Tax Policy Research to Support a New Framework for

Sustained Economic Growth of Pakistan

Interim Presentation at CGP Conference

by Mr. Daniyal Aziz

February 8th - 10th 2013

Research Focus

• Weak Local Property Taxation in Punjab

– Urban Immoveable Property Tax (UIPT)

– Local Rate

• Political Economy and Misgovernance of Local Property Tax Structure

• Policy Recommendations to Address weaknesses in Property Tax System

• Development of Methodology for Simulation Analysis of VAT

Research Methodology

• Literature Review/Review of Existing Research Studies

• Legal and Procedural Review of UIPT and Local Rate in Punjab

• Historical Trend Analysis of UIPT and Local Rate in Tehsil Shakargarh District Narowal

• Key Informant Interviews (KIIs) involving Snow Ball Technique

Significance of Strong Property Tax System

Unleashing the growth potential of cities :

• Improving the quality of urban services

• Implementing property rights and valuation basis of property important for unleashing the development potential of cities. Can be used as an instrument of urban policy to promote the rational use of land to generate social benefits to the community at large. 

• Developing vibrant land markets to promote Entrepreneurship which is necessary for Pro-poor Growth

• Promoting Agricultural Land Use Efficiency

Key Findings-Literature Review

• Existing Studies are mostly focused on UIPT and insignificant information is available on Local Rate

• Most of them have only investigated Punjab’s UIPT with respect to its Revenue Potential

• The literature review represents that Property tax has a significant share despite weak provincial tax revenue efforts and inability to achieve the revenue targets

• The UIPT and the tax on the transfer of property constitute the next largest source of revenue for Pakistan.

• Following Statistics (Nabi and Shaikh ,2011)clearly support these findings.

Overall Provincial Revenue Effort is LowProvincial Tax Revenue Mobilization in Pakistan

Provincial governments raise approx 0.4% of GDP in tax revenues (4% of national tax collection)

Provincial governments spend about 16 times as much as they collect in taxes

Property Tax – Important even as Provincial Tax effort is Poor Provincial Tax Composition – Punjab (FY 2008-09)

Country % of GDP FY 2008-09(Punjab’s GDP = $ 94930 Million)

Expected Revenue Increase of Punjab with Various Property Tax % Scenarios of Punjab’s GDP in Million $)

Punjab Province 0.026

Chile 0.7 $ 639.83 million

Ethiopia 0.5 $ 449.97 million

Croatia 0.2 $ 165.18 million

Indonesia 0.1 $ 70.25 million

Slovak Republic 0.6 $ 544.9 million

Sri Lanka 0.7 $639.83 million

Thailand 0.3 $ 260.11 million

Hungry 0.3 $ 260.11 million

Poland 1.1 $ 1019.55 million

Argentina 0.9 $ 829.69 million

Mexico 0.3 $ 260.11 million

South Africa 0.7 $ 639.83 million

Canada 4 $ 3772.52 million

USA 3 $ 2823.22 million

Property Tax Should be doing better as seen in..International Comparison of Property Tax Revenues: Select Countries

(Property Tax % of GDP, FY 2008-09)

0.026%

3%

Property Tax Collection in Punjab

is 1/5th of International Average

Property Tax Collection in Punjab

is 1/5th of International Average

Expected Revenue if Property Tax % of GDP Increases? • As per FY2008-09, Punjab’s GDP was 94,930 Million USD and

Property Tax Collection is around 24.68 Million USD.

• If the Punjab’s Property Tax %age of GDP increases from .026% to that of Indonesia’s 0.1 %. The Revenue will increase almost 70.25 Million USD

• Similarly, a revenue boost of 688.19 and 449.97 Million USD will be registered if Punjab achieves the property tax to GDP percentage of Chile (0.7%) and Ethiopia (0.5%)respectively .

• In case of achieving 3% property tax to GDP , Punjab can generate 2847.9 Million USD.

Key Findings – Legal and Procedural Review of UIPT

• The problem of weak property taxation lies in the Tax Structure and Administration such as;

• Valuation:– Under Punjab UIPT Act 1958 assessment of all rented or

owner-occupied properties on the basis of actual rent– Unusual increase in rental market (from 2002 to 2007) but tax

base static for both residential and commercial properties– Average property in Punjab might be undervalued by 45%– TMAs, entitled to carry out valuation, have neither capacity nor

expertise to include the built up areas in villages (lal lakir)– Overall valuation system lacks buoyancy, has inherent inability to

address peculiarities of properties and their rent-ability & unable to capture rise in capital value of property

Key Findings – Legal and Procedural Review of UIPT

• Coverage:o Cities have expanded over the years whereas the tax base has not

Failure to notify new rating areas and extension in existing rating areas

o According to a modest estimate, which is two years old, there are approximately 73 more rating areas in the Punjab.

o Approx 300k of 750k properties untaxed in Lahore alone.o Proper assessment and collection with the help of GIS

• Exemptions:o Low revenue yield and low coverage results in a reduced taxo Inefficient use of land (vacant not taxed)o Estimated revenue loss due approx 1/3rd of the total collection o Major source of corruption due to discretionary use

Demand/Collection Trends of UIPT in Shakargarh

Exemption Trends of UIPT in Shakargarh

Key Findings – Legal and ProceduralReview of Local Rate

• The tax is levied on a per acre basis and the tax is levied at a flat rate of 2 rupees per acre

• Surprisingly, the rate has not been revised in the last many years

• The rate is set at the provincial level and Local governments do not have any discretion in setting the rate despite the legal empowerment under LGO 2001

• This is an important point because if the local government has no rate-setting power, this levy is effectively an intergovernmental transfer from the provincial government.

Demand/Collection Trends of Local Rates in Shakargarh

Demand Statement for Local Rates-Tehsil Shakargarh

The Road Map for Key Informant Interviews (KII) Analysis

• The list of potential respondents in both urban and rural areas of Tehsil Shakargarh has been prepared

• Preliminary Outline for Key Informant Interviews (KII) has also been submitted

VAT Simulation Methodology

• GINI will conduct simulation analysis of various policy alternatives to enhance revenue by broad-basing to untaxed goods/services. Analysis will also involve identification of key constraints to policy alternatives and recommended actions to address them.

• In this part of the study a simulation model will be developed to estimate the VAT base, revenue potential and the extent to which businesses will comply with the alternative tax options.

• GINI will also assess the possibilty of developing a CGE (Computable General Equilibrium Model) for policy evaluation.

Thank You