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 to
illustrate 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
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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 peoples 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
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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 Districts 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
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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 districts 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
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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
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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
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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
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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
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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
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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--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
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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 DGs 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,
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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.
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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.
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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 TMAs 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.
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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.
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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.

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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.

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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
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
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
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
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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
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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 - - -
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
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.

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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. Lodhrans 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.

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Description 2001-02 2002-03 2003-04 2004-05
Taxes
Urban immovable property tax (UIPT) 1,883,000 1,760,647 1,715,000 -
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
Fee from cattle market 105,955 830,120 800,000 2,430,000
License fee 330,250 284,140 510,000 176,000
Fee on advertisement 96,000 105,000 263,840
other entertainment - - - 1,000
Sanitation fee 311,611 541,042 573,000
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
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
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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.

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Description 2001-02 2002-03 2003-04 2004-05
Taxes
Urban immovable property tax
(UIPT) 424,000 - 500,000 -
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
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. - - -
other entertainment - - -
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
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 governments 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 nave 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 TMAs 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
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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
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Description 2001-02 2002-03 2003-04 2004-05
Taxes
Urban immovable property tax (UIPT) 1,972,000 1,148,000 1,500,000 -
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
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
other entertainment 13,000 20,000 20,000 24,000
Sanitation fee - - - 588,060
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
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.
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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.

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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.
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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.
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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
7. Fees for specific services rendered by City District Government
8. Toll on roads, bridges, ferries maintained by the City District Government
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)
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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
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
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
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
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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)

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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

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This note was written by Muhammad Ahsan Rana to serve as a basis for class discussion rather than to

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