Property Tax: more questions than answers under proposed law changes

Property Tax: more questions than answers under proposed law changes

One major reform the National Council for Peace and Order (NCPO) is keen on carrying out involves the house and land tax regime. By taxing holdings of real property, the government can raise more revenue while reducing the gap between rich and poor. In short, the rich, who have more property, will have to pay more taxes. In addition, reforms could reduce the financial burden on local administrative bodies.

Importantly, the new tax regime is based on the appraised value of a property instead of the annual rental revenue it earns or might have earned. Three rates have been proposed: 0.5% for commercial properties, 0.1% for residential properties and 0.05% for agricultural properties. Each individual owner is no longer exempt, as the tax base is much broader than in the earlier system.

The proposed bill wisely contains a mechanism to encourage more efficient use of properties. If any property is not used, the owner will face an additional one-time penalty every three years of up to 2% of appraised value. This is bad news for most landlords, as property tax will become more expensive.

The new tax regime is calculated on official appraisal values, which aims to eliminate corruption resulting from the broad discretion given to tax authorities under the current system.

Interestingly, the Finance Ministry has declared the tax system will from now on focus more on property and consumption bases, both of which are broader and clearer, instead of direct tax on earned income.

Each government in recent decades has tried to enact a property tax and failed. Most people assume pressure from rich landlords scuttled the process. However, the truth is commercial properties under the new system would enjoy a great reduction in the tax rate, from the current 12.5% of annual value to 0.5% of appraised value. Even if land is unused, the tax would hardly be on par with the 12.5% of annual value under the current regime.

The main hurdle for the new bill is the expansion of the tax base since it will not allow exemptions for individual owners. This means all farmers who own land will have to pay property tax, more or less. Consequently, the new government will need time to review all potential negative effects carefully.

To prevent any negative effect, the current bill provides some concessions. For example, if someone owns less than 50 square wah for a house, or less than 50 square metres for a condominium unit, or the property value is less than 1 million baht, he or she will be entitled to a tax reduction. The amount has not yet been decided.

From the tax policy perspective, there are other concerns in the draft bill that the NCPO should not overlook:

Under the current local improvement tax, the rate is very low and farmers could afford to pay it even while waiting for money from the rice-pledging scheme. In any case, local tax authorities did not strictly enforce the law, and you rarely heard complaints from low-income earners. The new system would be more stringent, and the NCPO has already made clear its belief that people paid to enforce laws should actually do so.

Despite the preferential tax rate of 0.05% for farmland under the draft bill, there is no ceiling amount, as the new regime is intended to apply to every single real property owner by ignoring the "ability to pay" principle. Hence, a farmer who owns land and/or a house is likely to pay much higher tax, and the chance for a reduction is limited — as noted above, it would apply only to those owning less than 50 square wah for a house, or 50 square metres for a condominium, or to property of less than 1 million baht in value.

The new regime would severely hurt people who have many properties but not enough cash for tax settlement. They may be forced to sell some holdings. There is the possibility a glut of new property on the market would push prices down, giving the rich an opportunity to snap up some bargains. So the property tax could hurt the poor more than the rich.

The new system relies too much on the values used by the Treasury Department. No one questions these appraisal values, which are used only for calculating government fees and transfer taxes. In the future, the department's methods and figures will come under much closer scrutiny. Will the appraised prices fairly reflect property values? The department adjusts appraisal values every four years, and it will be interesting to see how the government manages this administrative burden.

Given that the new law imposes penalties on land that has gone unused for three years, it is believed that agricultural properties will be defined as those where at least three-quarters of the entire area has been used. The concern is whether the term "entire property area" focuses on each title deed or the entire area regardless of the number of deeds.

In the case of "blind land" that has no access to a public road or is the subject of a court dispute and has remained unused for years, the owners would still be penalised, with no legal excuse allowed. One solution would be to establish a land bank to buy such land from those owners at fair market value.

Concerns about mixed use also remain unanswered. Imagine that in a rural area, each house has a huge garden at the back, with space to plant trees and sell home-grown fruit. Such property will be seen as having mixed residential, agricultural and commercial use. We're curious about the criteria to be used to define each form of use. In the absence of clarity, it is not certain that corruption can be eliminated.

This article was prepared by Thanasak Chanyapoon and Prof Piphob Veraphong. They can be reached at 02-677-6300 or

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