Property tax in Mumbai to be based on capital-value system: SC

In a recent order, the Supreme Court (SC) has settled a long-standing dispute between Mumbai property owners and developers and the Municipal Corporation of Greater Mumbai (MCGM) about the power and entitlement of the corporation to levy property tax based on the capital- value (CV) system as opposed to the prevalent rateable-value (RV) system.

What is property tax?

In Greater Mumbai, the MCGM levies municipal taxes, including property tax, on lands and buildings under the provisions of the Mumbai Municipal Corporation Act, 1882. Property tax includes water and water benefit tax, sewerage and sewerage benefit tax, general tax, education cess, street tax and betterment charges.

Earlier method: RV-based taxation  

Before April 2010, property tax was levied based on the property’s RV, which was computed based on the gross annual rent at which the property is let out or, if not let out, the ground rent at which it may reasonably be expected to let annually, less a statutory allowance towards repairs and maintenance in case of buildings.

Further, for determining the RV, the MCGM took into consideration several factors, including property size and location, its condition, amenities provided, hypothetical rent receivable and capital value of the property. It is important to note that the RV cannot exceed the standard rent, as fixed under the Maharashtra Rent Control Act, 1999.

In short, property tax is a certain percentage of the property’s RV after certain permitted deductions.

Present method: CV-based taxation  

Under the CV-based taxation system, property tax is computed based on the market value/ready reckoner (RR) value and various other factors associated with the property as opposed to the rental value.

On April 13, 2009, the government proposed to amend the Act with effect from April 1, 2010, by introducing Sections 154(1A), 154(1B) and 154A, thereby, empowering the Municipal Commissioner to fix the land’s and building’s CV and levy property tax from April 1, 2010, based on property’s CV instead of its RV by considering the following factors:

• Market value/RR of the property
• Nature and type of property
• Area of the property
• User category, such as residential, commercial, offices, etc.
• Age and floors of the building
• Other factors as may be specified by the MCGM

To derive a uniform formulae for CV computation, the MCGM framed the ‘Factors and Categories of Users of Buildings or Lands (Assignment of Weightage by Multiplication) Fixation of Capital Value Rules, 2010, which were brought into effect from March 20, 2012. Thereafter, it framed the ‘Factors and Categories of Users of Buildings or Lands (Assignment of Weightages by Multiplication) Fixation of Capital Value Rules, 2015, which were brought into effect from April 1, 2015, for CV computation of various types of properties, such as open land, building, hoarding or tower, open terrace, mezzanine floor, loft and attic floor, demolished building and storage tank. As per the CV Rules of 2010 and CV Rules of 2015, a property’s CV is calculated in the following manner:

Section 154A of the Act further allowed the MCGM to provisionally fix the CV for the year 2009-2010, and such provisional CV was to be deemed to be the CV for the years 2010-2011, 2011-2012 and 2012-2013, pending fixing the CV and to issue property tax bills accordingly.

Challenges raised by property owners’ bodies

Until the formulae prescribed under the CV Rules of 2010 were implemented, the MCGM was empowered to continue to levy RV-based property tax. Thus, it continued to issue provisional property tax bills computed based on the RV. Pursuant to the new regime coming into force on March 20, 2012, final bills based on final assessment and special assessment (impugned bills) as per the CV were issued by the MCGM for the total tax leviable. The difference between the RV-based property tax from April 1, 2010, till March 2012 was to be settled/accounted for in the subsequent property tax bills.

Several petitions were filed and tagged together with the petition filed by the Property Owner’s Associations before the honourable High Court of Judicature at Bombay (HC), challenging inter alia:

• The validity of computation and levying of CV-based property tax
• Vires of the CV Rules of 2010 and CV Rules of 2015
• The amendment effected to the Act
• Retrospective applicability of the CV Rules of 2010
• The exploitation of future potential/FSI while determining the CV of any land

Bombay High Court decision

The Division Bench of the HC, vide an order dated April 24, 2019, (HC Order), upheld the constitutional validity of the amendments made to the Act along with the validity of the computation and levying of CV-based property tax, it, however, held that the CV Rules of 2010 shall apply prospectively from March 20, 2012, instead of April 1, 2010.

The HC held the following rules as ultra vires the provisions of Sections 154(1A) and 154(1B) of the Act:

• Rule 20 which dealt with the valuation of open land capable of utilizing more than 1.0 FSI or transfer of development right, taking into consideration the potential of construction on the vacant land for valuation (Rule 20)
• Rule 21 which laid down the formula for the CV calculation of open land or building or part thereof and provided for multiplication to the base value based on the carpet area of the land by permissible or approved FSI (Rule 21)
• Rule 22 which gave an overriding effect to CV rules over stamp duty RR (Rule 22)

Subsequently, the HC directed that the impugned bills issued by the MCGM be struck down and, consequently, fresh special assessment notices be issued after fixing the CV afresh, following Section 154(1A) of the Act.

Matter reaches SC

Aggrieved by the decision, the MCGM approached the SC by filing a Special Leave Petition.

The SC, by its order dated November 7, 2022, (SC Order), upheld the HC Order and held that Rules 20, 21 and 22 of the CV Rules of 2010 and 2015 are ultra vires. The SC further observed that while determining the CV of any property, only the present physical attributes and status of the land and building can be considered and not the prospects or FSI of the land.

On retrospective applicability of the CV Rules of 2010, the SC observed that the rule-making powers could not have created a liability pertaining to the period before the rules came into effect, that is, before March 20, 2012. Further, as the statutory provisions under the Act do not contemplate any likelihood of exploitation of capacity in future, the CV of the land and building must be based on the situation in praesenti and not on the likelihood of user or exploitation of the asset in futuro, especially when none of the factors delineated in Section 154(1A) of the Act speak of prospects.

Review petition before the SC

The MCGM, thereafter, filed a review petition against the SC Order, which was rejected by the SC on March 14, 2023. Thus, although the HC and the SC upheld the constitutional validity of the amendments made to the Act, which empowered the MCGM to levy CV-based property tax, the courts:

• struck down the MCGM’s power to levy such taxes retrospectively, that is, for the period from April 2010 till March 20, 2012
• confirmed that the MCGM is not permitted to compute the CV of land by taking into consideration future development potential/FSI

Impact 

The implementation of the CV system will curb disparity and bring uniformity in the property tax rates applicable to each type of land and building across Mumbai. For instance, under the earlier system, South Mumbai residents paid substantially lower amounts of property tax as the buildings were last assessed before 1940 when the rents were quite low. On the other hand, higher taxes were paid by residents in the suburbs and extended suburbs where buildings were constructed after 1960 and rentals were comparatively much higher. Furthermore, the dismissal of the review petition has brought a sigh of relief amongst developers and landowners across Mumbai who feared the MCGM’s property taxes based on the future potential/FSI and its retrospective enforcement from April 1, 2010.

Authors:

(Amit H Wadhwani is partner at Khaitan & Co.

Nirali Shah is senior associate at Khaitan & Co.

Nupur Antrolikar is associate at Khaitan & Co. )