Property Tax Revenue Could Help Cities Adapt To A Hotter World

Pune’s summer has turned relentless, with daytime temperatures soaring past 40°C in March and nights offering little relief as the mercury refuses to dip below 20°C. But for some residents, the heat isn’t the only discomfort — unpaid property taxes have brought an unusual worry. Instead of offering an amnesty scheme like many other cities, the Pune Municipal Corporation (PMC) has taken a different route — from blaring musical bands outside homes to cutting water supply — to recover dues before the financial year ends.

Meanwhile, cities and townships such as Ulhasnagar, Nagpur, Navi Mumbai, Nashik, Kolhapur, Ahmedabad, Hyderabad, and many others are choosing a softer approach, rolling out amnesty schemes to encourage property owners to clear their pending taxes, including a 100% waiver on interest.

In Pune though, past amnesty schemes have been frequently misused, according to a response to a Right to Information (RTI) query filed by Vivek Velankar, the president of Sajag Nagarik Manch, an NGO based in Pune. The RTI response from PMC shared with him in January highlights that in 2020-21, out of 149,683 taxpayers who benefited from the scheme, 63,518 defaulted again by 2024. Similarly, in 2021-22, 66,454 people availed of the scheme, but 44,685 became defaulters again in 2024.

Velankar says that amnesty schemes reward habitual defaulters. This is an injustice to those who pay taxes on time. Velankar’s RTI query also reveals 685 major defaulters with dues exceeding Rs. 10 million each, totalling over Rs. 27.55 billion. For context, this amounts to about a fifth of PMC’s annual budget for 2025-26 of Rs. 126.18 billion. He suggests that instead of blanket amnesty schemes, urban local bodies (ULBs) should focus on stricter recovery from big defaulters, preventing repeat beneficiaries, and improving tax compliance through better enforcement.

Property tax collection is an important source of revenue for urban bodies and can be used for climate-related expenditure, say experts. If ULBs can generate revenue independently, through sources such as property tax, it gives them more autonomy to invest in the services the city needs.

“The majority of services such as solid waste management, water supply, providing shelter during extreme heat and winter, maintaining sewage systems and transport, fall under ULBs and are directly linked to environmental challenges and climate change,” says A.K. Gupta, former additional director at the Regional Centre for Urban and Environmental Studies and Urban Transport, Directorate of the Government of Uttar Pradesh. Property tax and grants from the state government are the two major sources of revenue for ULBs, he adds. “In states like Madhya Pradesh, Uttar Pradesh, and Bihar, the share of grants is significantly higher than revenue generated locally through property tax, stamp duty, etc. These grants always come with conditions that ULBs must follow,” he says. “However, if ULBs generate more local revenue, they will be able to invest in these sectors and provide better services.”

Cities on the climate frontline

Pune, facing unusually high temperatures, is part of a larger trend of extreme weather linked to urbanisation that is becoming more common in urban centres.

The Reserve Bank of India (RBI) released a report in November 2024 on the financial health of Urban Local Bodies (ULBs) in which it also highlighted the challenges cities face due to climate change. It says, “The challenges posed by global warming, such as depleting water tables and rising temperatures, are becoming particularly acute for cities.” It underlines that cities have a pivotal role in achieving Sustainable Development Goals (SDGs) and combating climate change, given the concentration of population, physical infrastructure intensity, and energy consumption in urban areas. “The harmful impacts of climate change can be mitigated by switching over to sustainable policies such as enhanced investment in renewable energy, green building initiatives, waste management and energy efficient public transportation systems,” it says.

Ravikant Joshi, an urban finance expert and former chief accounts officer of Vadodara Municipal Corporation, observes that Indian cities are already experiencing climate impacts through heatwaves, floods, and water scarcity. “While cities must be part of the climate solution, they’re largely missing from the conversation,” he notes, adding that urban climate action requires significant funding due to higher infrastructure costs for mitigation and adaptation.

Barely about 50 cities are making climate action plans, mostly in the early stages of recognising climate goals. Few, like Mumbai and Ahmedabad, have adopted climate budgeting. However, he said their climate budgeting largely reflects existing expenditures—such as water supply, solid waste management, and infrastructure—reclassified as climate-related spending.

This is again a global trend. Several cities across the globe are pledging to tackle climate change, according to a study by researchers from the University of North Carolina and the University of Berkeley, published in the One Earth journal. However, there is a consensus that any effective climate action at the city level needs financial support. The need for financing cities became louder during the climate conference in Azerbaijan and the meeting of the G20 in Brazil, both held in November 2024, in the background of COP29, which was also termed as finance COP. The final agreement over the finance that will flow from developed to developing countries disappointed many, and now many experts argue to explore local avenues of climate finance too.

While explaining the increasing vulnerabilities of cities due to climate change and their role in achieving SDGs, the RBI report highlights that augmenting ULBs’ source revenues becomes crucial. “Transfers received from upper tiers of government often have attached conditionality on their usage,” it says.

Joshi echoes, “Every revenue source, including property tax, becomes crucial for climate resilience efforts at the local level.”

Shrinking the revenue basket

Municipal budgets in India are weakening. The Indian Council for Research on International Economic Relations (ICRIER) study, on behalf of the 15th Finance Commission, highlighted a growing imbalance between the ULBs’ responsibility and financial resources. As a share of GDP, municipal revenue and expenditure are decreasing, while urbanisation and infrastructure requirements are increasing manifold. As a result, ULBs are losing financial autonomy and becoming increasingly dependent on state and central government transfers.

The ICRIER report notes that state governments have gradually taken over tax sources traditionally under ULBs, such as entertainment tax, motor vehicle tax, and duty on property transfers. The introduction of GST dealt another blow by subsuming local taxes—including octroi, local body tax, entry tax, and advertisement tax—without ensuring direct compensation to municipalities.

Municipal revenue in India continues to account for a small share of GDP, remaining stagnant at around 1% from 2007-08 to 2017-18. In contrast, this figure stood at 4.5% in Poland, 6.0% in South Africa, 7.4% in Brazil, 13.9% in the United Kingdom, and 14.2% in Norway in 2010.

Property tax is the only major tax revenue source for municipalities in India, contributing about 60% of municipal tax revenue in 2017-18. By comparison, municipalities in other countries have access to a broader range of taxes, including sales tax, VAT shares, income tax, registration tax/stamp duty, vehicle tax, and construction tax.

Even within India, property tax collection remains significantly low. A 2020 World Bank discussion paper estimates that while the average revenue from property taxes in OECD countries ( a group of 38 countries mostly developed) is 1.1% of GDP, India collects only 0.2%—just one-sixth of that figure. This is also lower than the developing country average of 0.7% of GDP.

“Ideally, property tax should contribute at least 0.6% of GDP, but the target should be 1%,” says Joshi.

“Property tax revenues are a major source of revenue for urban local governments (ULGs). However, ULGs in India have been unable to optimally utilise this revenue stream,” says Shreshtha Saraswat, Senior Manager – Municipal Finance, Janaagraha, a non-profit organisation focused on urban governance and related issues.

There is also significant variation in property tax collection across states. The World Bank report highlights that Bihar’s property tax revenue is just Rs. 63 per capita, while Gujarat records the highest at Rs. 1,911 per capita. This is based on 2017-18 data.

Cities in Gujarat and Maharashtra have been advanced in property tax administration for over a century, consistently raising resources from the public. In contrast, many cities in North Indian states have chosen to levy property tax inefficiently and at a very low rate. As a result, North Indian cities rely on state government support for up to 80% of their funding. In contrast, cities in Gujarat and Maharashtra depend on state grants for only 40–50%, according to Joshi.

Experts Mongabay India spoke to also highlight the political economy as a significant hurdle in levying and collecting property tax properly.

The property tax puzzle

The RBI report released in November 2024 is based on a survey of 232 urban local bodies (ULBs). It points to sharp variations in property tax collection between states reflecting variation in tax rates, efficiency of collections, and the state of the economy. The report also highlights the different approaches ULBs adopt for enumeration, valuation, and assessment.

Effective property tax administration relies on three key principles: maintaining an accurate property register, assessing property value correctly, and setting fair tax rates. The final step is ensuring efficient tax collection.

As per the survey, 96.2% of municipal corporations have property registers. But 25.5% continue to use manual, paper-based records, which are vulnerable to errors, the report adds. In terms of the methods of valuation, the RBI report states that approximately 45% of ULBs employ methods that do not directly relate to a property’s condition, location, or size.

The report also highlights that physical assessment by revenue officials remains the most widely used method, with 55% of ULBs still relying on it despite the availability of GIS-based surveys.

As a result, a large number of properties remain outside the tax net. The RBI report states that 17% of cities have coverage ratios (the number of properties paying property tax as a percentage of the estimated total properties in the jurisdiction) of less than 20%. Only 9.4% of ULBs have coverage ratios exceeding 80%.

Shreshtha Saraswat, Senior Manager, Municipal Finance at Janaagraha, emphasizes the need for a comprehensive approach to property tax reforms. First, states and ULGs must expand their tax net by creating comprehensive property registers. Technology can play a key role here—periodic GIS-based surveys and digital data sharing between property tax records and state department records can help identify properties that have escaped taxation but are mapped in electricity discom or land department databases.

Second, states and ULGs need to ensure property valuations reflect market values to improve tax assessments. Third, they must enhance tax collection efficiency by enforcing penalties on defaulters, engaging third-party contractors or self-help groups to assist field staff, and promoting digital payment methods. “Most ULGs currently collect only 50-60% of their dues. By implementing these measures, they can significantly improve collection rates,” Saraswat said.

Here, Pune stands out as a good example. Having tried an amnesty policy, the city is now trying new approaches to enhance tax realisation. It has also implemented a system based on artificial intelligence for identifying discrepancies in property tax collections and unassessed properties.

(Published under Creative Commons from Mongabay India. Read the original article here)