Property Tax: BBMP’s Guidance Value-Based System

On March 6, 2024, the Bruhat Bengaluru Mahanagara Palike (Amendment) Act, 2024 (“Amendment Act”)  received the assent of the Governor, was first published in the Karnataka Gazette Extra-ordinary on March 7, 2024, and accordingly, the Amendment Act has come into force at once from the date of publication.  

The Amendment Act, inter alia other amendments to the Bruhat Bengaluru Mahanagara Palike Act, 2020 (“2020 Act”), lays emphasis on collection of property tax based on the guidance value of a property.

This article intends to provide insights on the new guidance value-based property tax system, which involves the calculation of property taxes based on the taxable capital value[1] of the property as opposed to the taxable annual value applicable under the old regime.

One of the major amendments brought into force under the Amendment Act is substitution of Section 144(5) of the 2020 Act, which now reads as follows:

“The property tax shall be levied by the Bruhat Bengaluru Mahanagara Palike by a resolution passed at such percentage not more than ten percent of the taxable capital value of a building, vacant land or both. The taxable capital value of a building, vacant land or both shall be calculated by multiplying the corresponding “unit area value” with the total built-up area of a building, vacant land or both for ten months, minus the depreciation of three percent per year depending on the age of a building. The property tax assessed and levied under this section, once notified by the Government, shall stand revised as and when the property, building or land value is revised by a notification under section 45B of the Karnataka Stamp Act, 1957 (Karnataka Act 34 of 1957) by the Government.”

As per the Explanation added to Section 144(5) of the 2020 Act, the meaning of unit area value has been clarified to mean the guidance value of the property or land published under Section 45B of the Karnataka Stamp Act, 1957, and as to the building standing on a plot, it means the value of the building as may be assessed based on the per square foot construction cost minus the depreciation at the time of assessment.

Under Section 144(18) of the 2020 Act, the Chief Commissioner has the power to clarify any doubt as to the classification of zones, unit area value and class of property, and the decision of the Chief Commissioner in this regard would be final. In consideration of the meaning of unit area value, as explained under the Amendment Act, Section 144(18) of the 2020 Act has also been amended, omitting the words “unit area value”. 

Guidance Value-Based Property Tax System[2]

Bruhat Bengaluru Mahanagara Palike’s Draft Notification dated February 20, 2024, determining the unit area value by the Chief Commissioner in pursuance to the Explanation to Section 144(5) of the Amended Act, was published as required by the proviso to the said Explanation for the information of the persons likely to be affected thereby.[3]

The Draft Notification goes on to define the mechanism of calculating the property taxes based on the classification of the property as residential and non-residential, vacant and built-up, rented and self-occupied, etc. Accordingly, property tax at the rate of 0.2% of the guidance value will apply for residential properties given out on rent. Reduced rates of 0.1% and 0.025% of the guidance value will apply for self-occupied properties and fully vacant lands respectively. Likewise, tax rates for commercial, industrial properties, etc. are also specified. It is also stated that property tax for the open spaces and parks in the apartment will be charged at the rate that is prescribed for fully vacant land. Whereas, the tax leviable on common areas in the apartment (including health clubs, swimming pools, etc.) would be at the rate of 50% of the per-square-foot rate that is payable for the property.  When it comes to sports stadiums, the rate applicable for open ground and playing areas would be equivalent to the rate applicable for fully vacant commercial lands (i.e., 0.025% of the guidance value of the land). For the covered area of the spectator’s gallery for viewing the event, the tax payable would be at the rate of 20% of the rate applicable for non-residential purposes.

Further, the Draft Notification states that if the tax payable under the Amendment Act is less than the amount payable at present, the latter would continue to apply till the property tax payable under the revised structure exceeds the existing property tax. After this stage is reached, the tax will be payable in accordance with the revised structure. Further, with effect from 2025, the property tax is proposed to be increased by 5% on 1st April of each year.

Remarks

The introduction of a guidance value-based property tax system by Bruhat Bengaluru Mahanagara Palike signifies a strategic shift towards more accurate and equitable taxation. By incorporating the concept of taxable capital value, calculated through the multiplication of unit area value with total built-up area minus depreciation, Bruhat Bengaluru Mahanagara Palike aims to provide a more precise assessment of property worth. This move not only enhances fairness in taxation but also addresses concerns regarding the current zonal classification system. Moreover, the differentiated tax rates for various property types and usages demonstrate a nuanced approach tailored to the diverse real estate landscape of Bengaluru.

However, the success of this initiative will depend on effective implementation, ensuring that the new system strikes the right balance between revenue generation and affordability for property owners.  

References:

[1]Taxable annual value is based on rental potential, offers stability and predictability, ideal for income-generating properties. In contrast, taxable capital value, as defined under Rule 5 of Karnataka Municipalities Taxation Amendment Rules, 2002, and Rule 4 of Karnataka Municipalities Corporations Taxation Amendment Rules, 2002, means the value of land or building, as the case may be, determined by multiplying the market value by the area of such land or building. The market value is notified by the Committee in accordance with Section 45B of the Karnataka Stamp Act 1957, as prevailing immediately before the last date fixed for filing return in Form No II.

[2] The new property tax system will be implemented w.e.f. April 1, 2024.

Image Credits:

Photo by Francesco Ungaro on Unsplash

As per the new system, property tax at the rate of 0.2% of the guidance value will apply for residential properties given out on rent. Reduced rates of 0.1% and 0.025% of the guidance value will apply for self-occupied properties and fully vacant lands respectively. Likewise, tax rates for commercial, industrial properties, etc. are also specified. It is also stated that property tax for the open spaces and parks in the apartment will be charged at the rate that is prescribed for fully vacant land. Whereas, the tax leviable on common areas in the apartment (including health clubs, swimming pools, etc.) would be at the rate of 50% of the per-square-foot rate that is payable for the property.  

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