Are cities sitting on a pot of gold?

Cities contribute over two-thirds of the country’s GDP, even though they occupy less than five per cent of the land and have just about 35 per cent of the country’s population indicating the economic potential of planned urbanisation. It is, therefore, perplexing that most cities find it difficult to maintain the core infrastructure.

The Constitution, through the Twelfth Schedule, expects the municipalities to handle many functions apart from the basic civic facilities, such as development and maintenance of parks, playgrounds, market places, libraries, dispensaries, veterinary dispensaries, nursery and primary schools, fire services, burial and cremation grounds etc. However, serious lack of finances has made the municipalities ignore these activities, or give only nominal attention, leading to decline in the standards of the available services and, consequently, in the quality of life for the citizens. However, the situation is not grim all across the country and many cities have shown the way in varied contexts.

Leasing out lands

One of the smallest municipalities among the state capital cities, the New Delhi Municipal Council (NDMC) has a population of just about 3.55 lakh (2023). Its annual budget for 2023-24 (Revised) was 4889, which makes it 1.38 lakh per capita. Compare this with the richest municipality of the country, the Brihanmumbai Municipal Corporation (BMC), having a population of 1.7 crore and annual budget of 52,619 crore for the year 2023-24, which makes it 30,952 per capita, almost one-fifth of NDMC.

A major source of revenue for NDMC is lease rental. NDMC has traditionally taken the route of leasing out its land to commercial establishments such as hotels. The lease rental in a typical case of IHC Hotel Taj Man Singh runs into over `60 crore per year, for a parcel of just 3.78 acres.

Cities need to take recourse to leasing out lands to commercial establishments, rather than selling off the lands. Typically, the lease is for a 30-year period, post which, the land value goes up substantially and the fresh round of leasing out fetches hugely higher rentals.

Land premium

Real estate development brings huge value addition to the economy, which is largely taken away by the developers, even though civic agencies have to take care of much of the infrastructure requirements for such projects. Therefore, municipalities would be justified in seeking a slice of the value addition to the economy coming from real estate projects. While cities fix standard charges for various approvals to be given to real estate projects, certain aspects would justify special levies, or ‘Premium’. Mumbai has several common premiums and charges for developers, including Floor Space Index (FSI) premium, Transfer of Development Rights (TDR), development charges, extra amenities premium, parking premium, land conversion premium, and heritage premium. These premiums help developers increase the value of their projects and ensure the development of infrastructure in the area.

In Mumbai, on an average, the premium payable used to be in the range 5000 per square ft, which the real estate sector found as too high, particularly during the Covid-19 pandemic. During FY22, the BMC slashed the premium rates by 50 per cent and the result was that the revenue from premiums and fees collected from real estate developers, which was 2107 cr in FY21, galloped to `15493 crore in FY22.

Rationalisation of tax

Own tax revenues are the backbone of any government’s financial structure. However, comparing the municipalities in terms of the gross figures of tax collection would not be justified, owing to the varying level of the local economies. Therefore, a better indicator would be the ratio of the Own Tax revenues to the GSDP of the state, for which has been substantiated in the Report of the RBI on Municipal Finances in India (November 2022). The large variation of the Own Tax Revenues to GSDP ratio among the states indicates that there is huge potential of revenue mobilisation through property taxes lying untapped. Typically, in Gurugram, the rents of residential properties in moderately upscale areas is in the range of `25 per square ft per month, whereas the property tax is in the range of less than one rupee for the whole year. Municipalities need to launch a concerted drive to update the property registers and the applicable tax rates. It is equally important to revise the circle rates, to enable the city to reduce the tax rates while retaining or even increasing tax collection.

Advertisement tax

The competitive environment in commerce and industry is raising the popularity of posters, banners, and graffiti in the cities. It is imperative that ULBs impose taxes on all such modes of advertisement.

Professional tax

Professional tax up to 2,500 per annum on individuals pursuing various professions, trades, callings and employments is permitted to be levied by the municipalities, panchayats and states, vide article 276 of the Constitution. However, only few municipalities are levying this tax directly. In Chennai City Corporation, it contributes 200 cr annually, 50 per cenrt of property tax. Surat Municipal Corporation collects around `90 cr from professional tax, close to 30 per cent of its property tax collection. With the rapid growth of service sector, professional tax has an excellent potential to augment the municipal finances.

Monetising city-own properties

The redevelopment of the properties owned by the government, adopting a public-private partnership framework, has given rich returns, as has been seen in the case of New Moti Bagh and East Kidwai Nagar in Delhi. These were government residential complexes in prime areas of Delhi, but the houses were old and decaying. The government sold out a small portion to non-government sectors (a five-star hotel, in one case), which gave enough money to redevelop the property with modern residential apartments, giving a bounty of revenues to the government. Municipalities can adopt the same model, by redeveloping their own commercial and residential properties in PPP mode, that would convert old assets into modern structures, besides yielding large revenues. Furthermore, the municipalities should adopt either revenue sharing model or lease rental model, to have a sustained stream of revenue.

India is already a $3 trillion economy, set to reach the 5 trillion mark very soon. This development is largely through the cities. Cities must identify the sources of economic growth to capture a portion of it and boost their revenue, enabling them to improve their infrastructure, resulting in a better quality of life for their citizens.