Over the last three years, a significant grassroots financial reform has unfolded, with 70% of India's 4,900 urban local bodies (ULBs) reporting a noteworthy increase in property tax collections. With over Rs 1 lakh crore in Central funding tied to property tax reform in the coming years, 3,086 ULBs across 22 states reported an increase in property tax collection in 2022-23 commensurate with their state’s five-year GSDP (Gross State Domestic Product) growth rate.

Out of the 4,771 ULBs reporting to MoHUA, 3,417 registered an increase in property tax collection for the fiscal year 2022-2023. In fact, this is a criterion for municipalities to be eligible for funds. In total, the 15th Finance Commission had recommended Rs 1,21,055 crore for urban local bodies over five years ending 2025-26. So far, out of Rs 21,791 crore allocated for ULBs under the 15th Finance Commission for this financial year, Rs 5,705 crore has been given.

The Ministry of Housing and Urban Affairs (MoHUA) and the non-profit Jaanagraha collaboratively collect audited accounts of ULBs, emphasizing transparency and digitization. The conditions for accessing the funds get more stringent every year – starting with the requirement that states notify the floor rates of property tax, then submit their annual audit accounts showing property tax collection and finally, have an increase in collections. This practice has evolved after the 15th Finance Commission’s recommendations in 2020 for devolutions to ULBs from 2021-2026.

Among the cities which have reported an increase in collection are 40 out of the 50 cities that have a population over 1 million, including Mumbai, Chennai and Hyderabad. Delhi, Srinagar and Chandigarh are not part of the million-plus cities under MoHUA as they are in Union Territories.

Preceding the implementation of the Goods and Services Tax (GST) in 2017, ULBs had diverse revenue sources, many of which merged with the GST. While states benefited, ULBs faced challenges. Recognizing this, the Finance Commission engaged with ULBs across states, acknowledging their reluctance to increase property tax collections. To induce change, the Commission employed penalties and incentives, tying compliance to grants-in-aid.

According to NK Singh, Chairman of the 15th Finance Commission, property tax serves as a vital avenue for ensuring the sustainability of ULBs. He states that we cannot genuinely have the devolution of the three Fs – functions, finance and functionaries, embedded in the Constitutional amendment, without their becoming financial entities. Singh emphasized that ULBs have yet to achieve their full financial sustainability, hoping for continued stringency in conditions from successive Finance Commissions.

An RBI report from November 2022, based on a sample of 201 municipal corporations, underscores the importance of property tax, constituting 31-34% of their own revenue. However, challenges such as poor enforcement mechanisms, outdated exemptions, property undervaluation, and weak tax administration contribute to significant under-recoveries in many Indian cities.

As a result of the Finance Commission recommendations, for the first time, the financial data of all ULBs is being put in the public domain through cityfinance.in, which was launched in June 2020. Jaanagraha CEO Srikanth Viswanathan notes a substantial shift in property tax reforms since 2020, highlighting the significant financial stakes involved, including over Rs 1 lakh crore under the 15th Finance Commission, Rs 5,000 crore as credit worthiness grant, Rs 50,000 crore linked to property tax reform in additional borrowing for states, and incentives under AMRUT.

A 2021 toolkit by MoHUA and Jaanagraha emphasizes the potential of property tax collections, setting an aspirational target of reaching Rs. 40,000 crores in 2024, up from the current estimate of approximately Rs. 20,000 crores. This comprehensive reform seeks to ensure financial sustainability at the grassroots level, aligning with the larger vision of devolution and governance reforms recommended by the Finance Commission.