With a view to augmenting the tax base, the state government on Monday decided to replace levy of holding tax with property tax in urban areas and also change the manner in which such tax is calculated.

"Property tax will be collected on the basis of unit area method in lieu of the existing annual rental value method. This would introduce more objectivity in assessment of properties and simplify the process of assessment, reducing the scope of human element in it," chief secretary Gokul Pati told mediapersons, after the state cabinet, headed by chief minister Naveen Patnaik, acquiesced to a proposal to introduce property tax.

Under the existing system, in operation since 1989, holding tax is levied per annum at the rate of 17.5 per cent of the annual value, calculated depending on whether the building is used for residential or commercial purpose. For residential houses, the plinth area of the holding in square metre is multiplied with Rs 13.65 to estimate a value, 15 per cent of which is deducted towards maintenance and 0.5 per cent of the land cost is added to arrive at the annual rental value.

However, under the proposed regime, an urban area would be categorized as highly developed, developed, developing, under developed and rural areas. A state-level valuation committee will determine the value of property in each category and eight to 10 per cent of it will be charged as tax.

Official sources said the proposed tax structure will enable urban local bodies to broaden tax coverage and better tax compliance. To achieve this, the cabinet decided to amend the Orissa Municipal Act, 1950, and the Orissa Municipal Corporation Act, 2003. The amendments would also aim at introducing community participation law to institutionalize citizen participation in urban development processes. "Like gram sabha is held in rural areas, area sabha will be conducted in urban localities," Pati said.