Property tax Holiday in Pandemic time, for Mumbai

Can we Claim it in existing legal framework ?

The property tax is a kind of impost / tax levied by Local bodies / Municipalities, upon lands and buildings, situate in their territorial jurisdiction. Due to the peculiar nature of tax, the property tax are regarded as “rate”, and not as “tax” or “fee”. The Apex Court in a case before it (AIR 1963 SC 1742), had the occasion to distinguish the rate from tax or fee, wherein it was stated that rate is an hybrid of tax and fee, as it has the elements of both, and is more in the nature of compensation paid for the services availed, although not directly attributable to the measurable benefits of the services availed.

The first elementary principle which governs any Municipal taxation is – the Tax levied by Municipal Corporation / Local bodies are compensatory in nature.

Municipalities levy taxes under respective State legislations. In area of Municipal taxation, the State Govts do not enjoy the same freedom and latitude as otherwise being enjoyed by them in other direct and indirect taxation. There are statutory limitations for Municipalities to levy taxes, that is to say, they can impose and recover taxes, “Only for the purposes of the Act” under which they are incorporated; and to the extent for carrying out its obligatory and discretionary functions under the statute, in which they are regulated and governed.

The Municipalities have been assigned certain obligatory functions which it must perform and for which it must find money by taxation. It has also been assigned certain discretionary functions. If it undertakes any of them, it must find money. Even though the money that has to be found may be large, it is not unlimited, for, it must be only for the discharge of functions whether obligatory or optional assigned and undertaken by it. 

It will be not open to them to collect more than it needs for the functions it performs. This is known as Compensatory nature of taxation. The Municipalities, therefore cannot raise the rate of taxation to such an extent, as to provide a “surplus” which is much more than what it needs for carrying out the functions assigned to it.

Having regard to the scheme of taxation of MMC Act, 1888, it does not permit Municipality to recover taxes, in excess of their needs. Section 139 of the MMC Act, 1888, expressly declare that, “For the purposes of this Act, taxation shall be imposed as follows …...”.

In the scheme of taxation (Sections 125 to 127 of the MMC Act), for every financial year starting from 1^st April, Accounts are require to be prepared and budget being finalized every year, comprising an estimate of expenditure to be incurred by the Municipal Corporation in the next ensuing official year; and inter alia, an estimate of receipts and income for the next ensuing official year from their properties and investments; and a statement of proposals as to the taxation which will be necessary or expedient to impose, in the next ensuing official year; and, very important for present discussion, an estimate of all balances, if any, which will be available for re-appropriation or expenditure at the commencement of the next ensuing official year [(Section 125(1)(b) and 125(2)(b)].

Among other taxes levied by any Municipality, property tax contributes the highest revenue. Again, property tax comprises, tax on land and buildings, Water tax, Water benefit tax, Sewerage benefit tax, Sewerage tax, street cess, Education cess and betterment charges.

The Year 2013 marks the dawn of property taxes being imposed in Mumbai, on the basis of Capital value of the property, retrospectively from the year 01.04.2010, as against the earlier practice of taxation based on Rateable Value of the property. This change of regime resulted in painful enormous increase in property tax liability of the property owners, in particularly of commercial properties. The said change of regime was under challenge before Hon’ble Bombay High Court. As many as 104 Writ Petitions including PILs were filed challenging that new regime. The lead petitioners therein were Property Owners Association. [WP 2592 of 2013]

Among other things, it was argued by the Mumbai Municipal Corporation / State of Maharashtra that, property tax regime based on Capital value, is introduced to augment the increasing expenditure and decreasing revenue of the Municipal Corporation. Their argument was contradicted by Property Owners Association by showing to the Hon’ble Court that Municipal Corporation’s Balance Sheet showing huge Surplus Income since 2007-08 to 2011-12; and went on to substantiate the same with Auditor’s Certificate in that behalf. The Hon’ble Bombay High Court, vide their Judgment dated 24.04.2019, have upheld the Constitutional validity of provisions of MMC Act, 1888, which introduced the regime of capital value based taxation. However, the Hon’ble Court have declared a rule as ultra vires, which permitted the Municipal Corporation to impose the tax retrospectively. Now the matter is pending in the Hon’ble Supreme Court of India. According to BHC Order, the property owners are permitted to pay 50% of the increase in tax liability; and the same is continuing before Apex Court proceedings.

For years together, the Municipal Corporation are having huge “Surplus”; and yet higher taxes have been introduced under Capital value regime. The Municipal Corporation is sitting on huge surplus, coupled with huge arrears.

The important question of law that may land up before the Hon’ble Bombay High Court would be – Whether Mumbai Municipal Corporation can propose and exact property Tax, whence they have huge surplus moneys (comprising the taxes collected over the years) available at their disposal, to finance their capital and revenue expenditure for the present official year 2020-21. The use of the expression “necessary or expedient to impose” in Section 125(1)(d) would be critical in deciding this question of law. The availability of surplus moneys, as provided u/ss 125(1)(a) and 125(2)(a), would have a direct nexus with the quantum of rate of proposed taxation, provided u/s 125(1)(d).

Apart from the legal import of the relevant applicable provisions of MMC Act, 1888, this question have to be decided in the backdrop of prevailing catastrophe of Virus-19 pandemic engulfing the entire globe, wherein almost 90% of the businesses are almost closed down, resulting in massive losses, potentially mounting bad debts, and potentially closing down of the businesses itself; thereby property owners may not have capacity to pay any taxes; and levying of any taxes may lead to confiscation of their property, in the event of non-payment. According to a Financial Express News Report, dated 12.05.2020, the Indian Retail sector have lost a gigantic 7.50 Lakh Crores business.

The Hon’ble Court may also have to appreciate that this “surplus” constitute the taxes exacted in earlier years, which can lawfully be employed to finance Municipalities one-year entire expenditure.

Further, the Municipal Corporation must also brace itself to recover property taxes from property owners who have defaulted in the new regime of capital value based taxation; and thousands of crores in this behalf are yet to be recovered.

In any Case which may land up before the Hon’ble Court, the Court must call upon the Municipal Corporation to place on record at least three figures, for last 8 years, that is from the year 2012-13 to 2019-2020 – (i) the total amount of property tax Bills raised for the entire Mumbai; (ii) the tax collected for the corresponding period; and (iii) the arrears of property tax. It may be appreciated that, by virtue of Section 140A, the Tax rate for these five years have remained the same. This is very important because Taxes have been levied not on the basis of budgeted requirements, but have been exacted uniformly for 5 years each, 2010-2015 and 2016-2020, on the basis of said statutory provision.

According to Budget Estimates for the Year 2020-21 prepared by Municipal Commissioner, revenue of Rs.8304.46 Crores are expected from property taxes, which includes Water and Sewerage Charges. Certainly this can be met through existing Surplus and Arrears. However, whereas extensive data are made available at MCGM website, with respect to Budgeted Estimated Revenue and expenditure for the year 2020-21, I must admit that I could not appreciate and understand the same; and unable to trace and elicit relevant data for the present discussion.

To summarize the argument, whilst Mumbai Municipal Corporation have huge surplus at their disposal, coupled with massive taxes collected under the capital value regime in the last 10 years, coupled with huge arrears, all the same can be lawfully employed to augment their one year expenditure.

Apart from this, it is a high time the Govt of Maharashtra constitute Maharashtra Municipal Property Tax Board, under the Maharashtra Municipal Property Tax Board, Act, 2011, to be manned by Retd. Apex Court and High Court Judges and experts in the field of Municipal administration, who have, inter alia, given the mandate to make recommendations for reformation in Taxation / Revenues, including on Property tax of the Municipal Corporation, who may suggest suitable measures, balancing the virus 19 effects and revenue needs of the Municipalities.

 

Sandeep Jalan

Advocate

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