Enhanced Resource Mobilization in Local Governments - Ahsan Rana

This note was written by Muhammad Ahsan Rana to serve as a basis for class discussion rather than toillustrate either effective or ineffective handling of an administrative situation. This material may not be reproduced in any form without the prior written consent of the Lahore University of Management Sciences. This research was funded by Canadian International Development Agency (CIDA). © 2006 Lahore University of Management Sciences ENHANCED RESOURCE MOBILISATION IN LOCAL GOVERNMENTS: A STUDY OF DISTRICTS KASUR AND LODHRAN THE CONTEXT Devolution reforms in Punjab, introduced by the promulgation of Punjab Local Government Ordinance (PLGO), 2001 have provided a three-tier local government (LG) system consisting of District Government (DG), Tehsil/Town Municipal Administration (TMA) and Union Administration (UA). Working under the direction and control of elected councils and Nazims 1 , the present local government system attempts to create institutions and mechanisms for public participation in design, management, monitoring and control of social service delivery. Many of the functions previously performed by the local offices of provincial government departments now fall within the domain of DGs/TMAs. There are 31 decentralised departments with management control and functional responsibility transferred from provincial government under Part A of the First Schedule to PLGO, 2001. These include civil defence, agriculture, forestry, livestock, education, mother and child health, primary and secondary health, and special education, to name just a few. Provincial governments are now mainly responsible for giving sectoral policies in consonance with national and international commitments, setting and monitoring performance standards, and providing guidelines and resources to meet the service delivery targets. Access to adequate resources for the local governments is now considered essential to meet the service delivery challenge (Ministry of Finance 2003). Additional fiscal space is required for enhanced allocations for the social sector as well as infrastructure development. These resources are also required to meet the social deficits that have accumulated over the past due to inadequate funding coupled with low utilisation in social sectors. Devolution reforms, as originally conceived and articulated, envisaged large-scale fiscal decentralisation to follow the administrative and political decentralisation. While a fiscal relationship has been forged between the province and the districts, an extensive reorganisation of resources has not taken place and the vertical financial imbalance stays in place with the major financial collections being made at the federal (and to a lesser extent at the provincial) level. Local governments, created after devolution reforms, are ‘hugely’ dependent on intergovernmental fiscal transfers from provincial governments which are in turn dependent on federal transfers (Nick, J ackie et al. 2004). On the other hand, the service provision has fallen to the DG/TMA level where the tax base and collection potential is the lowest. 1 Mayor or elected head - vernacular term used in Local Government Ordinances, 2001. 20-004-2006-2 Resultantly, a key challenge facing the local councils in Pakistan is to ensure consistent and reliable mechanisms of transfers from provincial governments and to expand own source revenues (OSR) in order to provide efficient and effective service delivery as envisaged in devolution reforms. The ability of LGs to generate a significant 2 proportion of their resources is critical in the decentralised dispensation. Besides generating the much needed resources for development, local resource generation has a direct linkage with accountability in service delivery (Bird 2001). To critically examine own source revenue generation by LGs and formulate recommendations to make these less dependent upon provincial and federal transfers, a case study was conducted of two districts of Punjab – Kasur and Lodhran 3 . RESEARCH DESIGN, METHODOLOGY, DATA COLLECTION AND CONSTRAINTS A combination of quantitative and qualitative methodologies was employed for data collection and analysis. Broadly speaking, the methodology had the following three components: Component 1 In the first component a brief literature review was conducted to understand the issues in local resource mobilisation. Unfortunately, not many studies are available on the post- devolution local resource generation experience of LGs in Pakistan. Greater reliance, therefore, had to be placed on studies conducted elsewhere. Nevertheless, the literature review helped in identifying the issues in local taxation and an examination of them in a comparative perspective. An important part of the literature review exercise was to critically examine the relevant provisions of Punjab Local Government Ordinance (PLGO), 2001 that govern the resource mobilisation at district/tehsil level. Component 2 Data was collected for the DGs Kasur and Lodhran and each of the six TMAs in the two districts 4 . A comprehensive template was developed to standardise data collection from various councils. It listed all major and minor sources of revenue for a local council; the legal framework authorising its levy; business process for assessment and collection; the amount budgeted against each tax, rate or fee for each of the last four fiscal years 2001- 2005; and the actual collection. 2 How ‘significant’ would be ‘significant’ is a moot point. Ideally, a local government should be able to meet at least its non-development expense from its OSR. But backward areas with scant economic and commercial activity will need to be subsidised for their recurring non-development expenditure as well. 3 The study was supported by Canadian International Development Agency (CIDA) and conducted by the Collective Action for Social Advancement (CASA). Kasur and Lodhran were selected as being the priority districts for CIDA, Pakistan. Clearly, the selected districts are not representative Punjab districts. Their geographical proximity with major urban centres (Lahore and Bahawalpur) lands them into an adverse core-periphery relationship and most development in these two districts has historically taken place as a reflection of the needs and priorities of the core districts. 4 An analysis of the local resource generation at the Union Council level was not attempted given the relatively small scope of this study and the large number of Union Councils in the selected districts. 2 20-004-2006-2 The budget documents for the last four years were used as the starting point and the amount budgeted for each source was picked from the budget documents 2001-2005. This was the easier part. The amount actually realised against each head had to be collected separately from the concerned collection authorities in the DGs/TMAs. Although the budget documents for fiscals 2002-2005 contained figures for the collection in the pervious years (i.e., 2001-2004), these were based on the eight-month actual collection in the current year and the last four-month actual collection for the preceding year 5 . Precision in analysis demanded accuracy of data and actual collection figures for each tax, rate and fee were obtained from relevant LG staff 6 . Using this methodology, data for the last four years was collected for all the six TMAs in the selected districts. Despite considerable effort, however, accurate and reliable data for all of the last four years for the two DGs could not be collected because the concerned staff was continuously unavailable and the time frame of the study was limited. For the DGs, therefore, the revenue collection data for only fiscal year 2004-2005 could be collected. Component 3 Any valid appreciation of the issues that directly concern people has to be rooted in an understanding of the people’s socio-economic profile, cultural norms and preferences (Mason 1996). Towards this end, a stakeholder analysis was conducted that identified primary and secondary stakeholders for each tax, rate and fee and assessed its importance for various categories of stakeholders and their ability to influence or be effected by each tax, rate or fee. Then a series of individual interviews and focus group discussions were held in both districts with this range of identified stakeholders. This included the District and Tehsil Nazims, Tehsil Municipal Officers, Executive District Officers (Revenue, Finance and Planning, Agriculture), various District Officers, Assistant Directors Local Government, Taxation Officers and the staff actually involved in assessment and collection of various taxes and fees. This helped in understanding the processes of assessment and collection and the problems therein. Additionally, separate focus group discussions were held with local NGOs, journalists, labour leaders, traders and shopkeepers and randomly selected groups of citizens. The suggestions and recommendations contained in the last section are based on the perspectives emanating from these interviews and focus group discussions. SOCIO-ECONOMIC PROFILES OF KASUR AND LODHRAN 7 District Kasur Due to close proximity with the provincial metropolis (only 55 kilometres), the economic profile of the district assumes the role of a satellite district. This directly impacts, positively and negatively, the local resource base of the district. A case in point is the recent establishment of an industrial estate in Sundar, district Lahore. On the positive side, 5 The budget documents are annually published in June. However, the preparatory work starts much earlier and consequently collection figures for the last quarter of the fiscal year are not available for reflection in the budget. The approximations are, therefore, necessary. 6 This, however, is not without problems of its own. Retrieving numerical data from numerous government registers is always subject to potential human error and faces reconciliation problems. 7 The data for this section has been taken from the District Census Reports (Statistical Division 1999) based on the 1998 census and the District-Based Multiple Indicator Cluster Survey 2003-2004, Planning and Development Department, Government of Punjab (Planning and Development Board 2004). 3 20-004-2006-2 property value in areas of district Kasur bordering Sundar sky-rocketed almost overnight. On the negative side, some of the local industry might move to the industrial estate. The total area of the district is 3,995 square kilometres. Administratively the district is divided into three tehsils: Kasur, Chunian and Pattoki. Kasur is the largest tehsil in terms of both area and population. 77.2 percent people live in rural areas. Kasur has a literacy ratio of 36.2 percent (female literacy is only 23.4 percent). The enrolment ratio (the proportion of students in population aged 5-24 years) is 32.1 percent for the district. There are 1,979 educational institutions in the district imparting education from primary school to graduate level. Only 2.6 percent of the population has graduation or higher education. The working age group (15-64 years) is 51.3 percent of the total population. 20.5 percent of the total population are estimated to be in regular employment in the public or private sector. The unemployment rate was 14.6 percent for the year 1998. Out of the total employed population, 46.7 percent were in elementary occupations e.g., labourers in agriculture and the industrial sector, sales and service related jobs; 32.2 percent were in skilled agricultural and fishing works; 8.8 percent were service workers, shops and merchant sales workers; and 4.4 percent were involved in craft and related trades. The district has good agricultural potential with a farm area of 393,000 hectares. Of this 295,000 hectares are under cultivation. The area under forestation is 6,000 hectares. The total canal-irrigated area is 195,000 hectares. The district produces 3.8 million tons of sugarcane, 409,509 tons of wheat, 72,500 tons of rice and 1,525 bales of cotton annually. The district has an average infrastructure base with 1,088 kilometres of metalled roads. Its industrial activity is concentrated around three major industrial centres - Kasur City; and two industrial zones in Chunian and Pattoki tehsils. There are 1,767 small and medium size industries in the district, mostly tanneries. The total number of vehicles registered in the district is 42,274. There are 19,513 landline home connections. The three cinema houses in the district have a seating capacity of 1,726 persons. The health facilities of the district comprise four hospitals and 34 dispensaries, having a capacity of 277 beds for indoor treatment. District Lodhran Lodhran is a relatively new district, which was established in 1991 by carving out some area from Multan district. Being an agricultural area, the economic activity of Lodhran is heavily agro-centred. The district is famous all over Pakistan for its fruit farms. The economic and commercial growth, however, has been adversely effected by its close proximity with Bahawalpur district. Much of the wholesale trading, for example, continues to situate in Bahawalpur because of its relatively central location and larger local economy. Lodhran District’s total area is 1,790 square kilometres and its population is 1,171,800. Administratively the district is divided into three tehsils - Lodhran, Kahror Pucca and Dunya Pur. Lodhran is the largest as far as area and population are concerned. The literacy ratio stood at 29.9 percent (only 16 percent for women) according to the 1998 census. The enrolment ratio was 26.1 percent for the district. There were 874 educational 4 20-004-2006-2 institutions of primary to post-graduate levels. Only 6 percent had a college degree/certificate. This extremely low level of education severely restricts economic options of the people. The proportion of population of working age groups (15 to 64 years) was 50.5 percent of the total population. 24.4 percent of the total population was formally employed in the public or the private sector. The unemployment rate, for the year 1998, was 18.9 percent. Out of the total employed persons, 33.5 percent were in elementary occupations e.g., labourers in agriculture and industrial sectors, sales and service related jobs; 52.2 percent were occupied in skilled agricultural and fishing work; 6.4 percent were service workers, shops and merchant sales workers; 2.1 percent were involved in craft and related trades. The total area irrigated through canals is 537,000 hectares. The district’s main agricultural output is 1.2 million tons of wheat, 2.1 million tons of rice and 11.8 million tons of cotton. As per the official records, about 1,671 acres of land are under forestation in the district. Another 5,616 acres are under fruit farms. Citrus and mangoes are the main fruits. The District has 853 kilometres of metalled road and 417 small industrial units. The most significant are a vegetable ghee mill, a flour mill and 58 cotton ginning factories. Other industrial units include agricultural implements, cold storage, poultry feeds, soap and detergents and spices factories. LEGAL REGIME CONCERNING LOCAL RESOURCE GENERATION Second Schedule to PLGO, 2001 (Appendix 1) specifies the taxes, rates and fees that a DG/TMA can levy. Sections 116, 117 and 118 of the PLGO, 2001 govern the levy and collection of taxes. The provisions are enabling in nature, and envision a rational, equitable and progressive local taxation regime. Under PLGO, 2001 taxes are to be levied after careful consideration and incorporating public objections. Any tax levied without consulting the public or incorporating its objections will be in defiance or contravention of the spirit of the PLGO, 2001. The Council process is also given its due place in the scheme of things. The requirement of getting the taxation proposals vetted by the Provincial Government (under Section 116) signifies the importance of the fact that the LGs, while striving to develop their fiscal capacity, need to work within the policy parameters laid down by the Provincial Government. Failure to pay taxes has been declared an offence and the arrears are recoverable as arrears of land revenue under The Land Revenue Act, 1967. The relevant sections of PLGO, 2001 relating to resource generation are reproduced in the inset on the following page. There are other sections of PLGO, 2001 that relate to collection of taxes or income generation by a local council (e.g., 118-A, 120, 120-M, 124, 142). These are not being reproduced here and only a reference to the relevant section will be made, wherever deemed necessary. The full text can be seen in PLGO, 2001 (Chaudhry 2005). 5 20-004-2006-2 116. Taxes to be levied (1) A Council may levy taxes, cesses, fees, rates, rents, tolls, charges, surcharges and levies specified in the 2nd Schedule. Provided that the Government shall vet the tax proposal prior to the approval by the concerned Council: Provided further that the proposal shall be vetted within thirty days from the date of receipt of the proposal failing it would be deemed to have been vetted by the Government. (2) No tax shall be levied without previous publication of the tax proposal and after inviting and hearing public objections. (3) A Council may, subject to provisos of sub-section (1), increase, reduce, suspend, abolish or exempt any tax. 117. Rating Areas and Property Tax (1) On commencement of this Ordinance every Tehsil and Town shall be rating areas within the meaning of the Punjab Urban Immovable Property Tax Act, 1958 (V of 1958). (2) The Tehsil or Town Council, as the case may be, shall subject to the provisions of section 116, determine the rate of property tax in an area within the Tehsil or Town: Provided that in the areas within a Tehsil or Town where rate has not been determined, the rate shall remain as zero. (3) Unless varied under sub-section (2), the existing rate in the areas within a Tehsil or Town shall remain in force. Explanation: For the purpose of this section the “rate” shall mean the tax leviable under the Punjab Urban Immovable Property Tax Act, 1958 (V of 1958). 118. Collection of Taxes (1) All taxes levied under this Ordinance shall be collected as prescribed. (2) Failure to pay any tax and other money claimable under this Ordinance shall be an offence and the arrears shall be recovered as arrears of land revenue. An examination of Second Schedule to PLGO, 2001 highlights certain overlaps and duplications that can result in DGs and TMAs working at cross purposes. These need to be removed to avoid multiple jurisdiction issues for example: • Fees for licenses or permits, or penalties or fines for violation is the subject of the District Council as given in Part-I Sr. No. 3 while it is also a subject of the Tehsil Council as per Part-III Sr. No. 9. • Rent for land, buildings, equipment, machinery and vehicles is the subject of District Council as laid down in Part-I Sr. No. 7 and of the City District Council of Part-II Sr. No. 6, while it is also given as a subject of the Tehsil Council as per Part-III Sr. No. 13 and of the Town Council according to Part- IV Sr. No. 9. Presumably, the legislators of law had intended that rent for land, building, equipment, machinery and vehicles shall be recoverable by the local council in which the ownership of such property vests. But this intent is not self evident and a clarification is warranted. • Fees for approval of building plans, erection and re-erection of buildings is a subject of the City District Council as laid down in Part-II Sr. No. 10, while it is also an assigned subject of Town Council under Part-IV Sr. No. 13. 6 20-004-2006-2 • Fee for advertisement is a subject of the City District Council as per Part-II Sr. No. 8 while it is also a subject of the Town Council according to Part-IV Sr. No. 6 (in the form of “fees on advertisement-other than on radio, television and bill-boards”). An important issue here is that of bill-boards, which have been specifically taken out of the purview of TMAs. Apparently this was required only for City District Government (CDG), Lahore where the Parks and Horticulture Authority is responsible for collection of such fee and to use the same for city beautification. For other Districts, this should remain the responsibility of TMAs. This confusion needs to be removed as in practice all TMAs (except the ones in CDGs) are recovering advertisement fee on billboards situated in their territorial jurisdiction. ISSUES, TRENDS AND PATTERNS – LITERATURE REVIEW Despite the significance of local resource generation, very few studies 8 have been carried out to examine the resource potential of the local bodies in Pakistan. Reliance had to be, therefore, placed on the examination of the regional and international literature related to local revenue generation. The literature indicates that factors steeped in political economy and elite structures have historically influenced local revenue generation decisions. Howe and Reed (2003), conducting a survey of the local tax system in USA, have determined that economic and political considerations have influenced the tax systems. While New England colonies relied on property and poll tax, the Southern colonies relied on custom duties and poll taxes instead of property tax due to the political clout of big landholders. In our context, this suggests that accountability by councillors and proactive civil society may be essential to keep a check on the elitist tendencies of District and Tehsil Nazims. Bird (2000) gave the desirable characteristics of a local tax. First, the tax base should be relatively immobile so that LGs can vary the rates without losing a significant portion of the base. Second, the tax yield should be adequate to meet the local needs, increase overtime as expenditure increases, and be relatively stable and predictable. Third, the tax should be one that is not easy to export to non-residents. Fourth, the tax base should be visible to ensure accountability. Fifth, the tax payers should perceive the tax to be reasonably fair. Sixth, the tax should be relatively easy to administer. Similarly, Progressive Tax Persons earning higher incomes pay higher taxes than those earning lower incomes. Important features are: • A high threshold is used to exempt the poor • Rate of tax increases with increase in income, therefore, the richest pay the most • The system is used as a part of the social welfare system where the cost of services for the poor is borne by the rich Regressive Tax A tax that takes a larger portion from those earning low incomes than persons with high incomes as the rate of taxation does not change with increase in income. Taxes on consumption are typical examples of regressive tax e.g., GST. 8 Inquiries from Decentralization Support Program, National and Provincial Program Support Offices, revealed that the only documented study with report at draft stage is “Tax and Non Tax Receipt Database Development -TMA Khanewal”- A study carried out by M/S AHNR Consulting for Provincial Program Support Office, DSP, Punjab October 2005. The other local study for which reference was found in ADB/World Bank/DFID (Department for International Development) landmark study “Devolution in Pakistan” is by Malik (2003). “Study on Tax Potential in NWFP: An Interim Report.” Islamabad. 7 20-004-2006-2 Roy (2004), requires that a good tax system should be administratively feasible, revenue burden should correspond to the general condition of the local economy, revenue yield should be stable and it should be adequate both for the payer and the local government. The most responsible and accountable local governments are those that raise their own revenues and set their own tax rates (Bird, 2001). Meaningful local autonomy and accountability can only take place if the local governments are able to set their own tax rates. In Pakistan, on the other hand, the provincial government has the power to vet the tax proposal and no tax can be levied without publication in the provincial gazette. Kitchen (2003) is of the view that in order to meet the growing needs of municipalities, it is mandatory that new resources, in addition to the traditional property tax and user fees, must be explored. After a thorough analysis in terms of revenue yields, collection mechanisms and comparison with yields from property tax, the above writers are of the opinion that Personal Income tax, General Sales Tax (GST), Fuel Tax, Hotel and Motel Occupancy Tax 9 can be justified as being reflective of benefits from municipal services. All these taxes need to be assessed in terms of the likely revenue potential as well as likely adverse effects. Hotel and Motel Occupancy Tax, for example, can be justified on the basis of expanded services provided to tourists and visitors. However, these have to be weighed against the possible potential of discouraging tourism and the resultant fall in income from other sources. A joint study conducted by ADB, World Bank and DFID (Nick, J ackie et al 2004) observed that there is little autonomy in preparing district development and non development budgets because of the inability to convey the quantum of provincial transfers and vertical programmes along with Federal and Provincial development programmes. An example is the salary budget where the DGs and TMAs have limited freedom, as pay scales are determined at the federal level. In Sindh and NWFP salaries are still being transferred through Account 1 instead of Account 4 10 controlled by the district government. The study also observed that there is greater budgetary certainty in TMAs because of increased reliance on OZT replacement grant and relatively buoyant OSR. Malik (2003) has estimated that a properly enforced Agricultural Income Tax (AIT) could generate over Rs 500 million per annum in NWFP alone. Presently due to collusion between revenue officials and landowners, lack of understanding, improper assessment and poor collection by the tax collectors, very little of the AIT potential is realised. It can be a good source of income for DGs if this tax, which is collected by the revenue machinery of DGs working under the control of Executive District Officer (EDO) and District Officer (DO) Revenue, is allocated to DG and deposited in Account 4. For this purpose an amendment in Second Schedule to PLGO, 2001 will be required. 9 None of these is covered by Second Schedule to PLGO 2001. Prior to devolution reforms, Octroi and Zila Tax (OZT) formed the major source of income for local councils until its abolition in 1999. When OZT was abolished, the government introduced 2.5 percent increase in GST. OZT replacement grant is, however, frozen at the collection levels of 1998-1999. Allowing local councils to collect 2.5 percent GST may be a very viable source of local resource generation. GST, however, is a Federal levy and its transfer to local councils will require constitutional amendment. 10 Account 1 is a province controlled account and the funds lying here can be utilised only when sanctioned by the provincial finance department. Account 4 is a district controlled account whose funds can be used by district governments. 8 20-004-2006-2 Local charges should not only be used as a source of revenue generation but also as instruments of policy enforcement such as parking charges to reduce congestion on roads in urban areas (UK Department of the Environment and the Regions 2000). There is little evidence that policy priorities have driven local charging priorities in Pakistan 11 . A research study carried out in TMA Khanewal (ADB 2005) indicates that there is a substantial potential of increase in revenues without enhancing the rates. It has been observed that service delivery potential of the TMA is weak because of its inability to meet all the expenditures. Another area of potential increase in revenue is the presence of rural areas which had not been surveyed to bring them in the tax net. The study found that there is resistance to payment, even when the rates of charges for services are fairly low. In case of water supply, despite the fact that rates are only Rs 25 and Rs 50 per month for domestic and commercial users respectively, there is limited potential of increase because of consumer dissatisfaction with service quality, irregular supply and presence of alternate supply in the form of sweet underground water. Hence optimal resources may not be available unless there is a significant qualitative and quantitative improvement in service delivery. 11 In order to use charged parking as a tool of policy implementation aimed at reducing congestion on urban roads, it is essential that charges are on hourly basis and variable with more congested areas having higher charges as compared to the less ones. Similarly LGs can be authorised by provincial governments to levy charges on industries causing pollution beyond certain levels. 9 20-004-2006-2 Figure 1: Resource Generation by Local Governments (Theoretical Concepts) Formula Based Inter Governmental Fiscal Own Source Revenue Transfers (Through Provincial Finance 1 Commission award) Local Governments have little influence over the share Helps in redistribution of Income between Local Government Predictable Income Discourages Discretionary Allocation Involves extensive data collection Tax Non Tax Receipts • Fees • User Charges Local Resource Mobilisation Local Government Surcharge 3 Taxes Sharing Independent Local Government Legislation & Administration 2 4 Legend Advantages: in Italics Disadvantages: in bold print Avoids Complications Easy Tax Administration Fiscal Autonomy Local Government Decides Tax Rate & Base Less Autonomy Complex Distribution Definitions: Formula Based Inter Governmental Transfers: It assigns revenues of higher levels of government to lower level on the basis of a formula comprising indicators such as population, tax capacity (inversely), and measures of need (e.g., per capita income). Independent Local Government Legislation and Administration: Under this form of taxation authority local governments are given the mandate to choose the tax base, decide tax rate and base and administer the tax. Local Government Surcharge: Under this approach, a higher level of government defines the tax base and collects its own tax along with surcharge (extra tax) set by the local government. Tax Sharing: Local Governments receive a fixed fraction of revenues from particular national taxes originating within their boundaries; commonly sharing rates are uniform across jurisdictions (though not across taxes), but this is not necessarily the case. Income Offers Autonomy Distortion to Local Government Duplication of Efforts Complexity in Administration Source: Asian Development Bank Annual Report 2004 10 20-004-2006-2 The study also noted that revenue generation can improve dramatically by improving record keeping through maintenance of disaggregated information of taxes and tax payers in all details by the use of information technology. The study recommended that tax collection mechanisms should be improved by ensuring minimal contact of staff with tax payers, one window operations, giving more options to taxpayers, better management and accounting of arrears. The study also recommended computerisation of tax records, capacity building of tax and revenue staff, increase in transparency of tax records, and wider dissemination of information about tax policies, rates and procedures through establishment of people friendly frameworks. TMA, Khanewal conducted a survey (with support from DSP) to assess the actual revenue potential of Khanewal from taxes, fees and user charges (ADB 2005). The aim of the survey was to identify new revenue generating units which were hitherto not paying taxes as they were not registered with the TMA. The survey concluded that if all potential tax, rate and fee payers are brought on record, the TMA OSR is likely to increase by 100 percent. OWN SOURCE REVENUE GENERATION IN SELECTED DGS AND TMAS 12 The actual collection data for various taxes, rates and fees for the last four financial years (2001-04) for all TMAs and for 2004-2005 for the DGs in Kasur and Lodhran is presented below. District Council Kasur The following table presents the revenue mix by source in respect of the District Government for two consecutive years: Table 6.1 Revenue Mix by Source (Rs in millions) Sr. Sources of Revenue 2003-04 2004-05 Percent change 1 Opening Balance 309.99 250.00 2 Provincial Grants 1542.57 1681.01 +9.0 3 District Own Receipts 27.61 29.40 +6.5 4 Total 1880.17 1960.41 + 4.3 Table 6.1 shows that the District Own Receipts (DOR) was only 1.5 percent of the total revenue during 2004-2005. There has been an increase of 9 percent in provincial grants as compared to 6.5 percent increase in DOR from the previous year. Similarly internal mix by source shows that DOR remained static at 1.5 percent of the total funds available during the two successive years. On the other hand the provincial grants rose from 82 percent of the total receipts to 85.8 percent. The slow rate of growth in DOR and no increase vis-à-vis total receipts over the years shows increasing dependence on provincial transfers. 12 Utmost care was taken in transcribing figures from various government registers. The data was shared with Finance, Revenue and Taxation authorities in Kasur and Lodhran with the request to indicate mis- recording, if any. Despite such efforts for data revalidation, the possibility of incorrect reporting of some figures cannot be ruled out because of human fallibility in manually transcribing such a large number of figures for different taxes, rates and fees. 11 20-004-2006-2 License fee is a major source of DOR. For Financial Year (FY) 2004-2005 it stood at 13.6 percent of the total DOR for that year. An examination of the notifications by the DG regarding rates of different license fees shows that the fees were last revised during FY 2003-2004. On the other hand, the revenue under this head increased from Rs 3.819 million in FY 2003-2004 to Rs 4.00 million in FY 2004-2005, indicating an increase in tax base which is a good reflection of the DG’s effort to bring more and more persons into the tax net. The license fee is levied on persons providing professional services and it is charged at different rates notified in the gazette. Annual renewal is required for the licenses in this category. When an application is submitted to the DG, the DG staff issues the challan and fee is deposited through that challan with the accountant for onward deposit in the designated bank account. Vigilance staff is supposed to check for tax avoiders regularly. But there is no proper survey of persons providing professional services within the territorial jurisdiction of the DG. In the absence of such a database, it is difficult for the DG to collect license renewal fee from every person liable to pay such fee. Further, considerable confusion prevails on the jurisdiction issue. The Licensing of Professions and Vocations Rules, 2002 do not clearly demarcate the DG, TMA and Union Council jurisdiction for levy and collection of the fee. Practically, whosoever arrives first collects the fee. The provincial government should clarify this issue and assign collection rights to any of the three LG tiers. Another major contribution towards DOR is on account of Water Management Fee. The rate of fee is Rs 200 per hour. It is recovered from farmers who hire laser levellers and tractors from the On Farm Water Management Wing (OFWM) of the Agriculture Department. There has been a significant increase in respect of this fee as recovery increased from Rs 1.245 million in FY 2003-2004 to Rs 6.00 million in FY 2004-2005 registering a rise of almost 500 percent. Its contribution towards DOR is also substantial at 20.4 percent. But the problem with this user charge is that it is the OFWM department that owns laser levellers and provides these to farmers on rent specified by the provincial government. This is essentially a provincial receipt and should be deposited in Account 1 (instead of Account 4, where it is deposited currently). Hospital Dispensary Receipt stood at 13 percent of DOR. This is charged at the rate of Rs 2 per patient and collected at the time a patient comes to the hospital. The collection increased marginally from Rs 3.6 million in 2003-2004 to Rs 3.8 million in 2004-2005. The single largest contributor had been college receipts in FY 2004-2005 at Rs 8.006 million. This is charged from students and includes different heads such as per student per annum admission fee (Rs 65 to Rs 225) and tuition fee (Rs 600 to Rs 720 per annum) for different classes. From the current FY, the colleges have been transferred back to the provincial government; hence this fee has also reverted to the provincial government. Since the DG would also be spared from expenditure on the colleges, the loss of income would be neutralised. There are a number of other rates and fees for the DG but their contribution has been insignificant. Put together, they contributed only about 30 percent of the total DOR whereas the above mentioned four major sources contributed about 70 percent during FY 2004-2005. The minor sources include fee other than Cotton Fee, Parchi Fee in Veterinary Hospitals, Pesticide Registration Fee, Soil Fertility Testing Fee, Rent of Rest- houses, 12 20-004-2006-2 Tender Fee, Enlistment/renewal Fee, Recovery from Plazas and Petrol Pump Fees. Some of these fees (e.g., Pesticide Registration Fees) are provincial receipts and should be deposited in Account 1 (as against Account 4 where these are currently being deposited) after the DG has kept the collection charges in terms of Section 8 of Part I of the Second Schedule. TMA Kasur The complete picture for four consecutive years 2001-2005, in respect of OSR for TMA Kasur is presented below: Table 6.2 Revenue Mix by Source (Rs) TMA Own Source Revenue 2001-02 2002-03 2003-04 2004-05 Taxes Urban immovable property tax (UIPT) 3,909,744 536,000 1,293,000 - Tax on the transfer of immovable property (TTIP) 6,952,489 11,865,000 10,517,000 73,929,022 Local tax on services - 327,000 651,000 Other taxes 14,375,679 1,055,000 - 272,900 Total Taxes 25,237,912 13,783,000 12,461,000 74,201,922 Fees Building plan fee 1,795,694 2,090,400 4,130,000 4,931,820 Fee from cattle market 232,444 718,600 880,000 817,295 License fee 69,804 - - 150,710 Parking/bus stand fee 9,491,867 10,800,000 12,810,000 11,960,861 Fee on advertisement 164,145 140,000 570,000 522,848 Fee on fairs, agriculture shows, industrial exhibitions etc - - - Fee on cinemas, theatrical shows or other entertainment 2,790 - - Sanitation fee - - - Other fees and fines 1,172,861 1,062,844 2,635,000 2,317,642 Total Fees 12,929,605 14,811,844 21,025,000 20,701,176 Rents & Rates Municipal rents 470,490 542,000 1,560,000 549,431 Water rate 8,568,066 10,506,000 10,400,000 10,039,645 Sewerage charges Total Rents & Rates 9,038,556 11,048,000 11,960,000 10,589,076 Miscellaneous Sale of stocks - - - Profit on reserve funds 531 1,256 5,000 Total Miscellaneous 531 1,256 5,000 A perusal of the latest Schedule of Taxes reveals that the same was notified in FY 2001- 2002 and has since been in force. The effect of non-revision of rates since long on total TMA revenue cannot be underestimated. Although it would have been rational for the TMA to revise rates to offset any increase or decrease in operating expenditures, the decision to revise a rate is more political than administrative. There has been a steady decline in OSR of the TMA, except for the Tax on Transfer of Immovable Property (TTIP), which is reflected in the heavy reliance on the provincial transfers. 13 20-004-2006-2 In case of TTIP, the phenomenal increase reflects the efforts of the TMA as much as the skyrocketing of property prices in the vicinity of Sundar Industrial Estate, Lahore. As the development work in the Industrial Estate has progressed during the last year or so, the property prices in the areas of Kasur bordering the Estate have registered a steep increase. Against the budget estimates of Rs 25 million during FY 2004-2005, the actual recovery has been Rs 73.9 million, which is an increase of about 300 percent. TTIP is an important revenue source for the TMA. Until recently the rate of this tax was 5 percent of the value of property as recorded in the sale deed/registry. It was later reduced to 2 percent and is now fixed at only 1 percent. This tax is collected from the buyer at the time of execution of sale deed or at the time of verification of mutation. The TMA staff assesses, levies and collects the tax from buyers of immovable property. The process is supervised and controlled by the contractor. The contractor, who pays the bid amount in a designated TMA account, also pays salaries of TMA staff responsible for collection. The contract is given on a yearly basis. The Executive District Officer (EDO), Revenue registers firms that wish to participate in the bidding 13 . The bids are presented in the council and the contract is awarded after open competition. If no contract is awarded, the TMA staff performs the assessment, levy and collection function. Generally, there is intense competition among contractors for the collection rights of this tax. Through a recent amendment, it has been made possible for a contractor registered anywhere to bid for the contract. This allows for greater competition in the award of contract. This is essentially a gamble. Property prices are highly variable. Sometimes, there are very few actual sales, on account of, for example, an anticipated property price hike. In such cases, the contractor might abandon the contract midway. It was hoped that lower tax rates would persuade people to correctly report property values and pay tax. However, despite the 300 percent increase over the budget estimates, the true potential of this tax has not been realised in TMA Kasur. Since the property value is generally under-reported in the sale deed/registry, TMAs cannot realise the tax even at this reduced rate of 1 percent. The valuation table determines the minimum price on which a sale deed can be registered, but the same is not revised regularly. The last time the valuation table was revised was five years ago. Authorised by the Stamp Act, 1899, DO (Revenue) revises the valuation table after survey of property prices. This power (i.e., the determination of valuation table) should be given to TMAs as the tax is assessed, levied and collected by the TMAs. DO (Revenue) has little to do with the tax, except to settle the property value in the valuation table. Services of professional private sector firms can be engaged for revision of valuation tables 14 . If the valuation table is revised upwards regularly, the provincial government will also benefit in terms of enhanced recovery of Stamp Duty (2 percent on all property transfers). Another important source has been Urban Immovable Property Tax (UIPT), commonly called House/Property tax, and for FY 2004-2005 the budget estimates put the value at Rs 30 million. This tax is levied on the owner of the house and is assessed and collected by the Excise and Taxation staff under the administrative control of the District Government. Legal confusion has caused problems in realisation of true potential of this tax. 13 The TMA should itself register the firms that wish to obtain collection rights of this tax. It would also provide additional revenue for the TMA in the form of Registration Fee and Annual Renewal Fee. 14 In 2004, City Bank conducted property assessment for its own purposes in three metropolitan districts. The same indicators and methodology can be adapted by other private sector firms, if they are assigned the task. 14 20-004-2006-2 Under Section 117 of the PLGO, 2001, every tehsil/town is a rating area and the TMA is authorised to determine the rate of property tax within its territorial limits. The tax is levied under the Punjab Urban Immovable Property Tax Act, 1958. There is considerable confusion in the assessment and collection of this tax. The Act of 1958 assigns the assessment and collection responsibility to the provincial government (in the Excise Department). PLGO empowers the TMAs to determine the rate of property tax within a rating area (a tehsil/town under section 117) and empowers the DG to assess and collect tax. The matter was taken to the Lahore High Court (2004 Monthly Law Digest 1927), which held that the local government, being merely a collection agent in terms of section 118 of PLGO, 2001, had limited duty and had no power to assess or to determine the rate of property tax in terms of the saving clause of Section 185. The legal confusion notwithstanding, practically the rate is determined by the provincial government and the tax is collected by the DG staff. Under PLGO, 2001, the DG should retain 10 percent collection charges and transfer the rest to respective TMAs. This however, is not being done and the Excise and Taxation Staff deposits the same in Account 1. The DG does not even deduct at source the 10 percent collection charges it is entitled to deduct. The collection charges are subsequently transferred by the provincial government 15 . To further complicate matters, under an administrative decision (Finance Department letter No. SO [TAX-1] 1-11/2003 dated 14-11-2003), the Punjab Government has suspended payment of the share of TMAs and linked it with the development of a three- year sustainable plan of water and sanitation that matches the receipts and expenditure on water supply and sanitation. There is a huge gap in receipts and expenditures of TMAs for providing the services of water supply and sanitation (sewerage and drainage). The expenditure on sanitation is much more than on water supply. There is no sanitation fee at all and only part of the expense on providing water is recovered as water rate (discussed below). The expenditure on water supply and sanitation puts a substantial burden on TMA’s resources. Clearly, the TMA is not in a position to develop a sustainable plan for provision of water and sanitation. Hence it remains deprived of its legitimate share from the collection of UIPT. The potential of UIPT can be estimated from the table below. The collection inefficiency is evident from the fact that actual collection has been around 40 percent of the net demand. If the tax is devolved in the real sense, the DG/TMA will have a stake in improved collection. If the DG retains 10 percent of the actual collection and transfers the rest to the TMAs, the tax immediately becomes a reliable source of significant income for the DG and the TMAs in Kasur district. Table 6.3 Property Tax in District Kasur (Rs) Year Gross Demand Net Demand Collection 2001-02 41,199,044 31,905,399 18,351,505 2002-03 47,095,015 38,893,524 15,714,272 2003-04 50,335,386 42,299,083 18,071,592 2004-05 54,759,032 45,907,612 18,782,405 15 But it is essentially not the same thing. Deduction of collection charges at source earns a modicum of legitimate financial authority for the DG. 15 20-004-2006-2 PLGO, 2001 empowers the TMAs to declare an area under their jurisdiction as rating area. All areas, however, have not been declared as rating areas, though the TMAs incur considerable expenditure for providing civic amenities and infrastructure in non-rating areas. Therefore, there is a need to declare those towns as rating areas which at present are not rating areas (commonly known as ‘zero areas’) or those villages which have now developed as towns. However, this step would require a strong political decision. The provincial government should actively consider transferring UIPT (House/Property Tax) to the TMAs in the real sense. While this is being done, TMAs’ capacity to collect this tax would need to be built along with removal of differences in the provisions of the Punjab Local Governments UIP Tax Rules and the Punjab Urban Immovable Property Tax Act, 1958. Revenue from the General Bus stand is another important source for TMA Kasur. This is a user fee collected from the owner/driver of the bus. Collection is made mostly through auction and sometime through self-recovery. The potential is apparent from the fact that during FY 2004-2005 the recovery was Rs 11.97 million against budgetary estimates of Rs 7.38 million, thus registering a substantial increase of about 62 percent. The TMA may consider a gradual increase in the rate per vehicle per trip. Moreover, private owners may not be allowed to operate bus stands, as a result of which traffic would be diverted to the one operated by the TMA. A slaughter house is being operated in the jurisdiction of TMA and the slaughter fee is collected from butchers by the TMA staff. The recovery under this head is low as compared to the budget estimates. FY 2004-2005 witnessed a shortfall of about 20 percent in the actual recovery compared to budgetary estimates. The potential is not realised as many animals are slaughtered outside the jurisdiction. Water rate, levied on the owner of the house where a water connection has been provided, remains an important source of revenue. Recovery is affected on a quarterly basis, by water inspectors who go from door to door. TMA staff does not issue bills; instead, it simply issues receipts for the amount recovered. The collection of this rate cannot be outsourced as the provincial government has desired departmental collection of all taxes, rates, cesses and fees where specific demand can be created for a particular service. In 2004-2005, the income from collection of water rate was only about 25 percent of the cost. A large number of illegal connections, huge un-recovered arrears (around 5,000 defaulters; approximately 30 percent default) and corruption by the recovery staff has greatly reduced the revenue potential of this rate. Zulfiqar Shah, Tehsil Nazim, Chiniot set out in early 2002 to increase the water rate for domestic connections. He presented in the house a proposal to increase the rate from Rs 20 per month to Rs 50. Next morning, people were on the roads agitating and shouting against him. They carried large banners and placards disapproving the proposed increase. He called the protesters to his office and tried to persuade them that a rate increase was necessary to make water provision sustainable and to bring improvement in service delivery. He told the protesting people that the TMA was able to provide whatever services it did, with the money paid by the people of Chiniot as taxes, fees and user charges. He also stressed upon the need to develop a tax culture rather than the tax evasion culture. While his discourse continued, a protester rushed to his home and brought a jar full of water supplied by the TMA that morning. The water was muddy and stinky. He poured it in a glass, placed the same on the table and asked the Nazim to drink it, if he could. He promised to accept and pay the rate increase if Mr Shah could show by example that the water supplied by the TMA was potable. 16 20-004-2006-2 The point was well taken by Mr Shah and he immediately agreed to withdraw his resolution in the house. He promised the people that the quality and quantity of water would be improved by the TMA before proposing a rate increase. Immediately, he set his team to work. The water tanks were cleaned and professional advice was sought on ways and means for cost effective cleanliness of water coming from the nearby river. Also, he managed to get the damaged motors and pumps repaired and ordered these to be operated almost round the clock. The strategy worked. By end 2002, he was able to challenge the people at large and ask if there had been a noticeable improvement in the quality and quantity of water supplied by the TMA. The house also gladly accepted his request/proposal to increase the water rate to Rs 30 as the first step. The extra income was used to make further investment in the water supply system that led to further improvement in the service. Next year, he was able to secure an increase of water rate to Rs 50 per month. The cycle continued successfully, and the water rate was fixed at Rs 70 per month in 2004. The water connection fee is Rs 1,000. If only the connection fee is recovered for around 1,700 illegal connections, this alone would earn the TMA an income of Rs 1,700,000. Provided the coverage and service are also improved, there is significant potential for increase in the water rate which can potentially make the service self-sustaining. The rate is determined by the TMA, but the same rate has been prescribed for all residential connections, the house size notwithstanding. Since water meters have not been installed, charging of a flat rate causes losses to the TMA in terms of less than due recovery. There is a potential of increasing the rate as well as for improving the recovery position. The users, however, will not pay enhanced rate until potable water is provided in sufficient quantity, which is not the case at present. Only a part of the city is provided water by the TMA and the coverage stands at 60 percent. If the coverage is increased (which would not require a huge additional investment if the existing infrastructure is upgraded to some extent), revenue generation may increase considerably. As opined by Tehsil Nazim, at least 30 percent additional money can be recovered annually through increasing recovery efficiency and 40 percent can be increased by increasing the coverage with current capacity and infrastructure. The TMAs may also reserve an amount in their annual budget for installation of water meters in a phased manner. A uniform rate per unit may be fixed for metered connections irrespective of their being domestic, commercial or industrial. Bakar Mandi also fetches some revenue for the TMA. During the last FY it was Rs 0.81 million against the budgetary estimates of Rs 0.9 million. Reasons may include poor facilities at Bakar Mandi by the contractor (causing owners not to bring animals there) and poor monitoring by TMA staff. Building fee collection is substantial – Rs 4.9 million in FY 2004-2005. This fee is levied on the owner of the building and TMA itself collects the fee. Anyone who wishes to construct a house must get the building plan and architectural design approved by the TMA. The building fee is charged for such approval. There has been an increase of more than 100 percent under this head, which emanates from a temporary boom in the construction activity in the TMA limits. Another important potential revenue source is the Advertisement Fee. The fee is for various kinds of billboards. Collection of Advertisement Fee has been less than satisfactory for the TMA, as it reached Rs 1 million only in 2002-2003 and has declined by almost 50 percent since then. There is considerable potential of greater income considering the large tract of Kasur-Lahore highway which is suitable for billboards. 17 20-004-2006-2 However, confusion surrounds the levy of this fee. Legally speaking, the fee on bill-boards falls under provincial purview. Clause 6 of Part iii of the Second Schedule to PLGO, 2001 clearly says that TMAs may charge a fee “on advertisement other than on radio, television and billboards.” The billboards for City District Governments (CDG) were probably an exception where Parks and Horticulture Authority (PHA) is responsible for collection of this fee (e.g., Lahore CDG). In practice, however, board rent (including billboards) is being charged by all TMAs across the board except Lahore. An amendment in PLGO is warranted to clarify the situation. Proper survey should be done to collect data about number of boards in the territorial limits of TMA. It is proposed that survey should be outsourced to the private sector. The fee also needs to be increased. TMA Chunian The revenue by source in respect of TMA Chunian is presented in Table 6.4 for the period 2001-2005, which reflects the changing mix of the different revenue sources. As can be seen, the income under House Tax has been nominal. During 2004-2005 this was budgeted at Rs 2.0 million, whereas only Rs 0.236 million could be realised. Except for 2003-2004, this has tended to stay at the same low level over the years. The issues essentially remain the same as discussed in the case of TMA Kasur. TTIP Tax is the most important source of revenue for the TMA, in fact larger than all the other sources combined. It has proved quite buoyant for the TMA. Registering a steady increase since 2001, the actual realisation had almost tripled by 2004-2005. During FY 2004-2005, the total recovery was Rs 9.3 million against a budget estimate of Rs 4.5 million. A regular revision of valuation table, preferably on yearly basis to stay in tune with the highly volatile property market, is recommended to realise the full potential of TTIP. 18 20-004-2006-2 Table 6.4 Revenue by Source (Rs) Revenue Source 2001-02 2002-03 2003-04 2004-05 Taxes Urban immovable property tax (UIPT) 335,632 213,482 1,100,000 236,041 Tax on the transfer of immovable property (TTIP) 3,153,366 3,788,095 4,800,000 9,270,250 Local tax on services Other taxes 6,700 Total Taxes 3,495,698 4,001,577 5,900,000 9,506,291 Fees Building plan fee 99,233 91,739 250,000 375,801 Fee from cattle market 544,321 461,950 720,500 361,115 License fee 61,862 106,820 1,615,000 116,475 Parking/bus stand fee 4,034,860 3,390,886 4,260,000 3,222,789 Fee on advertisement - 35,000 15,000 89,650 Fee on fair, agriculture shows, industrial exhibitions etc. - - - Fee on cinemas, theatrical shows or other entertainment - 21,650 295,500 Sanitation fee - - - Other fees and fines 119,416 11,900 200,000 761,247 Total Fees 4,859,692 4,119,945 7,356,000 4,927,077 Rents & Rates Municipal rents 886,417 894,965 1,600,000 1,365,950 Water rate 1,007,940 1,466,110 1,800,000 1,982,360 Sewerage charges 129,829 91,900 189,000 Total Rents & Rates 2,024,186 2,452,975 3,589,000 3,348,310 Miscellaneous Sale of stocks - - - Profit on reserve funds - - - Others 1,223,714 492,372 - 431,065 Total Miscellaneous 1,223,714 492,372 - 431,065 Among the fees and user charges, Adda Fee is the most significant source for the TMA. TMA earned Rs 2.56 million against a budget target of Rs 3.7 million during FY 2004- 2005. The shortfall of about 31 percent may be attributed to pooling of contractors at the time of bidding and weak monitoring by the TMA staff. The fee is charged from the owner of the vehicle on a per trip basis at a rate of Rs 15 from a bus, wagon or coaster and Rs 10 from smaller commercial vehicles. Both methods are used by the TMA; auction (recovery through contractor) and self-recovery. In the case of outsourcing, the contractor is also responsible for routine maintenance and providing basic facilities such as toilet, waiting room and prayer area. Presently there are only two bus stands in the territorial limits of the TMA but there is potential for establishing more bus stands. In fact, the TMA is developing a new adda at Allah Abad. Developing bus stands at a number of places generates additional income, while also performing an important regulation function. The TMA charges Rs 5.0 and Rs 3.0 per square foot of covered area in respect of industrial and commercial buildings respectively as building fee. During FY 2004-2005 the TMA earned a sum of Rs 0.38 m under this head. Despite the relatively small levels of current recovery, it can potentially be an important source of revenue given the large size 19 20-004-2006-2 of construction activity in the TMA limits. The fee also plays a control role and allows TMA to ensure that building by-laws are followed. There are, however, a number of issues involved in this. First, the building fee is levied on buildings in the city. The villages, in which a lot of unregulated construction activity goes on, are so far exempt from payment of such fee. They should be brought within the ambit through a decision by the TMA. Recently, the TMA has decided to confer town status on seven big villages. This decision will facilitate service delivery in these towns, and also bring them within the ambit of house tax and make them liable to pay building fee. Second, enforcement is poor and punishment is seldom awarded for violation of the approved plan. In fact, the encroachment fee provides a convenient window for regularisation of any violation of the building plan. TMA earned only Rs 1.98 million as water rate during FY 2004-2005. The average monthly expense is estimated at Rs 180 per connection against a recovery of Rs 55 only. The monthly water rate for household connection is Rs 55 for Chunian and Rs 50 for Collection Unit Kanganpur, while the monthly commercial rate for Chunian is Rs 200 and for Kanganpur Rs 100. The rates were notified in 2002. Even at this low level of rate, around 10 percent of the current demand goes in default every year. There is great potential for increased recovery of water rate. First, the TMA should increase the coverage as much as possible with the existing infrastructure. Second, regular bills should be issued to each household with a water connection. The bill should also indicate the amount of arrears, if any. Third, the provincial government should immediately withdraw its instructions to the contrary and allow outsourcing of recovery of water rate. To avoid unaccounted for collection of arrears from households by the contractor, outsourcing should be in the form of payment to contractor of a recovery percentage. Since the amount will be deposited with the TMA or a designated bank against a specific bill, extortion by the contractor will be, hopefully, minimised. The increased revenue can be ploughed back into improvement of service delivery, which can in turn lead to upward revision of water rate. The rent of shops owned by the TMA is recovered from the tenant of the shop. Rs 1.37 million was recovered against a budget target of Rs 1.8 million during FY 2004-2005, registering a shortfall of 24 percent. The rent varies from shop to shop but is not commensurate with the market trends. If the shop rent is fixed at the current market rates and recovery is affected, this can be a very important source of revenue for the TMA. Unfortunately, the shop rents remain at an abysmally low level. As per law, the rent can be increased to a maximum of 10 percent every year or 25 percent after every three years. The market far surpasses any such increase. Consequently, property worth millions is rented out at nominal rates. Under the pugri system, shops are transferred from one owner to the other at a deposit of millions of rupees. The TMA, however, remains out of the loop. TMA Pattoki Table 6.5 shows the revenue of TMA during 2001-2005 after devolution under different heads. As elsewhere, TTIP remains the single largest source of income for the TMA. In 2004-2005, the TMA earned a sum of Rs 13.8 million against a budget target of Rs 14.6 million. This increase of more than 400 percent over Fiscal 2003-2004 can be ascribed to large scale speculative buying of property in the vicinity of industrial areas. 20 20-004-2006-2 Table 6.5 Revenue by Source (Rs) Description 2001-02 2002-03 2003-04 2004-05 Taxes - - - Urban immovable property tax (UIPT) - - 3,200,000 - Tax on the transfer of immovable property (TTIP) 13,489,783 9,062,920 9,000,000 13,810,100 Local tax on services - - - Other taxes - - - Total Taxes 13,489,783 9,062,920 12,200,000 13,810,100 Fee Building plan fee 109,940 1,065,955 1,500,000 204,480 Fee from cattle market 2,628,040 2,823,430 3,200,000 4,185,000 License fee 285,000 198,000 500,000 444,200 Parking/Bus stand fee 1,792,626 2,225,465 13,000,000 4,831,087 Fee on advertisement 13,802 20,000 100,000 88,913 Fee on fair, agriculture shows, industrial exhibitions etc. - - - Fee on cinemas, theatrical shows or other entertainment - - - Sanitation fee - - - Other fees and fines - 2,338,155 10,646,000 339,489 Total Fee 4,829,408 8,671,005 28,946,000 10,093,169 Rents & Rates Municipal rents 4,419,374 5,769,351 8,500,000 6,505,099 Water rate 342,783 408,935 2,000,000 261,910 Sewerage charges Total Rents & Rates 4,762,157 6,178,286 10,500,000 6,767,009 Miscellaneous Sale of stocks 1,326 - 10,000 Profit on reserve funds 22,776 27,004 100,000 Others 4,391,480 5,716,421 1,000,000 729,280 Total Miscellaneous 4,415,582 5,743,425 1,110,000 729,280 A major source of revenue for TMA Pattoki is the fee received from the two bus stands in Pattoki and Pohal towns. TMA notified in 2002 a flat rate of Rs 10 per trip to be charged on any vehicle using the bus stand. During FY 2004-2005 the actual recovery was quite dismal when only Rs 2.7 million could be recovered against a budget target of Rs 5.5 million. There is potential for establishing more bus stands within TMA limits. Existence of a bus stand and enforcement would stop the practice of commercial vehicles loading and unloading just about anywhere, which is a serious traffic hazard. At times, the recovery is made by the TMA staff, who recovers the fee for some months. This is followed by an auction at a price based on that collection. Often contractors pool in at the time of bidding. Established contractors seldom allow any other person to compete fairly. There is weak monitoring by TMA staff and poor enforcement of the terms and conditions of the auction agreement. Most of the time, the contractor does not even issue a receipt to the vehicle driver after collecting the per trip fee. 21 20-004-2006-2 Every year, the TMA earns a considerable amount as the rent of buildings owned by it. The recovery is made by the TMA staff. Unfortunately, during FY 2004-2005 only a sum of Rs 6.5 million could be earned against a budget target of Rs 9 million. The issues that plague this important source of revenue have already been discussed. TMA has been successful in realising good income from the rickshaw parking fee. The actual recovery during FY 2004-2005 has been substantial at Rs 1.7 million against a budget estimate of Rs 0.5 million. A flat rate of Rs 5 per day was notified in 2002 and no revision has been made since then. The recovery is outsourced through auction. The contractor has been reportedly charging on a per trip basis rather than the authorised per day basis. This speaks of the weak monitoring by TMA staff for enforcing the terms and conditions of the agreement. Water rate recovery is dismal, only Rs 0.26 million in FY 2004-2005 against a minimal budget target of Rs 0.5 million. The user charge has good potential for revenue generation and self-sustaining service. However, a large number of illegal connections, payment default, nominal water rate and less than full coverage adversely affect its revenue potential. District Council Lodhran DG Lodhran is heavily reliant on grants from the provincial government and its own source revenue (OSR) is quite small compared to transfers. During 2004-2005, the total local generation stood at a paltry Rs 2.04 million. This is due to a number of reasons. First, almost all, including additional functions of the erstwhile Zila Councils (abolished under PLGO, 2001) have been transferred to the DGs, yet their revenue base has been shared with the TMAs, the Union Councils and the Provincial and Federal Governments. This was affected through abolition of OZT and collection of sales tax by the Federal Government, a share from which is transferred back to the DGs. Compared to this, the resource base of the TMAs is stronger and more diverse. In this context, Lodhran is not a unique case, though it has suffered more than other District Councils that had alternative sources of local revenue. Second, Lodhran is a relatively small rural district 16 with only 15 percent of the population living in cities and towns and there is hardly any industrial or commercial base. This renders insignificant the potential of revenue sources like license fee, rent of property particularly shops, and registration and renewal of contractors. Lodhran’s geographical proximity with Bahawalpur resulted in most industrial and commercial activity being located there rather than in Lodhran. There could have been significant income from agro- based sources such as the water management fee but agriculture remains traditional and most farmers have not yet awakened to the need of modern technology like laser levellers. Third, a potential source of revenue of the DG dried up when Punjab High Court, Multan Bench issued an interim injunction in 2001 suspending collection of education tax on private schools. The case is still pending and no recovery of education tax has been made since then. The case of Health Tax, which was levied on medical practitioners within the territorial jurisdiction of the Council, is similar. On a petition by the Doctors’ Association, Punjab 16 It is almost half in area as well as population as compared to Kasur. 22 20-004-2006-2 High Court, Multan Bench issued an interim injunction in 2003 suspending collection of health tax. The case is lingering and no recovery has been made as health tax since then. In 2002-2003, an amount of Rs 125,000 was recovered under this head. Under the Second Schedule, education and health tax have been assigned to the DGs. Even when a draft of PLGO was being discussed at the National Reconstruction Bureau (NRB), many people pointed out that these taxes had low potential as the justification of such taxation at the local level was not clear. Some people argued that it would be a double taxation if these taxes were imposed on private educational institutions and hospitals because a provincial registration fee and annual renewal fee was levied on all private educational and health institutions. The DGs Bahawalpur and Khanewal imposed these taxes on Sugar Mills under the title of Development Tax. Ultimately, they had to withdraw the taxes. Further, any such levy is conveniently passed on to the customer, thereby increasing the cost of health and education services. This has political implications. In 1999, the Punjab Government imposed a tax on private hospitals at 5 percent of the amount charged for a room. It had to be withdrawn in 2000. In view of this and the fact that no income is being generated from these taxes, the provincial government may either delete these items from the Second Schedule or redefine the basis of these taxes. A major source of revenue for the DG has been the local rate which is levied on lands assessable to land revenue as a specific proportion thereof. In rabi/kharif season, the patwari assesses and collects local rate from land owners in his beat. In 2004-2005, the collection of local rate stood at Rs 1.48 million against a budget estimate of Rs 5.2 million. This indicates poor capacity of revenue functionaries to collect rates and cesses, as well as the tendency of the DG to over-budget such items. The land revenue was abolished in 1998 by the provincial government after the introduction of Agricultural Income Tax. There is no tax base for the assessment of local rate after the abolition of land revenue. To remove this anomaly, the Second Schedule to the PLGO, 2001 needs to be amended to the extent that the local rate will be recovered at the given percentage of the amount of abiana assessed. The DG also receives rent from its shops. The rate varies from market to market and it was last revised in 1998. Despite great potential, the recovery is nominal. TMA Lodhran A major contribution to the TMA revenue in 2004-2005 came from TTIP. Rs 6.35 million were recovered against a budget estimate of Rs 6.0 million. Its collection registered an increase of 72 percent as compared with the previous year (FY 2003). The issues concerning assessment and collection of the tax have been discussed in detail earlier. However, it is highlighted once again that the valuation table should be revised at the most every three years and such revision should be done by the TMA on the recommendation of private sector firms after a comprehensive assessment of property market trends. 23 20-004-2006-2 Table 6.6 Revenue by Source (Rs) Description 2001-02 2002-03 2003-04 2004-05 Taxes Urban immovable property tax (UIPT) 1,883,000 1,760,647 1,715,000 - Tax on the transfer of immovable property (TTIP) 4,414,156 4,403,393 4,600,000 6,350,736 Local tax on services 653,663 525,800 40,000 312,088 Other taxes Total Taxes 6,950,819 6,689,840 6,355,000 6,662,824 Fee Building plan fee 392,254 617,105 600,000 544,438 Fee from cattle market 105,955 830,120 800,000 2,430,000 License fee 330,250 284,140 510,000 176,000 Parking/bus stand fee 1,389,212 2,411,999 2,595,000 3,027,830 Fee on advertisement 96,000 105,000 263,840 Fee on fair, agriculture shows, industrial exhibitions etc. - - - Fee on cinemas, theatrical shows or other entertainment - - - 1,000 Sanitation fee 311,611 541,042 573,000 Other fees and fines 1,410,699 1,629,838 2,481,898 1,149,614 Total Fee 3,939,981 6,410,244 7,664,898 7,592,722 Rents & Rates Municipal rents 1,600,484 1,296,432 2,356,966 937,496 Water rates 16,509 25,942 25,000 27,725 Sewerage charges 14,000 15,000 14,800 Total Rents & Rates 1,616,993 1,336,374 2,396,966 980,021 Miscellaneous Sale of stocks 170,000 50,000 Profit on reserve funds 17,582 389,058 200,000 179,724 Others 858,901 2,038,270 8,300,000 1,483,251 Total Miscellaneous 876,483 2,597,328 8,550,000 1,662,975 Another significant source is the General Bus Stand. A flat rate of Rs 10 per trip is charged. This rate was notified in 2002. A sum of Rs 3.02 million was earned under this head during FY 2004-2005. During this year a sum of only Rs 2.4 million was earned against a target of Rs 3.0 million as Bakar Mandi fee. The shortfall in revenue was attributed to poor conditions in the Bakar Mandi and tendency of the owners to sell the animals outside the mandi. A perusal of the rates fixed by the TMA reveals that the same were determined in FY 2002-2003. No revision has since been made. There have been some changes in the own source revenue of the TMA. There was a significant increase in the TTIP in 2003-2004, but the same was offset by the loss of UIPT income to the TMA. As discussed earlier, in 2003 the Punjab Government suspended the payment of UIPT share to the TMAs and required the latter to prepare a plan of sustainable operations of water and sanitation in their area. For TMA Lodhran, only Rs 27,725 was recovered as water rate. There is no sanitation fee; the amount recovered as drainage rate stood at a paltry Rs 14,800. Given this relatively low potential of the water and sanitation system to become sustainable in the near future, the TMA is likely to remain deprived of its rightful share from UIPT. Table 6.7 shows the potential of UIPT 24 20-004-2006-2 which can translate into significant revenues for the District Government as well as the TMAs if it devolves as envisaged under PLGO, 2001. Additionally, there are certain fees that the TMA needs to focus on to fully harness their potential. For example, the income from slaughter house can be increased if the facility is improved. Presently, around 70 percent of the animal slaughter takes place outside the designated slaughter house. This not only leads to erosion of TMA income but also effectively undermines any effort at quality control and food safety. Table 6.7 Property Tax in District Lodhran Year Gross Demand Net Demand Collection 2001-02 - 8,401,692 7,518,774 2002-03 - 9,829,904 8,614,585 2003-04 11,327,843 9,475,408 7,978,184 2004-05 15,049,251 - 9,037,224 Certain fees need to be abolished, such as the copying fee since the amount collected under this head (Rs 5,602) is negligible. With the promulgation of Freedom of Information Ordinance, more people should have access to public documents and to facilitate access the fee should be abolished. Practically, the applicant pays far more than what actually reaches the TMA coffers. Hence TMA would suffer no financial loss, while the people will benefit, if the fee is abolished. Probably, the expense on collecting this fee and maintaining a record is higher than the revenue generated. TMA Dunya Pur Dunya Pur is a very small TMA with limited avenues for local resource generation. Table 6.8 presents a comprehensive position in respect of own source revenue of TMA under different heads. There has been some increase in own source revenue over the years from taxes, fines, rates and rents and other miscellaneous heads. In the last FY it seems to have stabilised somewhat which shows that the revenue base potential has not been explored further. If the TMA revises the rates, it may again witness an increase in OSR in the current FY. Major sources of OSR have been Transfer of Immoveable Property Tax, building fee, Bakar Mandis (Dunya Pur and Kotla Hasan) and license fee. Rs 4.3 million, Rs 0.35 million, Rs 1.3 million, and Rs 0.33 million were earned respectively during FY 2004- 2005 under these heads. Year after year, the single largest source has been the TTIP. 25 20-004-2006-2 Table 6.8 Revenue by Source (Rs) Description 2001-02 2002-03 2003-04 2004-05 Taxes Urban immovable property tax (UIPT) 424,000 - 500,000 - Tax on the transfer of immovable property (TTIP) 3,013,415 3,555,633 3,270,000 4,314,000 Local tax on services 24,948 - - Other taxes 37,050 - - 61,100 Total Taxes 3,499,413 3,555,633 3,770,000 4,375,100 Fee Building plan fee 76,510 96,198 120,000 348,974 Fee from cattle market 84,000 902,075 993,680 1,347,191 License fee 159,320 442,546 600,000 333,670 Parking/Bus stand fee 388,230 330,292 - Fee on advertisement - 20,000 40,000 53,510 Fee on fair, agriculture shows, industrial exhibitions etc. - - - Fee on cinemas, theatrical shows or other entertainment - - - Sanitation fee - - - Other fees and fines 354,167 655,930 340,500 191,800 Total Fee 1,062,227 2,447,041 2,094,180 2,275,145 Rents & Rates Municipal rents 223,009 245,976 200,000 327,830 Water rates 936,974 1,344,505 2,037,574 1,817,300 Sewerage charges 9,600 4,300 150,000 55,170 Total Rents & Rates 1,169,583 1,594,781 2,387,574 2,200,300 Miscellaneous Sale of stocks 17,724 25,022 20,000 73,651 Profit on reserve funds 22,877 117,722 120,000 170,250 Others 74,746 583,715 1,402,426 1,424,604 Total Miscellaneous 115,347 726,459 1,542,426 1,668,505 The TMA could not receive any amount at all during FY 2004 as its share from the collection of the property tax due to the provincial government’s demand for a water and sanitation sustainability plan. The case of TMA Dunya Pur further questions the rationality of this decision. The average per year water rate collection in the TMA during the last four years was Rs 1.5 million. This covers approximately 40 percent of the cost incurred on supply of water to part of the town. There is no sanitation fee per se, though the TMA recovered Rs 55,170 (in FY 2004) as drainage fee. With this state of coverage and revenue generation, it would be naïve to expect the TMA to provide water and sanitation services on cost recovery basis. The end users lack the capacity, as well as culture, to pay for these services on cost. In practical terms, this implies that the provincial government will continue to hold back TMA’s share of property tax, thereby eroding the already fragile OSR base of the TMA. The Copying Fee has earned very little for the TMA. If this fee is abolished, the TMA will benefit in terms of reduced cost of record keeping. Another such levy is the vehicle tax. This tax is levied on owners of tongas, rehris and other non-motorised vehicles. Each 26 20-004-2006-2 vehicle owner is issued a license for plying such a vehicle within the TMA limits. The license fee is specified by the TMA. There is an annual renewal of the license and a fee is charged for it. Generally, a contract is awarded for the recovery of this fee through open auction every year. At times, however, there are no bidders and the TMA makes the recovery on its own. The contractor charges the owner of each non-motorised vehicle at the prescribed rate. This tax also needs to be done away with, considering that the amount recovered is nominal (only Rs 61,100 in 2004-2005) and that the tax is levied on the poorer segments of society. TMA Kehror Pucca TMA recovered Rs 4.7 million as TTIP against a target of Rs 3.5 million during FY 2004- 2005. Building application fee, sanitation fee, water rate, Bakar Mandi, Adda Fee, rent of property and parking fee have been major sources of OSR for the TMA. The TMA tried to levy Drainage Rate during FY 2004-2005 but failed. The rates were notified by the TMA in 2002 and then again in 2004. Periodic revision is useful in revenue enhancement. TMA earned an amount of Rs 1.2 million under Adda Fee. An amount of Rs 2.4 million was recovered as rent of property during 2004-2005. This source has greater potential as rents are much lower than the market rates. Receipts under the parking fee remained low at Rs 1.8 million as compared to a budget target of 2.7 million despite the fact that rates were revised in FY 2004-2005. Revised rates ranged from Rs 10-25 per day per trip. There was an income of more than Rs 1 million during Fiscal 2004 as Teh Bazari fee. The fee was levied by the municipal authorities in Punjab on temporary encroachments, but it was abolished under MLO 112. Recovery as Teh Bazari fee by TMA Kehror Pucca was actually the rent of shops which were constructed on encroached land. This clearly is an anomalous situation and amounts to tacit acceptance of encroachment. Recoveries under other sources i.e., entertainment tax, vehicle tax, slaughtering fee, fire fighting fee, copying fee have been negligible. 27 20-004-2006-2 Table 6.9 Revenue by Source (Rs) Description 2001-02 2002-03 2003-04 2004-05 Taxes Urban immovable property tax (UIPT) 1,972,000 1,148,000 1,500,000 - Tax on the transfer of immovable property (TTIP) 1,841,000 4,035,244 3,200,000 4,721,478 Local tax on services - - - Other taxes 3,549,000 481,571 3,100,000 140,295 Total Taxes 7,362,000 5,664,815 7,800,000 4,861,773 Fee Building plan fee 63,000 120,700 115,000 119,703 Fee from cattle market - 53,400 100,000 109,441 License fee 544,800 607,600 550,000 265,400 Parking/bus stand fee 677,700 1,281,000 1,050,000 3,016,279 Fee on advertisement - - - 44,600 Fee on fair, agriculture shows, industrial exhibitions etc. - - - Fee on cinemas, theatrical shows or other entertainment 13,000 20,000 20,000 24,000 Sanitation fee - - - 588,060 Other fees and fines 1,251,654 5,058,300 1,070,000 2,408,260 Total Fee 2,550,154 7,141,000 2,905,000 6,575,743 Rents & Rates Municipal rents 1,626,000 1,742,000 1,900,000 2,488,000 Water rates 99,500 326,500 500,000 213,880 Sewerage charges 177,000 10,350 500,000 Total Rents & Rates 1,902,500 2,078,850 2,900,000 2,701,880 Miscellaneous Sale of stocks 50,600 - - Profit on reserve funds 6,000 153,500 150,000 Others 3,973 410,000 420,000 211,790 Total Miscellaneous 60,573 563,500 570,000 211,790 RECOMMENDATIONS A number of recommendations have emerged from a critical examination of the fiscal relationship of LGs with the provincial government and the business processes employed by DGs/TMAs for assessment and collection of various taxes, rates and fees. These are discussed in the following paragraphs. Recommendations specific to various local taxes, rates and fees have been discussed in the earlier section. • The local governments’ autonomy to set their own tax rates is very limited as the provincial government plays a controlling role. There is a need for the process of provincial government approvals and gazette notification to be made automatic and more predictable once the legal process, as provided in PLGO 2001 and Punjab Local Government Taxation Rules 2001, has been fulfilled. This would require suitable amendments in the PLGO. If full autonomy to fix rates is not to be devolved, then the issue can be resolved by providing band widths within which the DGs and the TMAs would be free to act. 28 20-004-2006-2 • OZT was a buoyant levy having a history of more that a hundred years The replacement grant for OZT was fixed at 2.5 percent of the federally collected GST. However, it was frozen at the level of 1996-97. It is recommended that the transfers should be based on actual 2.5 percent of GST collection. Unfreezing the level and building in a healthy increase, based on actual 2.5 percent of GST collection, would be a fair deal for the local governments as the tax would have increased at a fairly robust rate if it not been frozen. • General financial management at the local level should be improved. It has been assessed that without increasing the rates of present taxes the yield can improve dramatically by maintaining records properly, conducting regular surveys and incorporating changes in tax records, improving monitoring, and including systems of reward and punishment for the tax collecting machinery. • Existence of updated data bases is critical to an effective system of collection of tax and non-tax receipts. Computerisation of records and improvement in accessibility of tax and finance related information in easily understandable formats will also enhance accountability by the tax payers and users of services. The present maintenance of desegregated information of taxes and tax payers, relevant laws, rules and notifications is not up to the mark. • Computerised recording of property related transactions should be encouraged. It would result in generating greater revenues by reducing errors and omissions and direct interface with the revenue staff. Better services would have a salutary impact on the collection of various levies, which could also be enhanced as the clients would prefer paying to the government exchequer and saving time that is wasted in visiting the revenue and excise offices frequently. • The interaction between tax payer and the tax collector needs to be reduced. This can take many shapes. However, the common means are outsourcing of notice service and a regime of bill payments in banks or post offices. Taxation proposals, objections to taxation proposals and valuation tables should be made public through newspapers as not many people have access to the official gazette. • Similarly there is a general need to make taxation as simple and easy to understand for the tax payer as possible. This is the case with user charges as well. For example, assessment can be clearly explained with the demand notice as in the case of federal utilities such as electricity, telephone and gas bills, where units consumed and rates per unit are given. In case of notices for taxation, on the back of the notice the local government can provide as much information as is appropriate. This has already been attempted recently for UIPT notices. • The taxes, rents, fees and user charge in the DGs and TMAs are collected through methodologies that are obsolete. There has not been any significant investment in review and reform of business processes of the taxes. Identification and removal of loopholes and weaknesses in the processes can improve assessment and collection efficiency. Such improvements would also facilitate tax payers. 29 20-004-2006-2 • There is also a need for an effective system of dispute resolution. Billing invariably leads to disputes. In the absence of a mechanism for such resolution, people at times resort to non-payment, because of their dissatisfaction with the service. • Capacity and training of staff are critical to the success of any initiative for OSR enhancement. LG officials dealing with these issues may not have up to date information about government laws and rules. The staff has been trained in the old LG regime and needs re-training in current laws, rules and procedures. Serious efforts should be made to build the capacity of staff dealing with tax assessment and collection, maintenance of records, preparation of budget, receipt estimates, expenditure management and other aspects of financial management at the local level. The provincial government can consider compiling relevant laws and rules for the benefit of the local government officials. A summary of relevant laws and rules (Government of Punjab 2006) recently prepared by the Devolved Social Services Program Punjab can easily be internalised. It can be updated regularly to help the DGs and TMAs in having access to the latest information on laws, rules and policy. • There is a shortage of qualified and motivated staff to deal with financial management in local governments. Vacancies of essential staff e.g., tax inspectors should be filled. • Low yielding taxes and fees are generally not preferred in taxation theory as the hassle of collection, administrative expenditure and settlement of disputes makes the tax inefficient. Such taxes and fees should be done away with. Similarly certain fees have been abolished but are still being collected. Collection of such taxes (e.g., Teh bazari fee) should be stopped immediately. • Local councils should demonstrate their seriousness in improving service quality before resorting to any increase in rates and fees. Inquiries from civil society in both districts have revealed that the tax payers are willing to pay more provided the quality of services is proportionately improved. It is generally recognized that service users will have to share the costs of better services. • The potential of the DGs and TMAs to generate OSR is further compromised by the fact that they receive little by way of collection charges for many of the levies that they collect on behalf of the provincial government 17 . There is a general feeling among local stakeholders that while collection charges are deducted by the provincial government for levies that they collect on behalf of the LGs, there is no reciprocal arrangement for the LGs. This perception reflects both an equity and an efficiency issue. The main argument is that the collection systems would function much better if there was ownership of the work through collection charge payments to the respective office, as well as the government for collection of taxes, rates and rents. The additional resources would also mean better systems and data bases that would result in more efficient collections. It is, therefore, recommended that depending on the level of difficulty and complexity of collection, a collection charge ranging from 5 to 10 percent of the actual collections may be paid to the LG where collections are made by an LG for the provincial government. 17 Most of the taxes are collected by officers of the LGs. Even large provincial levies such as AIT, Motor Vehicle Registration Tax and Stamp Duty are collected by staff working under the DGs. 30 20-004-2006-2 • The TMAs, having inherited a number of functions from the previous municipal and town committees, have a vast area in which to provide services and consequently collect rates, fees and user charges. However, most of the collection functions of the DGs relate to collection on behalf of the provincial government. In addition to expansion likely from payment of collection charges, the DGs can also be assigned some of the more buoyant taxes to make them efficient and effective in terms of OSR. • All the major buoyant taxes are with the federal government. Many of the second level high yielding taxes are controlled at the provincial level. To set this equation right, some new viable and buoyant taxes, charges and fees should be added in the Second Schedule for DGs. As totally new areas may mean overlap and double taxation, one way out would be to give to the local governments one large and robust levy such as the AIT. Being a land based tax collected by the revenue staff, it can be properly enforced and collected in agricultural districts like Kasur and Lodhran. While making this recommendation one is cognizant of the issues with the AIT, including the need to make it income-based as opposed to a land based tax. The argument being that the receipts in case of the latter would invariably recede and reduce while in case of the former, we may be able to capture part of the 25 percent that agriculture adds to the national GDP. As such the devolution of this tax can be done in a pilot mode whereby any new methods for collection can be tried out in selected areas initially. • The use of tax as a tool of policy implementation may be increased. For example, charged parking can be introduced in congested areas with charges levied on an hourly basis. Similarly, industries and factories that cause certain amount of pollution can be charged for potential clean up costs on the “polluter must pay” principle. Tanneries in Kasur can be charged for pollution including that of the underground water which TMA is duty bound to clean. 31 20-004-2006-2 Appendix 1 Second Schedule*, Punjab Local Government Ordinance, 2001 [See sections 39(b), 54(1), 54-A, 67(i), 67-A & 88(b)] Part I Zila Council 1. Education tax ** 2. Health tax ** 3. Any other tax authorized by Government 4. Local rate on lands assessable to land revenue 5. Fees in respect of educational and health facilities established or maintained by the District Government 6. Fees for licenses or permits and penalties or fines for violations 7. Fees for specific services rendered by a District Government 8. Collection charges for recovery of tax on behalf of the Government, Tehsil Municipal Administrations and Union Administrations as prescribed 9. Toll on roads, bridges, ferries maintained by the District Government 10. Rent for land, buildings, equipment, machinery and vehicles 11. Fee for major industrial exhibitions and other public events organized by the District Government Part II Zila Council in City District 1. Education tax ** 2. Health tax ** 3. Any other tax authorized by Government 4. Local rate on lands assessable to land revenue 5. Fees in respect of educational and health facilities established or maintained by the City District Government 6. Fees for licenses or permits and penalties or fines for violations 7. Fees for specific services rendered by City District Government 8. Toll on roads, bridges, ferries maintained by the City District Government 9. Rent for land, buildings, equipment, machinery and vehicles 10. Fee for major industrial exhibitions and other public events organized by the City District Government 11. Fee on advertisement 12. Collection charges for recovery of any tax on behalf of the Government, Town Municipal Administration, Union Administration or any statutory authority as prescribed 13. Fee for approval of building plans, erection and re-erection of buildings 14. Charges for execution and maintenance of works of public utility like lighting of public places, drainage, conservancy and water supply operated and maintained by City District Government * Second Schedule substituted vide Notification No. Legis. 13-59/2000/P-VI dated 24-06- 2002. (Fifth Amendment-2002) ** The words “as prescribed” deleted vide Notification No. Legis. 13-59/2002 (P-VI) dated 05-10-2002 (Eighth Amendment 2002) (1999) 32 20-004-2006-2 Part III Tehsil Council 1. Local tax on services as prescribed 2. Fee on sale of animals in cattle markets 3. Market fees 4. Tax on the transfer of immovable property 5. Property tax rate as specified in section 117 6. Fee on advertisement other than on radio, television and bill-boards 7. Fee for fairs, agricultural shows, cattle fairs, industrial exhibition, and other events 8. Fee for approval of building plans and erection and re-erection of buildings 9. Fee for licenses or permits and penalties or fines for violations 10. Charges for development, betterment, improvement and maintenance of works of public utility like lighting of public places, drainage, conservancy, and water supply by Tehsil Municipal Administration 11. Fee on cinemas, dramatical and theatrical shows, and tickets thereof, and other entertainments 12. Collection charges for recovery of any tax on behalf of the Government, District Government, Union Administration or any statutory authority as prescribed 13. Rent for land, buildings, equipment, machinery and vehicles 14. Fee for specific services rendered by a Tehsil Municipal Administration 15. Tax on vehicles other than motor vehicles registered in the tehsil Part IV Town Council 1. Local tax on services as prescribed 2. Fees on sale of animals in cattle markets 3. Market fees 4. Tax on transfer of immovable property 5. Fees for fairs, agricultural shows, cattle fairs, tournaments, industrial exhibitions and other public events organized by the Town Municipal Administration 6. Fees for licenses or permits and penalties or fines for violations 7. Collection charges for recovery of any tax on behalf of the Government, City District Government, Union Administration or any statutory authority as prescribed 8. Fees on cinemas, theatrical shows, and tickets thereof, and other entertainments 9. Rent for land, buildings, equipment, machinery and vehicles 10. Fees for specific services rendered by a Town Municipal Administration 11. Property tax rate as specified in section 117 12. Tax on vehicles other than motor vehicles registered in the town **13. Fee for approval of building plans, erection and re-erection of buildings with the approval of the City District Government Part V Union Council 1. Fees for licensing of professions and vocations as prescribed 2. Fees for registration and certification of birth, marriages and deaths 3. Charges for specific services rendered by the Union Council 4. Rate for remuneration of Village and Neighbourhood guards 5. Rate for the execution or maintenance of any work of public utility like lighting of public places, drainage, conservancy and water supply operated by Union Administration 33 20-004-2006-2 6. Rent for land, buildings, equipment, machinery and vehicles 7. Collection charges for recovery of any tax on behalf of the Government, District Government, Tehsil Administration or any statutory authority as prescribed ** Added vide Notification No. Legis. 13-59/2002 (P-VI) dated 05-10-2002 (Eighth Amendment 2002) 34 20-004-2006-2 GLOSSARY Abiana a user charge for the supply of water for agriculture Adda a stand as in bus stand Bakar Mandi a market for the sale and purchase of animals Challan a form through which government dues are paid Kharif Kharif crops are sown in summer and harvested in late summer or early winter Mandi market Nazim the official head of a district, tehsil, Union Council or village Pugri under the pugri system the possession of a shop is transferred at a deposit of a considerable sum of money Parchi a receipt Patwari the patwari is the official custodian of the revenue record of his circle Rabi Rabi crops are sown in winter, and harvested in early summer Rickshaw a three wheel auto vehicle Rehri a vending cart Teh Bazari Fee rent charged by the municipal administration to allow a person to occupy a space for a while Tonga a horse driven vehicle ACRONYMS ADB Asian Development Bank AIT Agricultural Income Tax CASA Collective Action for Social Advancement CDG City District Government CIDA Canadian International Development Agency DFID Department for International Development DG District Government DO District Officer DOR District Own Receipts DSP Devolution Support Program EDO Executive District Officer FY Financial Year GST General Sales Tax LG Local Government NGO Non-government Organization NRB National Reconstruction Bureau NWFP North West Frontier Province OFWM On Farm Water Management Wing OSR Own Source Revenue OZT Octroi and Zila Tax PHA Parks and Horticulture Authority PLGO Punjab Local Government Ordinance TMA Tehsil Municipal Administration TTIP Tax on Transfer of Immovable Property UA Union Administration UCJ Union Council J urisdiction UIPT Urban Immovable Property Tax 35 20-004-2006-2 REFERENCES ADB, (2004). Role Book. Four-day Workshop for Elected Local Leadership, Decentralization Support Program. ADB, (2005). "Tax and Non Tax Receipt Database Development - TMA Khanewal". Lahore, Provincial Program Support Unit, Devolution Support Program. Bird, R., (2000). Intergovernmental Fiscal Relations in Latin America: Policy Design and Outcomes. Washington DC, Inter American Development Bank, Sustainable Development Department: 16-24. Bird, R., (2001). Sub-national Revenues: Realities and Prospects. Washington DC, The World Bank. Chaudhry, M. A., (2005). New Local Government Laws in Punjab. Lahore, Municipal Law Publishers. Government of Punjab, D. S. S. P., (2006). Compendium of Instructions for Local Governments. Lahore, Government of Punjab. Howe, E. T. and Reed D. J ., (2003). The Historical Evolution of State and Local Tax Systems. New York. Kitchen, H. M., (2003). "Special Study: New Finance Options for Municipal Governments." Canadian Tax Journal 51(6): 2215-2275. Malik, S. J ., (2003). Study on Tax Potential in NWFP: An Interim Report. Islamabad. Mason, J ., (1996). Qualitative Researching. London, Sage. Ministry of Finance, Government of Pakistan, (2003). Poverty Reduction Strategy Paper. Islamabad, Ministry of Finance. Nick, M., J ackie C., et al., (2004). Devolution in Pakistan - An Assessment for Reconstruction and Action. Islamabad, Asian Development Bank, World Bank, DFID. Planning and Development Board, (2004). Multiple-indicator Cluster Survey. Lahore, Government of Punjab. Roy, B., (2004). "Concepts & Practice of Intergovernmental Finance - PFC Workshop". Lahore, Provincial Program Support Office, Decentralization Support Program. Statistical Division, Government of Pakistan, (1999). District Census Report. Islamabad, Statistical Division. 36