What is the impact of property taxation on Residential Property?
Property tax, sometimes known as house tax or local body tax, is a form of indirect land value tax that is levied by municipal governments in many countries to raise revenue for public services such as education and healthcare. In some jurisdictions, it may be imposed only on certain types of properties, such as commercial buildings, while others impose it on all residential properties based on their size and location.
Property taxes on Residential Properties in India are charged at different rates depending upon the type of property. The rate of property tax depends upon the area of the building, its construction material, and other factors. It also varies from one state to another.
Impact of Property Taxation on Residential Properties in India :
1. Property tax is not a direct tax because it does not directly affect the income of the taxpayer. Rather, it affects the market price of the property which in turn affects the taxable income of the owner. This means that property tax is not a progressive tax since it does not increase proportionately with the level of income earned by the individual.
2. Property tax can have negative effects on the economy. If the government imposes high property tax rates, this can discourage people from buying new homes and encourage them to rent instead. Moreover, when people buy houses they invest money in upgrading their homes. But, if they do not own the property, they cannot use these resources to upgrade their home. Thus, property tax discourages investment in housing and ultimately slows down economic growth.
3. Property tax can cause financial hardship to low-income earners. Low-income earners spend most of their earnings on food and shelter. As a result, they often end up paying more in property tax than what they earn.
4. Property tax can lead to increased demand for affordable housing. When property owners pay higher property tax rates, they tend to sell their homes at lower prices. This leads to greater demand for affordable housing.
5. Property tax can reduce the supply of housing. Since property owners do not want to sell their homes at depressed prices, they often delay selling their homes until after the property tax period ends. This delays the process of developing new housing units.
6. Property tax can distort the allocation of capital across states. Because property tax is levied on the basis of the area of the building rather than its cost, it encourages developers to build large apartments. Large apartments are usually located in urban centers where there is a shortage of land. This reduces the availability of land for small-scale development projects.
7. Property tax can lead landowners to avoid making improvements to their property. Landowners who live in rural areas often face difficulties in finding buyers for their land. They often try to improve the condition of their land so that they can attract potential buyers. However, if they are required to pay property tax on the basis of the improvement made to the land, they might decide against investing.
