Land Rent Structure : A Relook

Sanjeeb Mishra


The uniqueness of land as an Economic asset stems from its fixed supply and immobility. It is an indispensable part of all kinds of Economic activities i.e., Agrarian, Industrial or Service. Land rent is the price annually paid for the exclusive right to use a certain location, piece of land or other natural resources.

The market value of any particular parcel of land is a product of the locational advantages enjoyed by it which in turn are facilitated by nature and the benefits and services provided by the community. Land value can be considered as the relationship between a desired location and a potential user. The ingredients that constitute land value are utility, scarcity and desirability. 

In Agrarian Economies Land rent used to be a prime source of revenue for the State Exchequer. However with the advent of Industrial era and then subsequently the emergence of the concepts of Welfare State and Knowledge Economy, the importance of Land Rent as a source of revenue has steadily declined. The artificially suppressed rate of Land Rent fixed by the Govt both in rural and urban areas are too low to yield substantial revenues. The raison d’ etre for rationalization of Land Rent as the prime source of community / public revenue has been delineated below.

1) The quantity of land being fixed in supply, demand is the sole determinant of land rent. Such inflexibility in supply renders the rent of land without any incentive function. When the rent of land is taken for public purposes, production and distribution are not held back. This is because the same amount of rent would otherwise have been taken by some private individual. Thus Economic Rent is the only source of revenue which can be realized for community purposes without having any negative impact on the productive potential of the economy.

2) Further whatever is not collected as Land Rent will be capitalized into the Market Value of lands by the land owners. Exorbitant rates of market value of land are impediments to emerging entrepreneurial activities involving land. Land owners sell the Capitalized Land Rent i.e., Land Value which is uncollected by the community even though it is unearned income. This widens the disparity between land owners and non land owners. Further if the producers of the land market value i.e., nature, government and people don’t utilize land rent, someone else will. 

3) People are attracted to a well run community because of the better standard of living offered by it. The community must secure adequate revenue in order to provide good quality services. This revenue can best be procured when the community recaptures the value of the benefits and services provided by it. This can be done by collecting the Rental Revenue from land that reflects the value of the services and facilities provided by that community as the land rent belongs equally to all people who live in a community which helped produce that value.

4) Each person has a right to keep what he or she produces, but no one has the right to waste what belongs to all people i.e., the land which includes the natural environment. Each person should have an opportunity to use the best land for his business or personal needs, as long as they are willing to pay the land rent that other land users are willing to pay. 

5) Any moves to enact good government principles without collecting the full market rent of the land may result in a failure. People are guided by the profit motive. When people can make a larger profit by doing nothing, but keeping the land they posses out of use for a long period of time, they will do so. When the community collects the full market rent of land, they eliminate the motive for keeping land out of efficient use, because the unearned profit has been collected as public revenue. 

6) Further not only is land rent a potentially important source of public revenue, the tax on land is a means of limiting excessive speculation in land prices. This would ensure that the equal opportunity to be productive would be available to all citizens. 

The Economic market rental value of land should be sufficient to finance public services and to obviate the need for raising revenue from taxes, such as income or corporate taxes, sales tax and value added tax. Public revenue should not be supplied by taxes on people and enterprise until after all of the available revenue have been first collected from the natural and community created value of land. Only if land rent were insufficient would it be necessary to collect any taxes. 

To realize the potential of land rent as the prime source of public revenue, a land site should be available only to the user who can make the highest and best use of the site and maximize the site benefits of all people. 

The Differential between the actual Land Rent being realized and the potential for such realization in the Urban and Rural areas of our state has been illustrated below. 

The key concepts required in this exercise have been defined below :

~ 'Land Rental Value' is the annual fee individuals are willing to pay for the exclusive right to use a land site for a period of time. This may include a speculative Opportunity Cost.

~'Land Taxes' is the portion of the Land Rental Value that is claimed for the community.

~'Capitalization Rate' is a market determined rate of return that would attract individuals to invest in the use of land, considering all the associated risks and benefits.

~'Land Market Value' is the Land Rental Value, minus land taxes, divided by a capitalization rate. 

To determine the 'Land Rental Value' of a particular parcel of land the following formula can be used :
Land Rental Value = Market Value X Capitalization Rate + Land Taxes. 

This formula can be used illustratively to assess the Land Rental Value of a Posh Locality of Bhubaneswar like Saheed Nagar which, though is adjacent to the Central Business District (thus having high commercial potential), is basically being used for housing purposes by the Middle Class with the associated low rental realization. In Saheed Nagar a 60’ X 75’ housing plot approximating 100 dcmls in area has a Market Value of around Rs.20,00,000/- (twenty lakhs)only @ Rs.2 crores per acre. Assuming a Capitalization Rate of around 15% and land tax of around Rs.1,000/- only (including holding tax), the Land Rental Value as per the above mathematical formulation is :- Rs.20,00,000 X 15% + Rs.1,000 = Rs.3,01,000 (Rupees three lakh one thousand only).

Thus the annual fee that potential users are willing to pay for the use of this plot is Rs.3,01,000/- (Rupees three lakh one thousand only). Against this, the rent being realized at present is Rs.40/- only. Such low rate is encouraging the owner/user to use this parcel of land for an uneconomic and unproductive purpose like housing against its high commercial potential. In other words such low rent is not ensuring optimal use of this piece of land both from the individual and community point of view. Raising the land rental value to the level of Rs.3,01,000/- would dissuade the owner to use it for housing. He would move out of that place by selling this land which in turn would make way for its better commercial utilization by capable organizations in shape of Corporate Offices, Commercial Complexes, Hotels or High rise Housing Complexes etc. Such organizations would be willing to pay a rental value of Rs.3,01,000/-. Simultaneously, migration of the Middle Class to the periphery of the township for housing purposes would help develop these areas. Thus rationalization of land rental value would ensure optimal pattern of land use (by encouraging housing in peripheral areas with low economic potential and true commercial use of centrally located areas) as well as adequate revenues for the community.

Likewise the Rational Land Rent Value using this Mathematical equation has been calculated for five other areas of Bhubaneswar town, the details of which have been furnished below in Tabular form. 

Name of the Area Market Value
(Rs per acre)
Rate of Capitalisation Land Tax (Rs) Land Rental Value
1.Forest ark 20,000,000 20% 12000 4012000
2.Goutam Nagar 12,000,000 15% 9000 1809000
3.BJBNagar 12,000,000 13% 9000 1569000
4.Nayaalli 10,000,000 15% 8000 1508000
5.V S S Nagar 9,000,000 10% 5000 905000

Similarly in Buguda block i.e., a rural area of Ganjam district, now Irrigation facilities have been made available through the Baghua Medium Irrigation Project. The prevailing market value of one acre of Wet Dofasali kisam of land there is around Rs.85,000/- per acre with the annual rent per acre being Rs. 13/- only. If we calculate the Land Rental value through our earlier formula assuming a Capitalization rate of around 10% and ‘Nil’ land tax, the Land Rental Value comes to :- 
Rs.85,000 X 10% + 0 = Rs.8,500/-.

Thus the Annual Rental Fee that the potential users are willing to pay for the use of one acre of Wet Dofasali land is Rs.8,500/- (Rupees eight thousand five hundred) only. Against this the annual rent is only Rs.13/- per acre. Such low rate is encouraging the owner to hold on to this piece of land, even though it is not economically rewarding enough. However if the Rental Value is raised to the rational level of Rs.8500, the owner will sell it off to potential interested parties who are better equipped to harness its real agricultural potential through greater investment and application of modern technology. Thus the land will be put to better use with greater productivity and the community will realize its returns against the investments that have gone into creating the irrigation facilities. 

Furnished below in tabular form is the calculation of Rational Land Rent values in relation to five other villages of Ganjam district using the same mathematical formula :

Name of the 
Type of 
Market Value
(Rs per acre)
Rate of 
Land Tax Existing
Rent per 
Land Rental Value
Wet 65,000 8% -- 10 5,200
2.Dunkapada Rainfed II 48,000 10% -- 9 4,800
3.Bomkei Bila Dofasali 75,000 7% -- 13 5,250
4.Lochapada Rainfed II 85,000 10% -- 15 8,500
5.Mahua Rainfed II 60,000 8% -- 12 4,800

The value of land can be estimated with an acceptable accuracy, at a cost which is very small compared to the revenue to be obtained. A proper system of assessment and taxation of land can provide for the proper economic use of the land. A land site should be available to the user who can make the highest and best use of the site and maximize the site benefits for all people. A land tax can provide a major source of public revenue which the local governing body could use for the benefit of all people. A land tax can prevent the dispossession of our children, the future producers in the society. Justice requires that land values, which are created by society and nature, be made available for public improvements. This is the responsibility of good government. 

Sanjeeb Mishra, a member of the Indian Administrative Service, is presently District Magistrate and Collector, Ganjam (Orissa, India).