Making Sense of the Property Tax Increase in Kerala

The recent announcement of a pro­perty tax increase in the municipalities in Kerala has sparked criticism from various quarters. The proposed 25% increase in the property rax rate has commenced from 1 April 2023 onwards. But the increase is to be implemented in a phased manner, with a 5% hike in each of the successive five years. The property tax increase came alongside a slew of other statewide hikes on other utilities, including petroleum prices, which raised widespread protests. This article, however, argues that it is imp­ortant to analyse the increase in the property tax rate in the context of internal resource mobilisation to ensure fiscal sustainability and to ensure the aut­o­nomy of municipal governments in the state.

The revenue source of municipal governments consists of internal resource mobilisation and transfers from the state and union governments. As much as 50% to 70% of the municipal revenue in Kerala comes from the transfers. The magnitude of dependency varies depen­ding on types of municipal governments; municipal corporations have lower depen­dency as compared to municipalities. An adequate, seamless and formula–based transfer is indispensable for the financing of local governments. However, the transfers are not a substitute for internal res­ource mobilisation. An excessive dependency on state governments erodes the fiscal autonomy and jeopardises the fiscal capa­city of urban local governments (ULGs). The internal resource mobilisation, otherwise called own source revenue (OSR), is important for the fiscal cap­acity, financial prudency and accountability of municipal governments. The main own revenue generation sources of municipal governments are through taxation and non–tax sources like fees, fine and charges. The tax revenue accounts for 50% of the total OSR of municipal governments of Kerala. Out of that, the property tax amounts to 50%.