Tax The Land

In the growing urban landscape of Kathmandu Valley, land taxation has been neglected as a tool to achieve the public policy objectives of social justice and equity.

City administrators all over the world use land taxation to generate revenue for day-to-day development activity and public works. Land taxation also helps in town planning by guiding certain land uses, controlling speculation, and promoting economic growth through efficient use of property.

The value of the land is an important portion of the total national wealth, especially in a country like Nepal with its poor capital base. The rationale for urban land taxation is that land as a resource should be subject to public control and managed properly in the interest of the nation. Public authorities must be able to recapture part of the landowner´s ´unearned´ income derived from the development of neighbourhoods through government investment programmes.

Different evaluation methods are used to levy property tax in different countries. The rates vary. For example, in Denmark it is 0.4 per cent of the property´s market value while in the United Kingdom, tax is levied on the basis of rental value of the property. In Nepal, some form of urban property tax does exist and is known as the “Houses and Compound Tax” (ghar-jagga kar). This tax is applied on a house and the parcel of land surrounding it. Property lying idle or vacant are not subject to this tax.

The revenue generated through the ghar-jagga kar is extremely low, primarily because the administration of the tax is very weak. This weakness can be attributed, firstly, to the absence of up-to-date inventory of property in map form and the inadequacy of existing cadastral maps. In addition, the existing assessment system does not consider the real value of buildings in terms of their use and location. It merely considers construction costs of the house with allowances for depreciation.

There is assessment of land, which is made on the basis of its location and access to infrastructure and services. However, the assessment rates are quite low. Property with value of less than NRs 0.2 million is exempted. Above that figure, the tax rate is an additional NRs 100 per annum for each additional NRs 0.5 million. A progressive rate, from 0.15 percent to 2 per cent, is levied on higher property values.

The insignificant contribution of the ghar-jagga kar to the national exchequer is clear from me fact that in 1988-89 it generated only NRs 19 million nationally. This was a dismal 0.19 per cent of the Government´s total revenue for that year. What elsewhere is known as the “land transfer tax” is known in Nepal as a “land registration tax” (jagga darta kar) and the tax rate under this category is high. In municipal areas, it is 12 per cent — buyers pay 5 per cent and sellers pay 7 per cent of the quoted value of the land in the registration deeds. In rural areas, the tax rate is 7 per cent of the quoted value and is paid by the buyer only.

In some countries, a form of tax is levied when development works and public investments enhance the quality of life in an area. The residents are made to pay more in taxes when roads, sewage, water supply, electricity, schools and recreational facilities are added. This tax is somewhat similar to the land profit tax, whose purpose is to return part of the increased property values resulting from development works back to public authorities. In some countries, profits made on the sale of land are taxed as income. Usually, the lax is imposed on the increased part of the value of land after necessary adjustment for inflation. No such tax exists in Nepal.

The use of the urban land tax in the different forms as a major source of finance for management and development of urban areas has not received serious attention in Nepal. Since the power of taxation (and collection) is vested in the central Government and since the local municipalities have little or no say on any land tax matter, the major source of revenue at the municipal level is the octroi tax (chungi kar) levied at the entry point of municipal areas on commercial goods. The amount of revenue raised through property tax at the municipal level is insignificant.

TEN BILLION RUPEES

 The major problem of every town in the country is deficient infrastructure. Since the three big towns of Kathmandu Valley have the highest concentration of population, they are the hardest hit by their inability to raise revenue through taxation. The pace of urban expansion has outstripped all development programmes, and problems range from crowded streets to drinking water shortage, a polluted environment, poor public health facilities, overloaded and non-functional sewerage, and strained public transport.

A recent study conducted with the assistance of the Asian Development Bank (ADB) has proposed a ten-year investment programme to meet the infrastructure needs of the Valley. The major areas for which investments are targeted are water supply, sanitation (including the sewerage system), drainage, solid waste disposal, street lighting, roads, and so on. The study´s estimate for the investments required over the next decade is a mind-boggling NRs 10 billion.

As things stand, it is unlikely that anything more than a small fraction of this proposed amount can be generated through property taxes, and the bulk would have to be carried out through outside funding. An example: the Nepal Water Supply Corporation´s total income for 1990-91 was about NRs 48 million, whereas its operating cost was about NRs 120 million. As such a scenario is true also in other sectors, the major portion of the proposed capital investment would have to come from international sources, either in the form of grant or loan. It is unlikely that revenue generated through property taxes will provide more than a small fraction of the required amount.

The revenue generated through property taxes (including land revenue tax, ghar-jagga kar, rooftop tax, house rent tax) during 1989-90 in Kathmandu Valley was only about NRs 9.3 million, whereas municipalities in the Valley collected about NRs 91.2 million through octroi tax. Not less than 50 per cent of the income is spent on regular administrative and operational activities of the towns. Capital investment programmes are limited. It is paradoxical that Kathmandu Valley, despite its being the major production center in the country, is paying so little to meet the minimum acceptable standards of urban living. It takes a jump of imagination to see how the one billion rupee a year that the ADB plan requires is going to be raised.

ONE WAY STREET

 The major portion of the large funds required to improve upgrade urban infrastructure has to come from outside sources if the present tax structure remains unchanged. It is not politically feasible, or even advisable, to allocate large portions of internal financial resources for improving the urban infrastructure. The only course left is to gradually increase the revenue within the Valley itself such that some of the urgent improvement works can be done through local resources. It is because of the infrastructure and services made available by the Government over time at huge -cost that people have been able to improve their productivity and skills. A vibrant economy has set the pace of growth almost everywhere in the Valley. Today, many residents of Kathmandu have become enormously wealthy for the sole reason that the value of their land has appreciated as much as a hundred times over the past decade. For example, a ropani of land with an access to a road in Baneswor 20 years ago cost around NRs 10,000. Today, the plot would fetch NRs 1.5 million or more. Landowners have made little effort to improve their property, and the increment in land value is due solely to the soaring demand for serviced land for housing and other activities. Since the appreciation of the land value can be directly attributed to the public investments in the infrastructure and service, it is quite reasonable that part of this huge increase in land values should go back to the public authorities. The only way to do this is to tax the urban land at a comparably higher rate than agricultural lands. As discussed earlier, there are a number of options.

Public investment in roads, sewers, water pipes and electricity is what has played a vital role in raising the value of land. Unfortunately, this has been a one-way street in which no effort has been made to recapture even a small amount of the wealth thus generated for the benefit of public works.

The time has arrived to review the country´s overall strategy of resource mobilisation for development projects. Where return on investments can obtained through taxation, pricing and tariffs, dependence on external financing should be gradually reduced. From this point of view, urban land taxation can be used as an important tool for mobilising financial resources to cater to the needs of different aspects of urban development.

The existing laws which deal with land are basically concerned with agricultural land, but they are made to cover both urban and rural areas. At a time when urban land use is rapidly and uncontrollably transforming the Valley´s agricultural land and at the same time helping earn enormous new wealth to their owners, there is a need for a separate Urban Land Act. At the very least, urban land should be treated separately under existing laws. The new act or amendment to existing laws should include provisions which allow different forms of public interventions, including the various types of taxation, such as property tax, transfer tax and profit tax.

In urging urban taxation measures, it is important not to ignore the question of equity and fairness. Any measure would be counter-productive if the additional burden of taxation fell not on the urban rich but on the poor — and the three towns of Kathmandu Valley house a majority low-income population. Without forgetting the question of equity as a policy concern, therefore, urban Kathmandu Valley must be made to pay its share of the cost of disproportionate development that it has benefitted from, which has led to improved quality of life vis-a-vis the rest of the country.

P.B. Chhetri is an engineer and urban planner at the Department of Housing and Urban Development, Central Regional Directorate. He is in charge of the planning activities for the Department in the Valley.