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Realty punters to face tax hit
June, 11th 2007

Are you feeling lucky because the land you bought for peanuts has appreciated manifold thanks to major public investments in the area, such as the Metro rail? The use of the land may now attract a betterment levy on the increase in land value.

The moment you seek approval for construction on the land, you may have to pay a levy of 5-10% on the incremental land value. The move may hit speculators, who may now be required to share a part of their gains with the government.

The ministry of urban development has written to many states, including Gujarat, Maharashtra and Delhi, asking them to allow their local authorities to impose such a tax. We are of the view that in urban sprawls, many land masses have appreciated in value due to infrastructure development, such as Metro rail and airports. We feel states must levy a charge on the land and use the funds to revamp underdeveloped parts of cities, a ministry official told ET.

Such levies exist in other countries too. For instance, in Sydney, the municipal corporation levies a betterment tax on land stretches that have appreciated in value due to Sydney Harbour Bridge.

The government also feels developers tend to buy land for speculation. The proposed levy, apart from discouraging speculation, will also buttress government coffers. The urban development ministry recently organised a meeting of state urban development secretaries and municipal commissioners, where it was decided to amend state municipal laws. The proposed betterment levy is also believed to have been discussed.

The ministry official said the new law could include provision for such a levy. But officials said a new law may not be needed for charging betterment levy as it can be imposed through executive orders. The levy has been in force in Andhra Pradesh for over five years now. The change in state municipal laws would be a broader process incorporating many amendments that have become necessary and not necessarily related to the proposed levy.

The government feels proceeds from such levies should be used to top-up centrally-sponsored funds for urban infrastructure development. The government is in talks with the World Bank for creating one such fund with an initial corpus of $500 million. The formula that Nirman Bhawan is working on is simple: the state that contributes more to the fund will be rewarded in terms of higher disbursements from infrastructure and transport funds, such as the Jawaharlal Nehru National Urban Renewal Mission.

In major cities, wherever infrastructure development has taken off, such levies will be beneficial to support the growth of underdeveloped areas and suburbs. Moreover, public transport would gain immensely if the funds thus collected are used for the development of transport networks, an official said.

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