This Article is Written by Ishmeet Kaur
Introduction
Taxes at the local level are very important to municipal corporations, state governments, and other local bodies to carry on administrative and developmental activities. They are the basis for infrastructure development, provision of public services, and implementation of welfare schemes. As opposed to central taxes, it is the state governments and municipal authorities that impose and collect local taxes, thereby establishing one of the most important characteristics of decentralized governance. In addition to providing revenue, local taxes also affect the nature of economic activities in states and municipalities so as to give equitable consideration to financial viability and public good[1].
Two local taxes considered very important due to their direct bearing on residents and business activities are property tax and the entertainment tax. Property tax is charged on property owners in reference to the idea of tax rates based on property value. The funds derived are mainly used for urban development, road upkeep, sanitation, and the provision of other civic amenities. Entertainment tax is a tax that is imposed on enjoyment, which mostly includes watching movies, getting entertained in amusement parks, and cultural events, making sure that luxuries contribute to the government. With the implementation of Goods and Services Tax (GST), the entertainment tax regime got a new set of dynamics with its absorption into a larger tax framework.
Beyond property and entertainment taxes, there are many other kinds of taxes that Paris or any locality derives from its inhabitants. One such tax is called professional tax, which is imposed as a levy on taxable income from salaries, wages, fees, or even profits of professionals or self-employed persons – this varies from state to state. Another form of revenue generation is toll tax, which is imposed on vehicles moving on construction roads and highways for the sole purpose of maintaining the roads and funding infrastructure development[2]. Advertisement tax-from that charged on all billboards and outdoor advertisements-is reputed for being an effective way of ID-ing and regulating urban aesthetics for the sake of municipal income. The definition of local taxation by its very nature would ensure that the traceability and thus the financial stability of states and municipalities are directly related to the specific considerations that each of the states and municipalities needs in line with the system. Such differences are most likely to show in the structure and implementation between states because of the variance in their local economy activity, population density, as well as local governance structures. All of these taxes give an understanding to their roles in assisting the public services and infrastructural development of the country which is India.
Types of Taxes in India and Their Significance
As one of the main sources of revenue for municipal corporations and governing bodies in various areas, property tax is taken from real estate that includes residential and business properties, as well as land, based on assessed value. The tax collected would be allocated for the upkeep of local amenities like roads, sanitation, water supply, and waste disposal. Property tax assessment generally depends on the property location, size, usage, and market value. It is used differently by different municipalities in the annual rental value system, unit area value system, or the capital value system. The legal framework under which property tax is governed varies from state to state, whereby every municipal corporation is empowered under a corresponding state municipal act to determine respective tax rates and modes of collection. For instance, property tax in Maharashtra is assessed under the capital value system in the Maharashtra Municipal Corporation Act, while there is a unit area value system in Karnataka under the Karnataka Municipal Corporations Act. An umpteen number of judgments reinforce the legitimacy of municipal bodies in property tax administration, one being the Supreme Court’s ruling in Municipal Corporation of Greater Mumbai v. Kamla Mills Ltd.
Entertainment taxes vary widely across different kinds of entertainment such as movies, amusement parks, sporting events, and recreation. The idea is to charge non-essential activities on a less-regulated entertainment industry. Tax on entertainment by the state government from the very beginning was imposed and collected by the state government. Hence changes in rates for the entertainment tax vary from one region to another. The introduction of the Goods and Services Tax (GST) in India changed the face of entertainment tax forever. Under the new regime, entertainment tax largely disappeared into GST and uniformity of tax rate was applicable throughout the country. However, some states have continued to impose additional local entertainment tax on certain events and activities[3]. Thus the transition to GST has simplified the taxation process and released consumers from the burden of multiple taxes. It also caused revenue loss to some state governments previously dependent on collections from entertainment taxes.
Apart from property taxes and entertainment taxes, there are local taxes which have been part into and contributed directly to the municipalities of the states. The professional taxes imposed on all those paid employed, self-employed professionals and all those businesses found within a particular state are one of the kinds of local taxes[4]. The levy of professional tax may be different for each state and included in an income of tax payer directly. This tax will normally be employed for state welfare and employment schemes. Toll Tax, being another significant local duty, would realize revenue for the upkeep as well as establishment of roads, highways, and bridges. The tolls paid must be by those commuters who use the toll road and must amount to a specific unit value which would be for use again in maintenance and extension of infrastructure. Advertisement tax, on advertisements used for outdoor advertisements levied on billboards and hoardings, is an extra source of income for the local municipality, but at the same time controls the placement and content of advertisements placed within public spaces.
Statewise Comparison of Local Taxes
The numerous ways that local taxes are charged and collected from one another vary from one state to another in India, primarily inheriting the variations from the economic activities of the states, administrative capabilities, and the form of governance the states operate under. Some of the states are quite well organized regarding the tax assessment and collection process from their people, while others have things going wrong in terms of enforcement and compliance. Such variations affect the revenue created at state and municipal levels and consequently the ability to finance the infrastructure and public services within a state.
This is why Maharashtra boasts one of the highest property tax collections in India: because of a very organized assessment system and digitalized records – the Brihanmumbai Municipal Corporation (BMC), for example, draws substantial income from property tax through its
capital value-based system, which enables efficient and effective valuation and collection. Everything happens under the Maharashtra Municipal Corporation Act for the assessment process, thus making tax compliance easy. On the other hand, Bihar and Jharkhand have to cope with excruciating property tax collection situations as a result of administrative inefficiencies and inactiveness in digitization, with tax compliance being very low[5]. Many properties remain unassessed or undervalued, thus resulting in revenue loss for local governments.
Professional tax also varies from state to state. Karnataka has one of the highest professional taxes in India, especially in urban centers like Bengaluru, which has a large concentration of salaried professionals and businesses. The revenues derived here are used for state welfare purposes. On the contrary, states like Goa and Arunachal Pradesh impose minimal professional tax due to low industrial and corporate presence. Professional tax scenarios in Tamil Nadu and West Bengal are also organized in tiered slabs, depending on income levels.
Entertainment tax, though mostly subsumed under the GST, is still levied by certain states for certain events and cultural programs. For example, Tamil Nadu and Kerala have levied additional taxes on film screenings and traditional performances. Such entertainment taxation specific to the states contributes to the preservation of cultural heritage while at the same time generating revenue sources[6].
In general, local tax frameworks reflect varying economic and governance priorities of the various states, leading to huge variants in tax rates and collection efficiencies.
The Role of the Government and Legal Framework
Article 246 of the Constitution of India gives state governments the liberty to levy and regulate local taxes in the Seventh Schedule so that they can be fiscally independent in generating revenue for governance, infrastructure, and public welfare. Thus, the legal structure governing local taxation draws heavily from the State List, which provides for various subjects for states to legislate on. According to Entry 49 in the State List, states can impose tax on appropriately classified lands and buildings, thus enabling them to constitute and administer the property tax.
Equally, Entry 62 permits the states to levy entertainment tax, while Entry 60 is in respect of professional tax. These provisions in such broad terms ensure that state governments are in a position to design tax administration in line with their economic situation and administrative priorities.
Property tax, which serves as a major source of revenue for municipal corporations, is governed by a slew of state legislation. For example, under the Maharashtra Municipal Corporation Act, assessments for property tax are to be based on capital value, enabling a truly dynamic, market-linked form of taxation. In contrast, Delhi, under the Delhi Municipal Corporation Act, follows a unit area-based assessment system, wherein the basic rate is decided based on the type of property, its usage, and its location. This hypothetical demonstrates the flexibility states have in putting together a property tax structure that speaks to the needs of the locality. Judicial review has played a significant role in asserting the power of states in respect of property tax. For instance, in Municipal Corporation of Greater Mumbai v. Kamla Mills Ltd. (2003), the Supreme Court upheld the legitimacy of a system of assessment of property tax in Mumbai, thereby affirming the role of municipal corporations in determining the cone of rate and method of valuation.
The entertainment tax, which used to be a significant source of revenue for the states, has witnessed major changes since the introduction of Goods and Services Tax (GST) from the year 2017. Before GST, states levied entertainment taxes on activities such as the sale of movie tickets, entry to amusement parks, and for admission to cultural performances. Tamil Nadu and West Bengal were heavily dependent on entertainment tax collections until the introduction of GST, and it was, therefore, one of the substantial sources of revenue from the film and entertainment industries. After GST, most of the entertainment taxes were subsumed under the general tax regime. However, some states continue to impose extra taxes on certain forms of entertainment within the ambit of their state legislations. For instance, Tamil Nadu collects an additional local body entertainment tax on Tamil feature films in accordance with the Tamil Nadu Local Authorities Entertainment Tax Act, while Kerala imposes a cultural tax on select live performances to promote traditional art forms. This illustrates that states exercise taxation power even amidst the power scheme of GST.
Professional tax is yet another one of the local taxes, which is constitutionally sanctioned under Entry 60 in the State List. It has to be conditioned by laws of the state concerned. Article 276 of the Constitution limited the imposition of professional tax to ₹250 per annum in the first instance, but later this limit was raised to ₹2,500. Many states prescribe their own rates of professional tax. Thus, Karnataka follows a progressive taxation system under the Karnataka Tax on Professions, Trades, Callings and Employment Act, where richer persons have to pay more tax. On the contrary, states like Goa and Arunachal Pradesh have very little professional tax because they have a smaller population of workers and economic activities.
By such legislation and judicial scrutiny framed state wise keep local taxation an important instrument of financial empowerment for states to customize their tax policies as per their governing and developmental priorities.
Challenges and Famous Cases
In India, local taxation is the most neglected form of public finance, faced with all major challenges[7]. Tax evasion becomes a source of grave problems, like property owners underreporting their assets, or businesses fail to declare their real revenues to minimize the tax burden. Overall, these differences lead to a number of disputes and inefficiencies in the process of tax collection because of the dissimilarity in tax assessment techniques employed by different states[8].
One of the most prominent cases is New Delhi Municipal Council v. State of Punjab[9]. Here, the Apex Court adjudicated on the jurisdictional authority under which municipal corporations can act in property taxation disputes. Karnataka Bank Ltd. v. State of Karnataka[10]dealt with a claim for professional tax levied on banks by the state and clarified the extent of application of the state laws for the taxation of financial institutions.
Reforms have been proposed and implemented to deal with these problems. property record digitization and online tax payment systems have introduced a lot of benefits in terms of increasing transparency and reducing opportunities for evasion[11]. Rationalization of tax rates and self-assessment mechanisms have lightened the compliance burden on taxpayers further.
More reforms are still needed for the establishment of a socially equitable and operationally efficient local tax system that aligns with sustainable urban development.
Uniform Taxation vs. Statewise Variations
The question of whether local taxes should be uniform across all states or left to the state governments for individual determination is a vital area of concern in Indian tax policy[12]. Supporters of uniform taxation are of the opinion that a common tax system will promote easier compliance, reduce administration and curb evasion. A uniform tax will provide predictability for business and individuals, allowing the economic transaction between states to take place without the inconvenience of different rules burdening their respective operations[13]. The introduction of Goods and Services Tax (GST), with its implementation in 2017, stands as an instance of how tax unification can improve efficiency, churn out cascading effects, and fabricate a structured economy. In addition, a system for property tax and professional tax uniformly applicable across the country could further support the fiscal consolidation and ensure the equal distribution of revenue among states.
Conversely, the proponents of varying-state taxation say that states exist economically, politically, and developmentally in their own unique conceptual worlds, and so there should be some flexibility in their tax systems[14]. Maharashtra, an industrialized and urbanized state, must have a comparatively higher property tax to take care of extensive infrastructure works, urban planning, and public services. Himachal Pradesh and Arunachal Pradesh, on the other hand, are states that experience low urban density and limited industrialization and may not need such a high level of property tax. In the same sense, wherein states will average higher professional tax rates when there is greater corporate presence, Karnataka and Tamil Nadu would be examples. Smaller states, on the other hand, have a far lower concentration of professionals.
The application of a rigid, one-size-fits-all taxation principle creates inequalities in local governance, which may in fact serve to hinder economic growth by blocking the path to such growth in poorer regions[15]. A compromise between fairly uniform application of core tax principles with state discretion to manipulate rates according to their local contexts could function quite well for this purpose, within which context the most efficient taxation and equitable resource allocation would be guaranteed, thereby ensuring national economy’s sustainability.Top of FormBottom of Form
Conclusion
Some of the local taxes such as property tax, entertainment tax, and others go toward public infrastructure and services. A significant contribution to state and municipal government revenue comes from these taxes. However, there are still issues of tax evasion, pitfalls in valuation of properties, and inefficient enforcement of local tax laws. The introduction of GST has simplified the compliance requirements for a number of local taxes and for the entertainment sector in particular. Nonetheless, some further reforms must be made for improving compliance and efficiency. These include: Improving digital infrastructure and standardization of assessment; awareness among the public could serve to optimize local tax collections, which in the long run would be beneficial for both urban and rural development programs across India.
[1] Municipal Corporation of Greater Mumbai v. Kamla Mills Ltd., (2003) 6 SCC 315
[2] Ashoka Smokeless Coal India (P) Ltd. v. Union of India, (2007) 2 SCC 640
[3] Tamil Nadu Local Authorities Entertainment Tax Act, 2017; Kerala Finance Act, 2018
[4] Karnataka Tax on Professions, Trades, Callings and Employments Act, 1976
[5] Niranjan Rajadhyaksha, India’s Property Tax Paradox, Livemint (Mar. 18, 2022)
[6] Arvind P. Datar, Impact of Entertainment Tax Reforms in India, 12 Indian J. L. & Soc’y 97 (2019)
[7] India Infrastructure Report, Urban Local Bodies and Their Financial Challenges, Oxford Univ. Press (2020)
[8] Richard M. Bird & Enid Slack, Taxing Land and Property in Emerging Economies: Raising Revenue… and More?, 18 Asia-Pac. Tax Bull. 245 (2019)
[9] (1997) 7 SCC 339
[10] (2008) 12 SCC 20
[11] Ministry of Housing & Urban Affairs, Smart Cities Mission: Digital Property Tax Assessment Reforms, Gov’t of India (2022)
[12] Vikram Chand, The Evolution of Local Taxation Laws in India: Challenges & Prospects, 34 J. Indian Tax Pol’y 98 (2021)
[13] Arvind P. Datar, GST and Its Impact on Federalism in India, 10 NUJS L. Rev. 85 (2018)
[14] John F. Due & Annette B. Due, State and Local Sales Taxation: Structure and Administration 93 (1988)
[15] United Nations Human Settlements Programme, The Role of Municipal Finance in Sustainable Urbanization, UN-Habitat Rep. (2018)
