Property tax: Adopting taxation on unimproved values

This is with reference to the recent announcement that it is proposed to implement a property tax. I would like to make the following comments and suggestions towards implementation of the property tax. Land taxation not only produces direct revenue but also when applied with the desired intensity would stimulate production. Land taxation has been operating in many developing countries which have obtained the desired results. In fact the United Nations issued a manual for land taxation way back in the 1970s for this purpose. There are also more recent publications, for instance, ‘Land & Property Tax – A policy guide by UN Habitat’ in 2011. In the former manual it had been proposed that the basis of taxation for developing countries should be ‘unimproved value’. ‘Unimproved value’ as defined in this manual is the “value of land without considering the improvements made on the land but considering the effect the land enjoys on account of surrounding improvements”. This rationale is quite acceptable as the investor’s effort and capital applied to the land are not taxed while the land value realized by the effort of surrounding society or state are only taxed. Adoption of a rate of taxation on unimproved value should be considered on the basis of ability to pay on the one side and also on the basis that the taxation should have sufficient impact so as to stimulate production on the other. In this respect, adoption of differential rates may be required which would vary inversely with land values. The process of taxation is lengthy. A list with extents of lands to be taken within the ambit of taxation will have to be prepared. It is suggested that land in excess of 1 acre in urban areas, 2 acres in suburban areas and 5 acres in rural areas be brought within the land tax. On implementation of this tax, it is suggested that the capital gains tax and transfer tax be done away with as both these are currently seen to be observed in the breach. Successful implementation of this scheme will no doubt, embody the trappings of administrative practicability, economic viability and social justice.