Property tax: putting cart before horse

The intent behind the proposed property tax is easy to support and harder to argue against. Expanding the tax base to include property held by wealthy individuals who contribute far less to the exchequer than their assets would warrant is, by any reasonable measure, a step in the right direction. To that end, the National Board of Revenue is contemplating the introduction of a direct property tax in the coming fiscal year on a limited scale, replacing the existing wealth surcharge which is essentially an add-on to the income tax payable by an individual. A dedicated committee is currently reviewing the proposal and preparing three possible models to be submitted to high-level policymakers by the end of this month. Where this proposal invites scrutiny, however, is not in its intent but in the considerable distance between what the reform aspires to achieve and what the state is currently equipped to deliver.
There is no denying that the current surcharge mechanism is poorly aligned with the realities of wealth accumulation, being ineffective in taxing inherited and underreported assets. Its reliance on the amount of tax paid has also created a situation where individuals with substantial immovable assets but low declared income can escape significant taxation. The need for a more effective alternative is therefore understandable, and obviously it is what has drawn the attention of policymakers toward property taxation. Be that as it may, the move must be preceded by certain preconditions being met, without which property taxation is likely to end up as yet another revenue instrument that is unequal in application and trivial in yield.
The most fundamental of these prerequisites is property valuation, which is likely to prove the most difficult obstacle to implementing a property tax. At present, property owners disclose the value of land and flats in their income tax returns at acquisition cost, which bears little relation to prevailing market prices. The consequence is that many individuals record properties at values that often fall below what the same asset could generate in a single month of rental income. In other cases, deliberate undervaluation at the time of registration ensures that official records show only a fraction of true market worth. A further complication arises from inherited or gifted property which many taxpayers report at zero value on the grounds that no financial transaction was involved at the time of acquisition. The only standardised valuation tool the government currently possesses is the mouza rate, which is notoriously outdated and disconnected from ground realities. Any attempt to apply prevailing market value without a dedicated and regularly updated valuation mechanism shall only invite arbitrary assessments and widespread disputes. Until such infrastructure is built and tested, imposition of property tax would rest on a foundation too weak to bear the weight of what is being asked of it.
Even with accurate valuation in place, the proposed tax raises a concern that touches on the basic question of fairness. Property ownership does not always translate into liquidity or regular income, and many individuals hold assets that generate no cash flow whatsoever, particularly in cases of inherited land or idle holdings. The surcharge system, for all its acknowledged weaknesses, does not disproportionately burden such individuals as it is anchored to the tax actually payable on income. A property tax assessed on present market value, by contrast, would impose a recurring annual liability on them, raising the very prospect of distress sales or non-compliance. For property taxation to deliver what it promises, it must be introduced in the right sequence and with adequate institutional preparation, for without these, even the best-intentioned reform is likely to fall well short of what it set out to achieve.