As J&K introduces Property Tax, a debate rages on: will its real estate sector sustain?

Srinagar, Jan 25: As Property Tax is all set to be levied in the Urban Local Bodies of Jammu and Kashmir from April 1, 2023, a debate is on over the question whether the real estate sector, and the overall business landscape, here could sustain this shock.

This week J&K government formally conveyed to the Housing and Urban Development Department to execute the Administrarive Council decision with effect from April 1.

Quoting the Administrative Council decision No. 13/1/2023, an official memo issued in this regard, reads – “The administrative council approved the proposal with the direction that the proposed Property Tax, which will take effect on 1st April 2023, shall be levied at half of the proposed formula.”

Pertinently, the introduction of property tax in J&K was considered by the previous elected governments as well, but never implemented.

How much will citizens will have to pay actually on annual basis?

As of now itnis unclear how much property tax will exactly be chargeable on commercial, vacant or residential properties. According to the government order in this regard, the Property Tax shall be levied at such percentage not exceeding 15% of the taxable annual value of land and building or vacant land or both as the Government may, by notification, from time to time specify.

Urban real estate experts told Ziraat Times that the percentage basis of the tax is unclear as of now, as the base taxable value to be considered for the tax is yet to be clarified.

“It is unclear what the base value for the taxable value of properties will be. What 15% tax of that property value would be remains to be seen”, said Sunit Kumar, a tax consultant based in Jammu city.

Property Tax in J&K shall also be subject to revision once in three years by enhancing the tax by such percentage not exceeding 10 percent of the tax as may be prescribed, commencing from the financial year from which the Property Tax is determined.

Where will the tax be levied?

The tax will be levied in the capital cities of Stinagar and Jammu and other towns across J&K governed by Urban Local Bodies as defined under the Jammu and Kashmir Municipal Act, 2000 and the Jammu and Kashmir Municipal Corporation Act, 2000.

With regards to the nature of the properties on which property tax will be levied, the official order says – Unless exempted under this Act or any other law for the time being in force, Property Tax shall be levied on all lands and buildings or vacant lands or both situated within the Municipal area.

How would the tax impact J&K’s real estate sector?

Real estate sector experts believe that this move is likely to result in a selling spree of properties across Srinagar and Jammu cities and also the towns where people have commercial and vacant land properties.

“The reason a selling spree is likely is that the rental yields in J&K on properties are abysmally low. In terms of return on investment (ROI) on real estate investment, the rental value usually is between  1- 2 %, or even lower, of the property value. Since the rental yield is very low,  most people will be unable to bear the property tax on their commercial or disposable properties”, said Nadeem Sheikh, a prominent real estate consultant.

However, there is another dimension of the matter.

“In J&K, there are generally three types of properties – commercial, residential and vacant investment properties. While commercial properties would see a rent increase to absorb the property tax, residential houses, especially with larger  gardens, could see the tax difficult to manage”, said Farhana Khan  a Mumbai based property tax specialist, adding that the most pressure would come on vacant investment properties that don’t fetch any rental income.

Experts believe that as the property tax pressure on vacant investment properties may be hard to bear on most of the investors, a selling spree is likely.

“In this case it is natural people would like to sell their properties in the absence of rental incomes. And that selling spree could very much mean a dip in prices”, said Sumit, adding, “when there would be too many sellers and less buyers, naturally real estate prices may come down in J&K.

How would it impact J&K’s overall economy? 

While the introduction of property tax in J&K is likely to result in precious revenue for Urban Local Bodies, which, in turn, could help in improving urban civic amenities, including waste management, a property selling spree and lack of buyers could see a considerable dip in the sector.

Traditionally, people in J&K would invest their savings in real estate, especially land, in the absence of other viable investment avenues. Lately, there have also been private investment in apartment buildings and gared communities. Property tax on those those properties like to upset their financial maths. Meanwhile, a lack of optimum buying and selling could also result in a dip in stamp duty revenue at a time when revenue generation is a priority for the goverment.

However, there are those who are sanguine about the move.

“See, property tax is a reality in most of the big and tier 2 cities and towns in the country. Urban bodies need revenue to sustain their services. There are multiple problems with municipalities and urban local bodies due to revenue crunch to meet people’s expectations with regard to civic amenities. Those amenities could get better with the introduction of the tax. This decision is inevitable”, said Farooq Athar, a social activist.

Some others, however, have a different take – “J&K is a state, or call it UT, which doesn’t have a vibrant business environment. The low rental yields on properties is a case in point. Under these circumstances, the better thing would have been to wait for few years until J&K’s economy is back on track”, said Neeraj Singh, an entreprenuer.

Government sources, however, maintain that introduction of the property was inevitable as government needs to diversify its revenue sources.

“One of the problems is that a large number of people have locked their investments in vacant properties and lands across J&K, without paying property tax, which puts pressure on civic bodies to ensure good quality amenities. Those properties are supposed to generate revenue. Same being the case with commercial properties”, he added.

Potential impact on tourism sector

Perhaps the biggest impact would be experienced by the tourism sector, especially the hotels segment, since hotel properties comprise the largest chunk of commercial properties in J&K’s urban areas, especially in Srinagar, Jammu, Pahalgam, Katra, Tangmarg and so on. Hotels and guest houses are likely to pay considerable taxes for the nature of their floor areas and land use.

“The hotel industry has already been reeling under financial problems. Property Tax would put additional burden. However, hotels would have no option but to pass on the cost of this tax to customers”, said Imtiyaz Ali, a guest house owner whose property is spread over an acre of land in Srinagar.

As the debate rages on, with misgivings and optimism going side by side, people expect that the introduction of the property tax must translate into a visible  improvement in civic amenities and services in J&K’s urban areas.