development (OECD) estimates that developed countries generate some 2.12% of GDP from property taxes. In Canada, property tax represents 91% of local government revenues. In the US, it represents 75% of local revenues.
According to the OECD, transitional economies generate 0.6% of GDP from property tax. In India, according to the National Institute of Public Finance and Policy, an estimated 0.16% to 0.24% of GDP is generated from property tax. The reality is that an exact figure is not really known, which is somehow synonymous with the decentralized and varied implementation of property tax in India today.
Why is property tax so important?
For starters, the process of creating a fair and equitable property tax system ensures that the vast majority of people's properties are not only mapped and registered, but the properties are also valued. Having a clear picture of people's rights and their responsibilities to the land supports good planning. How many times in India have we read a newspaper article about a stalled infrastructure project as the need to acquire lands has been ground to a halt due to conflicting land right claims to the land or over compensation for the land in question being acquired?
Property tax is also a great immovable tax base. It is clear and evident where the land exists and relatively apparent the property on that land. It is also widely regarded as a progressive form of taxation. .
In many developed economies, property taxes pay for the social, physical, and institutional infrastructures that the government has called out as the three great pillars of India’s Smart Cities initiative. This is the tax that for many a locality — at the municipal level — can better fund our schools, street lightening, fire departments, water works, and other municipal services.
The Indian scenario
Tackling the lag in property tax for cities could well thrust India over the middle income gap, representing a leap that many other transitional economies have not quite managed to make. Geospatial information and technologies is the basis for an effective property tax system, when tied and integrated with the valuation and property tax billing and collection function. The starting block for an effective land administration and property tax system is to locate where people live and then to map the rights or responsibilities they have to those lands. That includes mapping the lands.
Yet, for all of the enthusiasm surrounding the Smart Cities initiative, the hard work of reforming the property tax system in India is significant. The current property tax revenue growth rate is not pacing with an increase in municipal service expenditures. Only 56% of people with properties in municipalities pay taxes. Plus, the tax rates are in many instances grossly off the reality of true market values. Studies indicate assessed values are 30% less than market value. This partially explains why property tax revenues are not tracking well against inflation.
Furthermore, the rate that new properties are registered and included in the tax roll is low. Additionally, according to the National Institute of Public Finance and Policy, there are too many and too lenient allowances for property depreciation and other tax rebates.
So, even if a property is registered, there is great chance that the property is valued well below market averages, and what revenue is collected is only a fraction of the true taxable rate. To size this up, Mumbai collects around $612 million a year in property
tax revenue — a majority on stamp or transaction taxes. New York City collects some $12 billion annually in property tax, and London around $11 billion.
Here, I do not want to despair our current national efforts. Rather, I would like to point out that today, under the Smart Cities initiative, we have a tremendous opportunity to focus on really transforming the funding mechanisms to make our cities smarter. The evidence is clear that shoring up our revenues through improved property collection will make our cities smarter in several ways — by providing more clarity on ownership, by directing government services to lower-valued neighborhoods, and by creating funding mechanism critical to finance future physical infrastructure projects.
Geospatial technology integrated with valuation systems and property tax administration processes and e-government modules offer a known path to avoiding the middle income trap