Resource and Land Taxation
Indira Rajaraman
Tax Aspects of Domestic Resource Mobilisation – A
Discussion of Enduring and Emerging Issues
Rome
4-5 September 2007
Resource Taxation
Non-renewable: Mining, Petroleum, Timber
Renewable (within sustainability limits): Water,
Fishing
Fiscal Resources from Natural
Resources
• With natural resources, it is non-tax revenue in
the form of royalty and other compensation,
rather than taxation, which poses issues to be
resolved.
• Taxation of resources, whether within a VAT
framework or not, is on par with indirect taxes on
other inputs (conceptual parity, if not rate parity);
exports are usually exempted, with or without a
VAT.
• Non-tax royalties do not figure in double-taxation
agreements and are therefore not compensated
in any way.
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Are Resource Royalties an Emerging
Issue?
• Resources are not uniformly distributed spatially,
so there is the issue of whether non-tax revenue
should accrue to producer jurisdictions, and why.
• In the future, with buoyant commodity demand
from China and India, mineral prices are
projected to be buoyant, therefore this is a very
live issue.
• Demand-side players will lobby for royalty
design that will keep mineral prices less
buoyant, and producer jurisdictions will lobby for
royalty design that will keep up fiscal buoyancy.
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Rationale for Non-tax Compensation
• Economic:
– Land pre-empted from other use during extraction
– Depletion (inter-temporal fairness)
– Externalities (market failure to factor in concurrent
and inter-generational costs)
– Costs of restoration of land for other uses
– Permanent loss of livelihoods (river storage for hydro
power)
• Legal: Local jurisdictional rights in terms of
– Ownership
– Control
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Compensation Design
• Royalty rates:
– Specific rates ($ per unit quantum) low on buoyancy
but stable
– Ad valorem (% value) high on buoyancy, but can be
volatile
– Mixed systems are sometimes prescribed (Specific
plus % value) that strive for the virtues of both.
– Where resource prices on a steady upward trend,
producer jurisdictions benefit from fully ad valorem
design
• Hydro power not formula driven, designed case
by case, which introduces scope for corruption.
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New Approaches
• New approaches: profit/income-based royalty
• Competitive bidding processes to determine
royalty rather than pre-determined formula:
– suits the variability of mineral deposits
– but can be defeated by collusive bidding
• Competitive bidding for each component of
royalty makes collusion difficult across all
elements of a vector of bids
– Environmental
– Design (fully ad valorem or hybrid with specific
component)
– Depletion (separate for current local and intergenerational)
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Land Taxation
In situ
Transfer of property
Which Level of Government?
• Immoveable property (housing and land) is the
universally assigned tax base for local
government.
• Immoveable property as a tax base is
administratively suitable for local government:
– relatively easy to observe and assess,
– and relatively difficult to conceal.
• Thus, effective land taxation holds the key to
provision of the local public goods which are
critically underprovided in the developing world
– Water, sanitation, law and order, primary education
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Effective Land Taxation in
Developing Countries
• Requires three operational properties:
– parsimonious information requirements for
assessment;
– assessee acceptance.
• The critical need is for an incentive
structure for local revenue collection.
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Problems in Developing Countries
• Valuation distortions: Land markets are
frequently distorted as a result of taxation of
transfer of ownership (called “stamp duty” in
India), and taxation of capital gains, both of
which encourage under-reporting of the true
market value of land and property.
• Valuation basis: Not enough transfer
transactions for a robust estimate of capital
value.
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Common Solutions to the Valuation
Problem
• Urban property taxation is typically based on
rental value rather than capital value, since the
market for rental might be deeper than the
market for transfer of ownership.
• However, even rental value can be distorted by
rent control legislation.
• Being sought to be overcome by presumptive
zone-specific area-based taxation.
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Presumptive Parameters
• Parameters going into determination of the
presumptive rental value:
–
–
–
–
–
Type of usage (commercial/residential/other)
Type of construction
Zone (the zones need not be contiguous)
Age of building
Resident type
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Revenue Yield of Presumptive Levies
• Buoyant only if rates periodically revised.
• This calls for recalibration of the various
parameters underlying the determination of
the area-based rental value.
• Thus, area-based assessment will lead to
sustained revenue improvement only if it is
not a once-over change.
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Local Government Collection Incentives
• Require three properties to work in practice:
– Minimal costs of assessment and enforcement
(of the incentive).
– Cross-sectional fairness in assessment of
revenue potential across local jurisdictions.
– Distinction between revenue effort and
underlying revenue potential (matching grants do
not do this).
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Cost-effective Incentives
• The most cost-effective design for own resource
collection incentives:
– Norm-based closed-ended grants from higher
governments, where allocations are made after
deducting baseline calculations of local revenue
potential.
– Thus, the revenue potential is deemed to have been
collected (upto some stipulated percentage less than
hundred if need be), at specified floor rates.
– This calls for a minimal-cost method of estimating
jurisdiction-specific revenue potential.
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Other Incentives Commonly Found
• Grants from higher-level governments must not
be so structured as to carry adverse policy
incentives.
– Example: A grant system inversely calibrated to local
facilities will generate adverse incentives for keeping
these under-supplied.
• Other types of direct incentives commonly
recommended (based on performance indicators
like primary enrolments, small family norms) call
for monitoring and verification by State
governments and are liable to lapse over time.
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Compliance
• Compliance can be encouraged by linking
property tax payment to ownership rights
• Urban property taxation is a “benefit tax”
and there is non-compliance when no
commensurate services are delivered by
urban authorities
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Rural Land
• In rural areas:
– selective, not universal, coverage confined to crops
yielding returns above a specified floor
– systematic,
as
distinct
from
discretionary,
catastrophe exemption provision for rural land, given
the absence of perfect risk markets
• New issues arising with the conversion of rural
land into Special Economic Zones – explosion
in land value with no commensurate gain for
original owners of the land.
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References
• The Energy and Resources Institute, 2007,
Study on Compensation to Resource Bearing
States (Interstate Council, mimeo)
• June 2007 conference of Lincoln Institute
• Rao, U.A. Vasanth, 2006 “Is Area-Based
Assessment an Alternative, an Intermediate
Step, or an Impediment to Value-Based Taxation
in India”, Georgia State University
• Rajaraman, Indira, 2003, A Fiscal Domain for
Panchayats (Oxford University Press).
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