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Understanding
local authority taxation
Rates are a statutory payment. Whether big or small everyone in urban areas are liable for payment of rates. Be it the Bank of Ceylon tower, Twin Towers at Echelon Square or the giants like Electricity Board, Telecom or the humble hut dweller, everyone pays rates under the same law and on the same basis. People normally pay their rates as a matter of routine without any understanding of how their rate burden is computed and without knowing the legal implications or what redress is available to them if they feel the rates burden is heavy. The notice from the local authority will give the estimated rent of the premises, a very brief description of the property, the annual value, the rate percent and the quarterly rate. Some local authorities do not even care to give these basic components of the rating assessment. Rating income forms a major portion of a local authority's income. It is also a good slice of the income of the rate payer. Rate burden is not based on the income level of a person. Ability to pay is not a criterion. Assessment is based on the rental value of the occupation. No distinction is made between owner-occupiers and tenanted properties. Primarily it is a charge by the local authority for the occupation of land and building within their area of authority in return for services provided by the local authority to the occupiers. On principle it is the occupier who is liable for payment for the reason that services are provided to the occupier and not to the landlord. The local authority is statutorily obliged to supply very many services to the inhabitants of the local authority area. These include local roads, water, electricity, waste disposal, poor relief and many more. They need money to provide these services. The rating income of a local authority goes to defray these expenses. The rating system is something that has been handed down to us by the British. In Britain parishes had to collect money from the inhabitants to give relief to the poor. From then onwards the rating system originated systematically regularized within a legal framework. The principles of assessment and criteria for liability were evolved and developed. The rating law became an important sphere of the legal system. In Sri Lanka, rating is a statutory affair. The local authorities derive their power to collect rates from the inhabitants by virtue of the local authority laws namely the Municipal Councils Ordinance, Urban Councils Ordinance and the Pradeshiya Sabha Act. These three Acts together with the amendments made from time to time lay down the code, legal principles and generally matters incidental to the imposition of Rates and Taxes by local authorities. All properties within Municipal and Urban Council areas are subject to a rating levy. In Pradeshiya Sabha areas, only properties within 'built up' areas are subject to tax. 'Built-up' areas are declared by the Minister of Local Government from time to time. The Pradeshiya Sabha is an amalgamation of the now defunct earlier Town Council areas and Village Committee areas. State properties do pay rates on the properties they own. There is no legal obligation on the part of the state to pay rates to local authorities. However, as a matter of understanding a payment in lieu of rates is made by departments and ministries for their properties situated within the local authority ambit. The Acts exempt certain categories of property from payment of rates - e.g. land and buildings used for religious, educational and charitable purposes, buildings in charge of military sentries, burial grounds etc. Councils have the power to exempt properties on grounds of poverty of the owner. The tax burden of a ratepayer depends on two factors namely the annual value as assessed by the local authority and the rate percent as approved by the local authority. Unjustified However there is no justification for this differentiation for the reason that this aspect is taken into account when estimating the annual value. It is double counting as far as commercial properties are concerned. The annual value of commercial properties is higher in comparison to residential properties and automatically commercial properties have to pay higher rates. The other factor that determines the rates burden is the annual value as estimated by the local authority. The definition of annual value in the Municipal Councils Ordinance and the Urban Councils Ordinance are similar. The definition of annual value in the Municipal and Urban Council Ordinance is ---"annual value" means the annual rent which a tenant might reasonably be expected, taking one year with another, to pay for any house, building, land or tenement if the tenant undertook to bear the cost of insurance, repairs, maintenance and upkeep, if any, necessary to maintain the house, building, land, or tenement in a state to command that rent. Provided that in the computation and assessment of annual value, no allowance or reduction shall be made for any period of non-tenancy whatsoever. The definition in the Pradeshiya Sabha Act read as follows - "In this Act, unless the context otherwise requires "Annual Value" means the annual rent which a tenant might reasonably be expected, taking one year with another, to pay for any house, building, land or tenement, if the tenant undertook to pay all public rates and taxes, and if the landlord undertook to bear the cost of insurance, repairs, maintenance and upkeep, if any, necessary to maintain the house, buildings, land or tenement in a state to command that rent". Provided that in the computation and assessment of annual value - (a) The probable annual average cost of such insurance, repair, maintenance and upkeep shall be deducted. (b) No allowance or reduction shall be made for any period of non-tenancy whatsoever. Hence annual value means the annual rent of the premises on the basis that the tenant pays rates and taxes and the landlord attends to repairs and maintenance. In Sri Lanka normal tenancies are on the basis that the landlord bears rates and taxes and also bears costs of repairs and maintenance. A twist of the annual rent is therefore required to bring it to fall in line with the statutory definition of Annual Value. This adjustment to annual rent can be done mathematically. Suppose the rent of the premises is Rs. R per annum on normal tenancy conditions. Then the annual value worked according to the legal definition is 100 R divided by 100 + R where R is the rate percent levied by the local authority. As an example take a premises where the market rental value can be estimated at Rs. 5000 per month and situated in a local authority area where the rate percent levied is 25% percent. The annual value is not Rs. 60,000 but 100 multiplied by Rs. 5000 multiplied by 12 months and divided by 100 + rate percent i. e. 125 which works to Rs. 48,000. Thus if any rate payer is informed of the annual value only, by working backwards he can find the rent at which his premises has been assessed. If he feels that it is not the market rental value of the premises he has cause for complaint. No distinction is made between big or small properties. Whether it is the Oil Refinery at Sapugaskanda, or a residence in Colombo or the poor man's hut, the principle is the same. No distinction is made between owner occupied or tenanted properties. No bearing on the income of the owner or occupier. The title is irrelevant. Only the occupation matters. Even an unauthorised building on the road can be assessed for payment of rates. In estimating the market rent the assessor has to assume that the premises is 'Vacant and to Let'. What rent can it command in the open market? This is what the assessor has to ascertain. There are certain principles in making an assessment for rates. The property should be assessed 'rebus sic stantibus" which means that it should be assessed for the use to which it is put at the time of assessment. No change of user is allowed e.g. if a commercial building is occupied as a residence it should be assessed as a residential property. Agricultural properties should be assessed as agricultural properties. The assessor should adhere to the 'tone of the list'. This means that there should be uniformity in assessments. The CMC has a Rating Department of its own. Officers of the Rating Department attend to all rating assessment within the Colombo municipality. In all other local authorities the rating work is undertaken by the Valuation Department. There is no obligation on the part of the local authority to give the assessments to the Valuation Department. There are a few local authorities where the assessments are handed over to private valuers. Rating Officers should be qualified and competent to do their jobs. There should be two surveys. One a preliminary survey and then a final survey by an experienced rating surveyor. Big complexes such as industrial undertakings, utility undertakings should be taken as special properties and should be assessed on an individual basis. There are special properties such as big industrial complexes, infrastructure undertaking, railway (except the rolling stock) are assessed on the same basis of 'vacant and to let' principle. The assessor assumes that the Land, Buildings, and Machinery fixed to ground are vacant and estimates what a hypothetical tenant would pay as rent for the occupation of the complex. Valuers employ several methods to do so. Whatever method a valuer uses he must arrive at a realistic, reasonable rent to compute the annual value. Assessment numbers are given in a systematic way leaving out spare numbers for future developments. As one proceeds from down town, properties to the left of a road are given odd numbers and to right side even numbers. Upon numbers are given to "hereditaments" not facing the road. Up stair units are numbered according to floor number and an upon number for units within a floor. It should be clearly understood that the unit of assessments in the unit of occupation technically called the rating "hereditament." A building with several distinct occupation will have several numbers. Every occupier of a unit is entitled to a separate assessment number. It may be only a room. Lodgers and Borders are excluded but it must be shown that the landlord has the exclusive control of the premises. Temporarily occupation is not liable for rates but if the occupation continues for an unreasonable time rates could be levied. All local authorities should revise their 'Valuation List', sometimes called the Register of Assessments every five years. If that is done, rate payers will not have to face high rate increases suddenly. There is a tendency on the part of some local authorities to postpone revisions. This should not be tolerated at any cost. By postponing the problem of sudden increases in the rate burden worsens. Buildings coming up within a five-year period should be assessed immediately on occupation. Many local authorities lose a great amount of revenue by not assessing these new buildings in time due to corruption and lethargy of Local Authority Officials. What is the redress available to a rate payer for excessive and incorrect assessments? The first step is to lodge an objection to the Authority who did the assessment. Local Authority Laws provide for this. The Local Authority should keep a 'book of objections', hear the objection and provide relief, where such relief is deemed. Objections can be lodged only by individual rate payers in respect of his particular property. The taxpayer can adduce evidence. Many tax payers object on the ground that no services are provided by the local authority or that the roads are not repaired. These are not valid reasons for objection. If services were not provided the assessor would have taken the fact into account when assessing the rental of the property. Rate payers must be more vigilant about their rate burdens. The Valuation List is open for their inspection. Examine the 'tone of the list' and if one's assessment is out of tune there is room for objection. |
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