Change Through Opt-in: Property Tax Reform in Bangalore

In her latest Indian Express column on India’s urban policy challenges, Isher Ahluwalia describes the success of property tax reforms in greater Bangalore. It’s an interesting case of policy improvement through opt-in.

Prior to 2000, tax officials in Bangalore inspected properties and issued a notice of the tax payable, based on what they determined to be a reasonable expectation of rent. Ahluwalia notes that the tax officials had a high degree of discretion in defining “reasonable” rents—a situation that “created an environment for corruption and litigation.”

In 2000, city authorities introduced a self-assessment scheme (SAS) for property taxes. The scheme was optional, but if a property owner chose to forgo the tax middleman and self-declare, she could follow a set of clear guidelines for assessment. Taxpayers paid a rate of 25 percent of the self-assessment for commercial property and 20 percent for residential. Owner-occupied property received a 50 percent rebate.

Enough people opted for SAS that the scheme enjoyed early success, leading to an increase in tax collection, an increase in the number of properties on the tax role, and an increase in tax per property. The popularity of the optional scheme led to similar reforms for greater Bangalore in 2008. Features of the new property tax regime include a random check of 15 percent of tax returns with penalties for false declaration as well as publication of tax data to a city website so that taxpayers can see how much they’ve payed compared to their neighbors. According to Ahluwalia, the results of the reform include substantial increases in both registered properties and tax collection.

It’s possible that giving people an option to self-select into the reformed tax scheme enhanced its legitimacy and therefore compliance. The success of the optional scheme ultimately influenced further reform in greater Bangalore. Ahluwalia’s case study suggests that, in certain contexts, an “opt-in” strategy may offer an effective way to tackle reforms that would otherwise be controversial or difficult to initiate.

*Photo by Tahir Hashmi