Higher municipal tax on let out properties and properties used for commercial purposes is not justified- a discussion in view of proposed area wise property tax in Kolkata with additional multipliers in case of commercial property and let out property.

[C.A. DEV KUMAR KOTHARI]

General: 

Municipal tax e.g. KMC tax in Kolkata is in fact a service charge or fees for providing civic amenities. There may not be perfect correlation between services availed by a tax payer and tax payable by him. However, a logical correlation is required to be maintained between services rendered and tax chargeable. An illogically high tax on some type of properties without there being higher degree of services rendered is not at all justified.

At present there is assessment of each property for taxation. Now it is proposed to provide area wise annual valuation rate and based on that tax will be imposed.

Some multiplying factors will be applicable for different type of building or use to which building is put. E.G. multiplying factors is 4 for commercial properties and 2 for tenanted properties. It means that in case of let out commercial property area wise rate will be multiplied with 8. The tax will be eight times in comparison to tax on similar property used by owner for residence.

These seems totally unjust and illegal and the same need to be reconsidered by KMC and in case KMC does not reconsider them the same may require challenge before courts.

KMC does not provide extra civic facilities to tenanted properties and /or commercial properties in comparison to services provided to self occupied properties and / or residential properties.

In fact, in case of self occupied property, the owner has more freedom to use property to the maximum use. Whereas in case of tenanted properties usually landlord places many type of restrictions as to usages, time of use, number of members, water supply, common facilities etc.

Commercial properties are used for lesser duration- 8 full hours and 2-3 hours partly and there are about 125 holidays in a year. Whereas in case of residential premises there is greater use – round the clock and on all days without any holiday.

In case of tenanted properties there is also vacancy period when property remains vacant and any civic facilities may not be used during such period. 1/ 6  vacancy period  can be considered as average -  2 months in a year (6 months in three years).

Therefore, generally a tenanted property can avail lesser civic facilities per flat / office room of same size in comparison to a self occupied flat / office of same size.

A tenant does not use property and civic amenities more than a landlord himself can do in case of a self occupied property.

Due to rent laws in many cases rents are fixed at very old rates and the revision of rent to fair rent is very difficult and time consuming because the law and law enforcing authorities are in more favor of tenants than being fair to landlords. Furthermore, increase allowed in rent is very low and recovery of the same is also very difficult.

In case of letting out of properties the landlord has to face various risks and contingencies like not receiving rent, no increase in rent, not getting property vacated, difficulties in selling tenanted property at fair value, chances of subletting by tenant etc.

Considering various constraints in relation to tenanted properties, the multiplying factor should be less than in case of self occupied properties. It should be about one-half.

Taxing property tax on basis of rent is also not logical, because irrespective of rate of rent for different spaces in a building, the occupiers are eligible to avail municipal services uniformly. The KMC Act was amended long ago  for providing area wise  annual rates per square feet  as basis of taxation now it is expected that notification shall finally be issued / come into force  to provide area wise rates, with effect from 01.04.2012.

In the new scheme, city is divided in seven categories of area A- G. Area wise base rate is prescribed as follows:

Category Rs. / sq. ft.

A 85

B 65

C 50

D 40

E 30

F 20

G 15

Prescribed multipliers:

Multiplier for oldness of building: 20 years or less 1.00  More than 20 years 0.80  and for  Heritage Building 0.60

For width of roads:

Property on C-zone / major road as per LUDCP 1.20

Property abutted by Roads having width more than or equal to 3.5 m.

1.00

Property abutted by Roads having width

Structure Multiplicat ive Factor

Structure of Building MF Values

Single unit bldg, land >7.5cottah 3.00

Lifestylebldg., “Special Projects” 2.50

Pucca 1.00

Semi-pucca 0.60

Kuchcha 0.50

Usage Multiplicative Factor

Usage Type MF Values

Residential / Property used for welfare of orphan,destitute people, etc

1.00

Non-governmental, health and educational service, SSI, shop (less than 150 sq. ft.) 2.00

Cinema Hall, Restaurant 3.00

Hotels < 3 stars, office, commercial establishment, assembly bldg.. for entertainment/ recreation 4.00

Hotels >=3 stars, towers, ATM, hoardings 5.00

Occupancy Multiplicative Factor

Occupancy Status MF Values

Occupied by tenant 2.00

Owner occupied 1.00

Example:Illustrat

Consider, a flat owner occupied  residential flat that is more than 30 years old having covered space of 600 sq.f t. and located in a category ‘D’ block by the side of a road having width less than 3.5m  MF values for the property based on its

Age of the  property (MF1)  33 years 0.80

Structure type   (MF2)   Pucca 1

Occupancy   Status (MF3)   Owner occupied 1

Location (MF4) Abutting road having width

Usage type  (MF5)   Residential 1

Say, for a ‘D’ category block, the Base Unit Area Value = Rs.40 /sq.f t. per annum

Calculations

Final Base Unit Area Value (FBUAV) =

BUAV x MF1 x MF2 x MF3 x MF4 x MF5

Rs. 40 x 0.80 x 1 x 1 x 0.80 x 1 = Rs. 25.60 /

sq. ft.

Annual Value = FBUAV x Covered space

25.60 x 600 = Rs. 15,360

Tax Rate = 10%

Gross Annual Tax = Rs. 15,360 x 10%

= Rs. 1,536*

Gross Quarterly Tax = Rs. 1,536 / 4

= Rs. 384

* Howrah Bridge tax is not included

Let out properties:

In case a property is let out the multiplier will be 2. Therefore, in case the flat considered in the earlier illustration is let out by owner to a tenant, the municipal annual valuation will be two times and tax will also be two times.

Higher Municipality tax on premises used for commercial purpsoes:

In case of property is used for office or other commercial purpose, municipalities are generally charging higher municipal tax. The higher charge is either by way of higher valuation or by way of higher rate of tax or additional charges. Besides municipal tax on property, many times municipalities also charges some other taxes like trade license fees, profession tax, car parking fees, garbage disposal fees, commercial surcharge etc. As per proposed are wise tax in Kolkata there will be multiplier of four in case property is used for commercial purposes. Therefore in case the flat mentioned in the illustration is used for commercial purposes, the annual value and tax will be four times. This is not at all justified.

Suppose the same flat is let out for commercial purposes, then there will be additional multiplier of two. Hence the annual valuation and tax will be eight times, in comparison to annual valuation, if the flat is self-occupied by the owner for residential purposes.

Purpose of Municipalities:

Municipalities or Municipal Corporations are established for the purposes of rendering and providing various facilities, services and amenities in the municipal area of their jurisdiction. Many of such services are provided by municipalities alone and many with help of other departments of state Government. Therefore, provision of such services is the main purpose of any municipality.

Municipal tax / rate/ consolidated rate whether tax or fees:

Under the Constitution of India, the levy of municipal rate, duty, tax or fees by whatever name called is considered as ‘tax on property’. Municipalities are established for the purpose of providing civic and other facilities to the public of municipal area.

 For the purposes of municipality, municipality can impose municipal fees or tax. This tax is in nature of tax on property and not as a tax on income by way of rent of the property owner. By whatever name called, municipal tax is in nature of fees for such services. There may or may not be perfect correlation with services used by any particular citizen, but in totality of public of the municipal area, it can be said that the municipal tax is nothing but a fees or charge for common services, facilities, amenities etc. provided to the population of the municipal area.

Depending on difference in development of different areas, facilities and amenities provided by municipalities, infrastructural facilities and support provided by municipalities etc. different annual valuation rates are fixed by municipalities in different areas. This clearly shows that municipal tax is in nature of fees. It is in nature of tax, only to some extent, because it is not dependent of use or extent of use of municipal facilities by the property owner.

The main services or amenities provided by Municipality are:

Water supply- for consumption by human being and animals. This include water used for domestic and commercial use like drinking, cooking, in bathrooms, urinals and latrines, cleaning of clothes, cleaning of buildings etc.

Sewerage system and garbage disposal- by way of sewerage pipe lines and garbage collection and disposal system.

Street lighting.

Roads and street cleaning and maintenance.

Municipality  run schools, dispensary, hospitals.

Birth and death certificates and recording.

Public parks and amusement centers.

Maintaining Heritage Buildings.

Maintaining funeral and burial grounds.

More extensive use is by residential buildings:

Use of such services by residential buildings is more extensive than use by office buildings for the various reasons as tabulated below

DIFFERENCE BETWEEN BUILDINGS USED AS OFFICE AND AS RESIDENCE AND EXTENT OF USE OF AMENITIES PROVIDED BY MUNICIPALTIES

Description of service	Use in residential property	Use in commercial  property	Remarks – use in offices as compared to residential premises
Days  of use	All days -365 /366 in a year.	About  240- 280 days in a year.	70% in offices say ¾ at maximum.
Hours	24 hours	About 8-10 hours.	About 1/3  .
Days of use and number of use multiplied	365 X 24=8760	280  x 10 =2800	About 32% say 1/3 at maximum.
Water supply	For drinking, cooking of meals, washing clothes. Washing houses, use in bathrooms, urinals , latrines,	Mainly for drinking and use in  urinals, Use for cooking is much less	About 1/5 . 1/5 X 1/3 =1/15
Sewerage	Extensive use	Much less use	About 1/5 1/5 X1/3 =1/15
Waste disposal	Extensive use	Much less use	About 1/5 1/5 X1/3 = 1/15
Street lighting	Extensive	Much less	About ¼ ¼ X 1/3 = 1/12
Foot falls	24 hours but lesser numbers	8-10 hours but higher numbers	About 3 times in numbers. 3 X 1/ 3= 1
Car parking.	24 hours ( it is generally  not chargeable). Most of parking are in personal properties	8-10 hours( it is  generally chargeable extra by municipalities)	Free service 1/3 X 1/3 = 1/9
Birth and death records and certifications	Basically it is in relation to residential properties	Nil	Nil
Public parks, amusement centers etc.	Mainly in residential area and used in residential area. In some case extra charge is levied	Hardly any use  by occupiers of office buildings.	nil
Maintaining funeral and burial grounds.	Mostly used by residential premises.	Hardly any use. Even if death occur in an office building, funeral or burial takes place in the area where the deceased is usually living.	nil
Schools, hospitals	The residential property occupiers gain directly.	Hardly any direct benefit. Indirect benefit is only in case of employees who studied in local municipal schools. For hospitals also there is some use by office occupiers.	Negligible.

Taking into consideration all above factors it can be said that in case of office premises, the use of municipal facilities is very low for the following reasons:

Number of days and number of hours for use of office buildings are much less and it gives multiplier of 1/3^rd at the maximum.

Many of services provides by the municipalities are used to very low extent in comparison to use in residential buildings.  Use as occupier of office buildings is comparatively very low. Only in case of foot fall and car parking we find that there is higher use in case of office buildings.  Taking an overall picture, the extensity of use of office buildings can be described at about 1/5 and it will not exceed 1/ 4 (25%) even if some over time use is considered in offices.

Therefore, overall extensity of use of municipal services by office occupiers of offices is about 1/3 X 1/4 = 1/12 in comparison to use in residential buildings.    

Passive use of some of such facilities by office premises during off hours is also low in comparison to house in residential properties. Even if take into account such passive use for sewerage, street lighting, watch and ward, cleaning services etc. this will not be more than 1/12 in comparison to actively used facilities by residential properties.

Therefore, taking into account active and passive both type of use in office buildings, it can be said that overall use in case of office buildings will be around 15 - 20%  in comparison to use by residential premises.

An example:

There is a five storied building. The sue of five storied building is follows:

Ground floor	First – third floor	Fourth floor	Remarks.
Used as show room	Used as offices	Used as residence
Monday to Saturday. Sunday and public holidays closed So number  of days used is about 300 days	Monday to Saturday. Sunday and public holidays closed So number  of days used is about 300 days	All days used
Hours   9.30 to 20.30 = 11 hours Mon- Fri and 6 hours on Saturday. Total 3000 hours in a year	Hours   9.30 to 17.30  = 8 hours Mon- Fri and 5 hours on Saturday. Total 2250 hours in a year	24 hours Total 8760 hours in a year.
Use -Percent  use based on hours in a year taking 100% for residential use: 34.25% Considering extensity of use: 34.25 X 60% = 20.55%	25.69% Considering extensity of use: 25.69% X 40% = 10.28%	100% 100%

The above write-up and illustration shows that there is no justification of higher rate of tax on office buildings and there is no justification for higher tax merely because property is let out..

Why higher rent in office and commercial use:

Now the question comes why there is usually higher rent in premises used for office and other commercial purposes in comparison to used for residential purposes.

Higher taxes:

One of the important reason is higher and un-certain municipal and other taxes. Such taxes are usually borne by the owner.

Higher risks: local, commercial and other risks are higher in case of property used for office and other commercial purposes. The following table shows comparative risks:

Property let out for office  or other commercial purposes	Property let out for residential purposes	Remarks
Higher taxes with high un-certainties	Lower taxes with more certainty.
Lower and specific demands depend on suitability for particular use. The demand has low price sensitivity. In case of not finding suitable tenant for suitable use, low rent will also not attract more tenants.	High Demand. Demand is also price elastic, in case of low demand at any time, reducing rent can attract more tenants raising demand.
Vacancy period is higher- waiting period for new tenant coming- in, is longer.	Vacancy period is lower- waiting period for new tenant coming in is short.
Risks of rent collection is more due to uncertainty in business. Even in case of non-payment of rent, it will be difficult to get vacant possession due to labor and corporate laws.	Regular rent payment is  general way of living in rented premises. In case of defaults, it is much easier to get vacant possession.
Local risks- are higher	Local risks are lower.
Risks associated with business of tenant are higher. In case of problem in business the rent payment may be stopped or become irregular and sometimes space is closed and rent is also not collected. E.G. in case tenant company going into liquidation, or strikes, lock-out  or closure of business.	No such risks. Even if tenant has problem in his business, he will keep the residential property harmless and pay rent on time or vacate the property as soon as possible.
Risks of damages are higher due to labor and other problems associated with business.	Very low risks. Only few tenants have tendency to damage tenanted property and that too only just before they have decided to vacate. During stay, they need to use property properly.
Legal risks associated with business of tenant are high. Some times premises may be closed, receivers may be appointed by court. Illegal activities in business may cause harm to property and rent collection may be stopped.	Legal risks are low.
Legal risks associated with rent control law is also higher.	Legal risks associated with rent control law is lower.

Rent should not be basis of valuation for KMC Tax.

As discussed earlier KMC tax is for the purposes of municipality. It is in nature of fees. At present there is valuation of each property. Now it is proposed to area wise rates because taxing property on the basis of rent has no logic. In the same locality and say in the same building some space is let out at very low rent and other on much higher rent. We have seen rents fluctuating very widely within a short to medium period of 1-3 years. Whether rent is low or high makes no difference so far availability and availment of service of KMC is concerned. Irrespective of rate of rent in any building, the occupiers of the building can avail and avail services of KMC almost uniformly.   

We find lower tax for owner occupied office and tenant occupied office when rent is low. In case of higher rent higher MT is levied. For example, there is no justification of three room carrying annual valuation  of say  Rs.108  , 76 and 22  when the  rooms are side by side and are used in similar manner merely because first room is let out at say Rs.10 PER SFT pm the second at say Rs.7 per sft pm and the third one is used by the owner. As per proposed scheme, in case of let out property there will be multiplier two. In case of commercial use there will be further four multiplier. These are not justified.