Saturday, May 10, 2008

BMC plans ot hike property taxes

Finally property dealers are acknowledging that property prices are beyond reach in Mumbai along with the fact that there are too many apartments for sale with no buyers at these prices.

The BMC’s proposal on property tax would be detrimental to the market, says Sandeep Sadh

After the inflation jumping to 7.57%, Mumbai, the financial hub and the dream city for many is in for a rude shock. The BMC plans to get stringent about collecting property tax upto 83.5% on residential properties and 112.5% on commercial properties which, after rebate of 40 to 60%, becomes nearly 30% of your rental income. As per the recent news this is payable every six months by the property owner.
The BMC has taken the twodecade-old formula of accounting for taxation this time around and the simple logic given so far is that they are going by the book, even if the book is 20 years old.
While implementing these policies the BMC must look at the general interest of the public and consult professionals in this regard.
This will add to the burden of higher taxation, inflation, crumbling infrastructure, spiralling property prices and high interest rates. There will be a lesser yield on investment and property transactions done purely from an investment perspective.
Mumbai being the financial capital of India, and the fastest growing city in Asia has an inflow of both local Indians and expatriates who typically come to work in Mumbai for a short span of two to three years.
They are looking for rented accommodation and sign up a leave and license agreement for any period between one to three years generally.
With BMC now planning to impose nearly a three-month rent as tax to the owners per year, the rents will go up by nearly 30%, which is totally absurd.
This is an excerpt of a recent article, which says, "Rentals at many places in the city have gone up by 100% to 200%, and yet we don't get our share of that profit."
Why should the BMC be given a share of profit? Firstly, it is the investors or property owners' hard-earned money and they have the right to make profit and they are paying income tax.
These are policies which are already two decades old and based on the old rent system.
Why cannot an intelligent system be brought in, which should be based on keeping taxes both the licensor and the licensee are already paying?
The BMC policies are already known to be notorious for taxing year on year even if the property is not rented. There is no rationalisation on the taxation.
I was speaking to a Consulate General and they have called off a transaction for a residential property as the owners wanted to place the onus of taxation on the Consulate.
The Consulate General said that this kind of irrational taxation will be bad for Mumbai's reputation as companies who will want to relocate their expatriates will find it difficult to pay such higher taxation.
He added, "Nowhere in the world is taking an apartment on lease such a task and with such higher prices and taxation it is a problem."
They are already thinking of shrinking the size of expatriates.
The city is anyway ill-maintained. With crumbling infrastructure and visionless policies the BMC is placing itself into a one-sided high- handed body to only collect money and have proportionately less accountability and contribution to the city's welfare.
Mumbai is already one of the most expensive cities in the world to live in and to place on record the seventh most filthy city as well, it is thanks to the BMC. How do you expect people to pay such high rentals to survive after taxing them and what do they get in return?
What happens to the tax if lease agreements are terminated mid-term? With higher taxes more and more people will opt out of Mumbai and find out ways and means to circumvent taxes and therefore increase corruption.
The BMC and the government should find out ways and means and take more and more property owners and individuals and companies renting out properties in confidence before announcing such policies.
The BMC is looking for revenue but what it does not realise is that it cannot be done at the cost of individuals who spend their hard-earned money to invest in properties only to lease out for income and they are already paying all sorts of taxes to do so.
The annual return on investment on residential properties has already gone to 4% owning to higher property prices in the city.
Not each location gets a great rental value and with extra tax liability the government is only looking at closing the doors for the investors who are looking to invest in real estate.
If there are no returns in the property market why should investors look at buying it? This will impact the sale of properties and all mutual funds, REITs and other real estate related transactions will also be impacted. This in turn will also impact the property market dramatically.
In the past three years, the rental values in Mumbai have gone drastically higher ranging from 30% to 200%.
Many people started buying their own apartments as the rental values would be nearly 50% of their EMI.
Inventories in Mumbai are already building up, there are more and more apartments vacant and a lot of property owners are willing to give 10% to 25% discount on quoted prices due to a little slow down.
The scare of huge taxation will also impact this further as none of the licensors / licensee will want to be a part of any further hike or taxation.
Earlier, the tussle used to be between the licensor and the licensee to get a deal done; now both will have to unite and find ways to fight out with the BMC.
Highlighted below are the taxes which both the licensor and the licensee pay in any case for renting out properties, besides other expenses like maintaining the properties, painting, polishing, annual maintenance contracts, furnishings, paying VAT etc on all household goods, service taxes on labour and so on.
Fringe Benefit Tax payable by the employee in case of a company lease - 20%
Service Tax - Presently only on commercial property - 12.36%
Property tax on leasing/licensing (more in commercial property)
Stamp Duty and registration fees
Income Tax
Society outgoings/non - occupancy charges paid by the owners
Municipal taxes on property in general.
This typically means, that the BMC wants to penalise the investors who invest in real estate.

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