India
Land value capture in India
Several land value capture instruments are used systematically in the country, with varying levels of success across states (Table 2.26). Upon state approval, local governments and development authorities can implement these instruments and collect the revenues. The inaccuracy of land registry systems and the lack of local administrative capacities are common challenges to implementation.
Enabling framework
India is a federal republic with a two-tier subnational government structure: 28 states and 8 Union Territories at the regional level and 267 468 local governing entities at the local level, among municipalities and rural local bodies (Panchayat) (OECD/UCLG, 2019, p. 177[1]). Local government’s organizational structure is complex and differs according to each state.
The state governments are responsible for creating the legal framework for land value capture as they are in charge of land and hence land value capture. The central government legislates on behalf of Union Territories. The national policy document that guides the use of land value capture instruments is the Value Capture Finance Policy Framework (2017), elaborated by the Ministry of Urban Development.
The state is responsible for local laws, including Master Plans. Of the total of 4041 urban local bodies, only about 1 420 have approved Master Plans, of which 10% are regularly updated. Most master plans are prepared by State Town and Country Planning departments or Development Authorities, with inadequate participation of the Local Entities.
Land value capture rules are uniformly applicable across municipalities of the same state, with varying levels of success. Municipalities do not have substantial revenue resources and cannot increase taxes and fees without state order. The main challenges relate to the lack of an appropriate incentive framework to local governments, lack of valuation tools and techniques, lack of database, lack of local administrative capacities and the lack of updated and comprehensive urban property records.
Charges for development rights
States, local governments and development authorities can implement charges for development rights and collect the revenues from the charge. Local entities need permission from the state to adopt this instrument. They charge developers for approving changes in land use from agricultural to non-agricultural, under the state Land Revenue Codes. Town Planning Legislations and related regulations contain provisions for other changes in land use, which therefore vary from state to state. When developers request to build developments at higher density, they are charged for development rights and also have to pay developer obligations (see section below).
For conversion of land use, the levy is calculated as a percentage of the estimated increase of land value that derives from the zoning change. It may also be levied at a fixed rate per unit of area. This type of charge is extensively adopted across the country, given that, due to high urbanization rates, most cities are in the process of land expansion.
In the case of development at higher density, the excess floor area is charged at a fraction of market value, usually between 30% to 70%. Hence, it may vary across areas or zones. It is primarily implemented in large cities, where the demand for building at higher density is more significant.
The charge is paid at the time the planning permission is granted, either in cash, through the provision of affordable housing units, or a combination of both. The conversion of land use is often paid in cash. The charge for higher density is often paid with the provision of affordable housing units, with the goal of offsetting urban development externalities.
If developers are required to build affordable housing units, they cannot alternatively pay a fee. The units are built on-site, within the boundaries of the project. Beneficiary households must be classified as economically weaker sections, whose values may vary from state to state.
The lack of adequate legal frameworks at the regional level, low demand for building at higher density in many municipalities and the overall low quality of land registry systems hamper the implementation of the charges. Landowners and developers sometimes file claims against the obligation to pay charges.
Developer obligations
Developers are subject to obligations to obtain approval for new developments. Developer obligations are foreseen in several state legislations since the 1950s. They are typically levied within the framework of charges for development rights (see section above). Upon obtaining approval from the state government, local governments and special purpose bodies implement the obligations and receive their revenues. They have no discretion in issuing development approvals, establishing the impact rule or reinvesting the collected funds on their own.
The obligations consist of cash payments and/or direct provision of affordable housing units. When paid in cash, the collected revenues are used to finance improvements offsite. Some state ordinances admit exemptions to payment, for instance, if the land or building is in control or possession of public authorities or if the project is being developed by an educational, medical or charitable institution.
Cash payments are calculated using a formula that takes into account land values and the costs incurred by the public authority due to the impacts on infrastructure. In the state of Maharashtra, for instance, the fees are prescribed as percentage of market rate of land, applied separately to land area and construction area. The rates for land area range from 0.5% for residential and institutional use to 1% for commercial use. In addition, there is a charge on construction area, at 2% for residential and institutional use, 3% for industrial use and 4% for commercial use. States other than Maharashtra have prescribed the obligation in absolute Indian rupees per square meter.
If developers are required to build affordable housing units, they can do so within the boundaries of the project or off-site. The units are not comparable to the market-rate units. Beneficiaries are households who reside in the municipality and whose income falls below a specific percentage of the median income level.
Development norms and land use regulations often lack in clarity, rendering implementation difficult. In addition, many local governments lack administrative capacity to calculate and impose the charges. Other obstacles to implementation include the risks of real estate markets and low-quality land cadastres.
Infrastructure levy
Landowners pay a levy for government-built infrastructure from which they specifically benefit, for example public roads, public transport, public utilities and green space. States, local governments and special purpose bodies may implement the levy and receive its revenues. Local authorities need permission from the state government to do so. Although foreseen in the Town Planning Statutes of the states of Maharashtra, Gujarat, Andhra Pradesh and Karnataka, the instrument has only been implemented in Gujarat.
The levy is charged when granting development permissions. It can vary from 30% to 50% of the increase in value of land, depending on the state Acts. To facilitate estimations, a uniform rate for all affected land plots can be set. In Gujarat, for instance, a uniform rate per square meter is charged in order to recover the public scheme's cost.
Most local governments lack the administrative capacity to implement and collect the infrastructure levy. Moreover, the measurement and quantification of project benefits and its corresponding land value gains is difficult, particularly when real estate market is subject to cyclical changes. This can also render the adoption of the tool more contentious and prone to litigation.
Land readjustment
Land readjustment projects are used for the purposes of urban expansion, urban renewal and post-disaster reconstruction. States, local governments, special purpose bodies and developers occasionally implement them. Local governments and special purpose bodies need approval from the State to do so. They are the ones that collect the revenues from land readjustment projects.
For projects initiated by public entities and that have a public purpose, participation is compulsory. If landowners resist land contributions, their lands are acquired through expropriation, and compensation is paid. Expropriations are always carried out when necessary. In some states, for instance in Punjab, expropriated landowners have the option to choose cash compensation or developed land.
A share of 23% to 50% of the readjusted plots is reserved for public improvements, such as public roads, public utilities, schools, parks, social housing and green space – from which landowners will benefit. In addition, the land readjustment project typically includes the creation of jointly owned plots that are reserved for future sales, to generate revenues for the government.
Landowners receive a plot with an area proportional to their original holdings, on or as close as possible to the original land. But, depending on the case, they may be reallocated to different plots within the area. They cannot exchange reallocated plots for cash. Yet, owners of readjusted plots that are less valuable than the original ones are entitled to compensation which is typically adjusted against the contribution levied.
Public entities conduct analyses to define the contribution ratio that maintains the proportionality of landowners’ share before and after pooling. It is also important to address small landowners, non-title-holders, tenants and vulnerable persons. For this reason, a consultation process is typically carried out with these affected groups. Nonetheless, while large owners undoubtedly benefit from the process, the case may not be the same for small and marginal landowners.
In all, land readjustment is gaining acceptance in varied project contexts, which indicates its attractiveness and potential transferability across the territory. However, some challenges remain. Many states lack an adequate legal framework of land readjustment, which hampers its adoption. Other obstacles that limit the use of land readjustment are the low quality of land cadastres, the risks of real estate markets and the resistance by landowners and other affected groups, such as tenants and informal residents.
Strategic land management
Strategic land management is used by development authorities to access, hold and manage urban land, and by states to promote investment and industrial development. The implementation of land management strategies across states has been unsystematic and has lacked planning.
States and development authorities carry out land management operations through purchases at market price and expropriations and receive the revenues from further allotment. There is a preference for acquiring vacant, unproductive or unused land, especially in urban fringes. The government can only acquire land for which the use has been predetermined in regional legislation, according to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act (2013).
Acquired land is then rezoned and developed by the government, which raises land prices. Development includes basic physical preparation, new roads and construction of residential and commercial units. Afterwards, the government may auction developed plots to private actors or transfer them to another public entity. The government recovers investments through the sale or leasing of the developed plots.
Public land is leased to generate public revenues and facilitate planned urban development, including site-specific industrial projects of mining, energy, tourism, education, sports and health. Moreover, the government makes plots available to economically and socially vulnerable groups for residential purposes.
The ground rent is calculated as a percentage of the market value of public land. Exemptions to payment may be granted to leaseholders who are not-for-profit entities or if the public land will be used for specific public purposes.
Lease lands cannot be transferred without previous sanction of states, upon the condition that the land will be used for the purpose for which it was granted. The lands cannot also be sub-leased without government permission.
In all, strategic land management is considered an important tool to conform urban development patterns in accordance with states’ planning objectives. Yet, implementation challenges comprise inadequate legal frameworks at state level, lack of financing for land acquisition, low levels of local capacity and lack of coordination between public entities. Some projects face resistance from landowners, due to insufficient compensation and inadequate resettlement and rehabilitation policies.
References
[3] OECD (2022), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 13 January 2022).
[8] OECD (2021), “Subnational government structure and finance”, OECD Regional Statistics (database), https://doi.org/10.1787/05fb4b56-en (accessed on 25 November 2021).
[2] OECD (2017), Land-use Planning Systems in the OECD: Country Fact Sheets, OECD Regional Development Studies, OECD Publishing, Paris, https://doi.org/10.1787/9789264268579-en.
[1] OECD/UCLG (2019), 2019 Report of the World Observatory on Subnational Government Finance and Investment - Country Profiles, OECD/UCLG.