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Octroi is here to stay
March, 27th 2007

Maharashtra government is not yet ready to scrap or even phase out the octroi duty in cities governed by municipal corporations. A major roadblock is the stagnant civic property tax system that needs to be reformed. Reforms in the property tax system would help civic bodies register a quantum growth in tax collection and make up for the loss of octroi, a state government panel has recommended.

But the Democratic Front governments performance on the property tax issue has been as dismal as its miserable track record on other urban reforms. A draft bill proposed by the state in July 2006 to enable major civic bodies in the state to carry out property tax upgradation is still pending with a legislative sub-committee.

The bill was referred to the committee on the opposition Shiv Sena-BJP demand with a six month time-frame to carry out an in-depth study. Irony is that the committee has not had a single sitting on the bill so far, leave aside an in-depth study, urban development officials told ET. The bill was supposed to come up for consideration during the budget session. It seems very unlikely now, said an official.

In 2005, the Brihanmumbai Municipal Corporation had engaged Tata Institute of Social Sciences (TISS) to carry out an assessment of the existing rateable system of property tax and suggest better alternatives.

The TISS studied the system in Mumbai and compared it with the property tax practices in developed countries. Broadly, the TISS study observed that archaic legal provisions like the erstwhile Bombay Rent Control Act and its later version Maharashtra Rent Control Act, have virtually frozen property tax collections in Mumbai to their 1940-levels. The study recommended that property tax system be modernised and liberated from the grip of stagnant Acts. Highlight of the TISS study was its recommendation to make the current capital or market value of a property and rentals as the basis for levying tax.

Earlier this year, a state government panel formed to suggest alternatives to octroi virtually endorsed the TISS study. The panel estimated that the capital value system would lead to buoyancy in property tax collection and the revenue would gradually emerge as one of the feasible alternatives to octroi. For the 2006-07 fiscal, the BMC has set a target of Rs 800 crore through property tax.

The state panel estimated that this revenue could go up to Rs 1300 crore in the first year of capital value regime followed by a regular increase of at least 20% per annum in the collections. In Maharashtra, 22 municipal corporations collect more than Rs 5500 crore per annum through octroi. In all these cities, property tax collections through the rateable system have hit a plateau. The BMC collects around Rs 2600 crore from octroi which constitutes for 60% of its revenue. 

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