Loc calGovernanceSu upportProject Learninga L andInnov vationCo omponen nt(LGSPL ) LIC

LocalGovernment tDivision MinistryofLo M ocalGovernment,RuralDe evelopmenta andCooperat tives Gover rnmentofPeo oplesRepubliicofBanglad desh(GoB)

EnhancingReve enueSo ourcesforUn nionParishads s ReportofaStudyandR Recomme endation nsforRef form

by

Nic ckDevas
Interna ationalDev velopment tDepartment SchoolofP S PublicPolic cyUniversi ityofBirmingham
Sept tember 2008 8

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Copyright 2008 by Loc Government Division cal t

Disclaimer: Views express in this repo are those of author/s and do not necess : ssed ort d sarily reflect the views of Loca e al Governmen Division (LG nt GD), Ministry of Local Governm f ment Rural Dev velopment and Cooperatives, Government o d of Bangladesh any other ministry of GoB and UN agencie including UN and Locall Governance C h, m a ies NDP Cluster of UNDP P Bangladesh h.

Contents List of abbreviations Summary of recommendations Introduction Part A: Reforms to Enhance Union Parishad Revenues 1. 2. 3. 4. 5. 6. Reform context and scope Improving the assessment of Holding Tax Increasing revenue from business taxes and licences Improving local revenue administration Additional revenue sources Related issues 2 3 5 6 6 8 11 13 16 18 20 20 25 27 30 31 34

Part B: The Current Situation of Union Parishad Revenues 7. Holding tax 8. Business taxes and licences 9. Other revenue sources 10. Some issues with local revenue administration 11. Possible new revenue sources for UPs 12. Some wider issues

Tables 1. Mass appraisal system for Holding Tax 2. Suggested revision to the Model Tax Schedule 3. Revenue collection performance as a proportion of budgeted revenues for UPs in Sirajganj District 9 12 23

Annexes 1. Comments from the national workshop, Dhaka, 11th September 2008 2. Summary of recommendations of the Committee for Accelerating and Strengthening Local Government, as related to local revenues 3. Proposed assessment register with reductions 4. Proposed Holding Tax collections and arrears record 5. Proposed business tax / licence register and payment record 6. Revenue performance in Tongi Municipality 39 41 43 44 45 46

List of Abbreviations ADP ARV CNG CG DANIDA EC LIC LGC LGD LGED LGI LGSP LDT LTT MDG MLGRDC NILG RTI SLGDFP UDCC UNCDF UNDP VAT UNO UP USAID Annual Development Plan (development grant channel) Annual rental value (basis for property tax assessment Compressed natural gas (as in three-wheeled public transport) Central government Danish International Development Agency European Commission Learning and Innovation Component (of LSSP) Local Government Commission Local Government Division Local Government Engineering Department Local government institution Local Government Support Programme Land Development Tax (i.e. land tax) Land Transfer Tax Millennium Development Goal Ministry of Local Government, Rural Development and Cooperatives National Institute of Local Government Research Triangle Institute (consultant to USAID) Sirajganj Local Government Development Fund Programme Upazila Development Coordinating Committee United Nations Capital Development Fund United Nations Development Programme Value added tax Upazila Nirbahi Officer (Upazila Administrator) Union Parishad United States Agency for International Development

Exchange rate: $1 US = approximately Taka 67.

Acknowledgements I would like to acknowledge the assistance of officials of the Local Government Division and other ministries of the Government of Bangladesh, and of the various Union Parishads and Paurashavas visited during my mission. In particular, I would like to thank Mr Swapan Kumar Sarkar, Director General (MIE Wing), Local Government Division, Mr Md Nojibur Rahman, Joint Secretary, Local Government Division, and Mr Md Anwar Hossain, Deputy Secretary for Union Parishads, Local Government Division. I would also particularly like to thank Durafshan Chowdhery of UNCDF, Saidur Rahman Molla of UNDP, Azizur Rahman Siddique, LIC Monitoring and Evaluation Adviser, LGD/UNCDF, and Babul Azad of LGD/UNCDF for all their help during my visit.

Summary of Recommendations This is an opportune moment for reform of Union Parishad revenues. The Local Government Committee reported at the end of 2007, with recommendations about UP revenue sources, the Union Parishad Ordinance is currently being revised, and a new Model Tax Schedule about to be prepared. The recommendations made here are mainly for reforms that can be implemented within the present legislative framework (apart from a revision to the Model Tax Schedule), with a few which require legislative changes. UPs should be properly consulted before any reforms are introduced, and any reforms would need to be properly tested in the field. Several of the proposals below could be pilot tested immediately in a number of UPs. Holding tax 1. Introducing a simplified mass-appraisal system for assessing holding tax for houses, based on number of rooms and construction type, and retaining a choice over tax rates (up to the equivalent of 7% of annual rental value). 2. Making assessments more systematic and transparent, with any reductions on the grounds of poverty being made explicitly and recorded transparently. 3. Clarifying that holding tax can also be levied on non-domestic property, including structures like mobile phone masts. 4. Requiring every UP to carry out a re-assessment of holding tax over the next twelve months, compiling a complete register of properties, together with their assessments. Business taxes and licences 5. Updating the Model Tax Schedule to at least reflect inflation since 2003. 6. Simplifying the classification of businesses while also making the list more comprehensive, to include all services, professions and NGOs. 7. Introducing a simple and obvious classification of business size, to reflect (albeit crudely) ability to pay, thereby improving equity as well as increasing the revenue that can be generated. 8. Allowing a limited range of choice for the UP about the level of business taxes, with three approved levels of tax (low, medium and high). 9. Requiring every UP to compile, within twelve months, a register of all businesses in their jurisdiction, each with a tax assessed according to the revised Model Tax Schedule. Revenue administration 10. UPs to maintain records of tax payment against assessment (i.e. not just a chronological list of revenue receipts), so that it is immediately obvious which properties or businesses have not paid, and records of arrears can be compiled. 11. Collections to start on 1st July and finish on 31st June, with any non-payments by then being recorded as arrears. 12. Prompt banking of receipts, with larger payments being made by the payer directly to the bank. 13. Prompt follow-up action in the event of non-payment within the first three months, with lists of defaulters being prepared and publicised after that. 14. Spot checks and selective visits (e.g. by the UP Chair or elected members) to non-payers, both to motivate payment and to reveal any collusion or fraud by collectors. 15. Greater efforts to mobilise payment through information at ward-level and UPlevel public meetings, citizen participation in decisions about resource use,

16. 17. 18. 19.

public display of financial information, and proper accountability for the use of revenues, leading to greater willingness to pay. As a last resort, selective enforcement action (e.g. seizure of movable assets) taken against those who can afford to pay, in order to send a signal to others. Greater support for UP revenue mobilisation should be provided by UNOs and police. Gradual introduction of simple computerised spreadsheets for managing and monitoring local revenue collection. The grant system should incorporate rewards based on performance of revenue collection against assessments (or based on increased revenue collection).

New revenue sources 20. Charges for services that the UP provides directly to beneficiaries. 21. Taxing advertisements (bill-boards). 22. Taxing three-wheeled public transport (CNGs). 23. Fees for the extraction of sand, stone and other building materials. 24. Restoring to UPs the leasing of hats and bazaars, and possibly also water bodies (with UNOs monitoring the tendering process). 25. Increasing the UPs share of the Land Transfer Tax from 1% to 2%. 26. Giving UPs a 3% (or higher) share of the Land Development Tax, in return for assistance with mobilising the tax. 27. One possible new revenue source for UPs is a small local tax on electricity (collected through the electricity company as a percentage addition to the electricity bill). Related issues 28. Appointing to each UP a finance officer, with at least basic training in accounting and financial management. 29. Improving UP budgeting and expenditure management, including realistic budgets, based on the revenue that can actually be collected, and greater opportunities for citizen participation in decisions about resource use. 30. Enhancing accountability for resource use, through publicly available information on finances, and project monitoring by residents. 31. Increasing transparency and reliability in the allocation of intergovernmental fiscal transfers, with more of the transfers being paid directly to UPs and greater scope for local (UP) choice about the use of transfers. 32. Ensuring that any reforms of UPs revenues are compatible with those for paurashavas and cities, with mutual learning about good practices, and improved performance being shared between local governments. 33. The anticipated election of Upazila Parishads will call for revenue sources for that level; this should not be at the expense of revenue sources for UPs.

Enhancing Revenue Sources for Union Parishads

Introduction This report relates to a mission to Bangladesh by Nick Devas, of the International Development Department, University of Birmingham, between 1st and 12th September 2008. The mission was undertaken for the Local Government Division (LGD) of the Ministry of Local Government, Rural Development and Cooperatives. The mission was funded by the United Nations Capital Development Fund (UNCDF), through the Learning and Innovation Component (LIC) of the Local Government Support Programme (LGSP). This mission followed an earlier mission in July 2007, during which a study was made of local revenues of Union Parishads (UPs), identifying possible areas for the reform. The purposes of the second mission were: to build on the earlier study through further visits to UPs and paurashavas, and consultations with UP officials; to refine the recommendations for revenue enhancement reforms, including both reforms that could be implemented by UPs under the existing legal framework, and reforms requiring policy or legal changes at national level; to present these proposals to a national workshop for discussion; to devise some specific revenue enhancement actions that could be piloted in a number of UPs under the LIC programme. Discussions were held with senior officials in the Local Government Division, as well as with the Ministry of Finance. Visits were made to four UPs in two districts and two paurashavas. The mission culminated in a national workshop in Dhaka on 11th September 2008, with representatives from central government and sub-national tiers, including a number of Chairs of Union Parishads, together with donor agencies and NGOs, and with the Hon. Advisor for the Ministry Local Government as the special guest. Points arising from that workshop are included in Annex 1. This report is divided into two parts. Part A details specific proposals for enhancing revenues of UPs. Part B is a revised and updated version of the study carried out in 2007, providing the background for the proposals in Part A.

Part A: Reforms to Enhance Union Parishad Revenues 1. Reform Context and Scope 1.1 An opportune moment This is an opportune moment to be proposing reforms for enhancing UP revenues, for a number of reasons. Firstly, the Committee for Accelerating and Strengthening Local Government reported in November 2007. Among its recommendations were a number relating specifically to the revenue sources of UPs, including the following1: ensuring that local tax assessments are updated every five years; improving revenue collection performance of local governments; increasing UPs share of the Land Transfer Tax from 1% to 2%, and ensuring that the money from this source is passed on to UPs; giving UPs a 3% share of the Land Development Tax; reviewing the distribution of revenues from leases on hats and bazaars to ensure a fairer distribution; giving local governments more discretion about local tax rates; increasing the share of ADP (annual development plan grant) for local government (as a whole) to 10% of the national budget; apportioning to local government a share of national taxes collected locally. Further details on the recommendations of the Committee are provided in Annex 2. Secondly, the Government has recently drafted a new Union Parishad Ordinance, to replace the 2003 Ordinance. This takes account of many of the recommendations of the Local Government Committee, and is expected to be promulgated soon. It will be followed by a revision to the Model Tax Schedule for UPs, by the end of the year. Thus, the present study can provide a direct input into that process. Thirdly, Government has shown its support for UPs by channelling some block grant allocations directly to UPs, starting from 2004. This has enabled UPs to have greater choice and control over resources used locally. In addition, from 2008, substantial funds are being channelled through UPs in poorer regions of the country for rural works programmes to reduce poverty. Fourthly, the World Bank-funded Local Government Support Programme is channelling substantial resources to UPs. This programme started in 2007 in 1,050 UPs, and will gradually extend to all UPs (at least, those UPs which meet minimum performance qualifications). LGSP builds on the earlier experience of the Sirajganj Local Government Development Programme which, among other things, was successful in increasing local revenues in a number of UPs. As part of LGSP, the Learning and Innovation Component (LIC), funded by UNCDF, EU and DANIDA, is developing and disseminating good practices and innovations to UPs in six districts. Under this component, there is scope for pilot projects in a number of UPs to experiment with revenue enhancing reforms. This report provides suggestions for what could be included in these pilots. 1.2 Scope of Potential Revenue Enhancing Reforms The revenue enhancement reforms discussed here can be divided into five groups: a) Improvements to the assessment of the Holding Tax b) Reforms to local taxation of businesses and business licences
1

This list is based on the English language summary of the Committees report.

c) Improvements to local revenue collection and administration d) Identification of new or additional revenue sources for UPs e) Some related reforms, including intergovernmental transfers and local financial management. The first three categories of reform can be undertaken by UPs largely within the existing legal framework, although the second will require a revised Model Tax Schedule something that is already planned to be developed before the end of 2008. Identifying some new revenue sources would certainly require legal changes, although others are really no more than refinements of existing local taxing powers. Some of the related reforms also require national policy or legal changes but others can be implemented by UPs under existing powers. It should be pointed out that there are no magic solutions to the problems of local revenue in UPs, and that many of the problems faced here are common to local governments around the world. Most of what is proposed here is far from new. Much of it is about enabling UPs to implement what they are already supposed do, or to adopt good practices have already been adopted in some UPs. In a few cases, suggestions are drawn from well-tried experience in other countries. But the hope is that everything suggested here is realistic for UPs to implement in Bangladesh. 1.3 Three Es of reform Any reform of local revenues has to maintain a balance between three aspects: Effectiveness: that is, increasing the proportion of tax due that is actually collected; Efficiency: that is, minimising the amount of tax revenue that is used up in collecting the revenue. There is typically a trade-off between effectiveness and efficiency, since spending more to collect more may increase effectiveness but reduce efficiency; Equity: that is, fairness between tax-payers, reflecting their relative ability to pay. But it is also about equity between those who pay and those who do not pay if the better off do not pay what they are supposed to, then any equity in the design of the system is lost. This can undermine public confidence in the tax system. Thus, it may be justified to spend more on collection in order to reduce non-payments and hence reduce inequities. 1.4 Current UP revenue sources The revenue sources of UPs are the following: Holding Tax, levied on buildings and n on-agricultural land within the UP; Business taxes or licences on commercial activities within the UP, levied under the Model Tax Schedule; Leases from hats and bazaars, currently administered by Upazilas, with UPs receiving a share; a 1% share of the nationally collected Land Transfer Tax; fees for various certificates (citizenship, etc.); other local income (bank interest, rents from UP property, etc.); regular transfers from central government: both the block grant direct to the UP and the ADP grant that is managed at Upazila level; special transfers under various government and donor-funded programmes, such as LGSP.

The focus of this report is on the first two, since these are the main revenue sources under the UPs control. 1.5 Field testing and consultation The practicality of the reforms suggested here, including the proposed tariffs for holding tax assessment and business taxes, need to be tested in the field to see if they are appropriate. There should also be full consultation with UP Chairs, members and officers before any changes are imposed, even on a pilot basis.

2. Improving the Assessment of Holding Tax 2.1 Current system According to the law, Holding Tax is to be assessed on the basis of the annual rental value (ARV) of buildings and land (excluding agricultural land). ARV can either be determined from actual rents if the building is rented (or if it is not, from rental data for comparable buildings), or calculated from construction costs. Regulations specify the way the tax should be calculated. For UPs, this system is quite complicated, and they generally lack the skills to implement it. Some UPs use assessors (typically students) to prepare the valuations based on the official formula.2 However, for the most part these assessments are quite suspect. In many cases, arbitrary adjustments are made, whether on the basis of assumptions of household income or for other reasons, so that the final assessments bear little relationship to the formula. In other places, UPs are making much simpler assessments based on the number of rooms, type of construction and facilities (water supply, toilet). These assessments may be sufficiently fair, especially, if they are made in a transparent way. However, the problem with either arrangement is that assessments are often not made systematically, and adjustments for household income or poverty may not be made transparently. As a result, there may be significant inequities in the assessments. This can undermine peoples trust in the system, and therefore their willingness to pay. 2.2 Mass-appraisal system What is proposed for piloting in some UPs is a simpler and more transparent assessment system, commonly know as mass appraisal. A simple table is provided showing house construction types and numbers of rooms (construction type will need to be defined precisely enough so as to minimise scope for manipulation). From that, it is very easy to assess a particular house. Table 1, below, uses five grades of construction and up to four rooms. For houses with more than four rooms, a rate per sq ft can be used. The table also includes one category of shop (up to 100 sq ft), being the most common type of non-residential property in UPs. Where individual water supply (tubewell or piped) is available on the plot, the assessment would be increased by 25%. (Communal water supplies would not be included in the assessment, nor would toilets, since there should be no disincentive to households providing toilets.) For non-domestic properties, other than a basic shop, the ARV method would still need to be used.
An NGO, Comilla Shastha Sheba Foundation, has started offering a service to UPs in one district (perhaps more) to make assessments of holding tax. They offer to compile the UPs assessment register using the proper ARV method, at no cost to the UP. They generate some revenue by offering to households a plot number plate, but this is optional. From the one example seen, it appears that the assessment register is properly compiled, although how accurate or uniform are the valuations is difficult to tell. Such a service could well be appropriate for UPs to use, although it is at present only available in a limited area.
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Table 1: Holding Tax: Possible Mass Appraisal System

Tax Rate: 3% Tax in Taka I room 2 rooms 3 rooms 4 rooms For more than 4 rooms, rate per sq.ft. (1) Small shop or stall (up to 100 sq ft) (2) Water on plot (3) Tax Rate: 5% Tax in Taka I room 2 rooms 3 rooms 4 rooms For more than 4 rooms, rate per sq.ft. (1) Small shop or stall (up to 100 sq ft) (2) Water on plot (3) Tax Rate: 7% Tax in Taka I room 2 rooms 3 rooms 4 rooms For more than 4 rooms, rate per sq.ft. (1) Small shop or stall (up to 100 sq ft) (2) Water on plot (3) High Quality 350 580 820 1050 35 820 Pacca 230 350 510 700 23 510 Semi-Pacca 190 280 370 470 17.5 370 Add 25% Tin Roof 120 190 260 350 12 260 Katcha (4) 70 120 190 230 7 230 High Quality 250 420 580 750 25 580 Pacca 170 250 370 500 17 370 Semi-Pacca 110 200 270 330 12.5 270 Add 25% Tin Roof 80 130 180 250 8 180 Katcha (4) 50 80 130 170 6 130 High Quality 150 250 350 450 15 350 Pacca 100 150 220 300 10 220 Semi-Pacca 80 120 160 200 7.5 160 Add 25% Tin Roof 50 80 110 150 5 110 Katcha (4) 30 50 80 100 3 80

Notes: (1) If building has more than one storey, include total floor area of all storeys. (2) For shops, industries and other businesses larger than 100 sq ft (10m2), and multi-storey residential blocks, the annual rental value method should be used. (3) Water source on plots means private connection or tubewell, not shared or communal. No adjustment for a toilet since there should be no disincentive to providing a toilet. (4) Katcha here means mud and thatch. Tin-roof is taken as being between katcha and semi-pacca. High quality means pucca construction with a high standard of finish, and typically with an electricity and a water supply.

Table 1 shows the assessment values at various tax rates: 3%, 5% and 7%. Tabulations for 4% and 6% could easily be prepared if required. The UP would chose which tax rate to set and therefore which table to adopt. The assessments in the table are based on estimates of the annual rental value using the construction cost figures produced by GoBs Public Works Department (PWB). However, they are not precise valuations but they nevertheless provide a consistent basis for assessment. (Precise valuations are not required, of course: what matters is consistent treatment between all properties, so that the tax burden is distributed fairly.) The assessments in the table are substantially higher than those currently being applied typically Taka 20 100. This is not surprising, since most existing registers are now at least five years old and assessments have not been updated. Inflation since they were compiled has probably nearly doubled property values. But the assessment schedule is also slightly more progressive than the present assessments, with relatively higher values at the upper end, but still with a minimum assessment of Taka 30 at a 3% tax rate. 2.3 Removing the ceiling One requirement for the new system to work properly is to remove the present tax ceiling of Taka 500 per building. This ceiling is a serious anomaly because inflation has eroded the value of Taka 500, so that annual rental values of larger properties, and particularly non-residential properties, are well above that ceiling. A particular issue arises with multi-storey blocks of rooms, where the assessment should be many times higher than Taka 500.3 As it stands, such a ceiling benefits only the rich. 2.4 Adjusting for poor households At present, reductions to assessments are often made on the grounds that households are poor. Such reductions may well be justified, but should be made transparently, in the interests of fairness. Thus, it is suggested that any reductions should be made explicitly, in a public meeting at ward level, if possible, and approved by the UP. It is also suggested that the reductions should be limited to 50% of the assessment, so that everyone contributes at least something. Furthermore, it is suggested that no more than one quarter of households be given a reduction. In many UPs, most people are poor, so the intention here is that reductions should be given only to the most needy, not to everyone or almost everyone. Annex 3 provides a pro-forma for a revised assessment register, showing the basic information on the property (plot number, owner, occupation or income source, number of rooms, type of construction, whether or not there is an individual water supply on the plot). From this, the basic assessment can be made from the assessment table (Table 1). There is then a column for reasons, if any, for a reduced assessment. The last column shows the final assessment, taking account of any reduction (of up to 50%) that may have been given. This assessment register should be a public document which anyone can consult. 2.5 Holding tax on non-domestic properties There seems to be some ambiguity about whether holding tax applies to all property or only to houses. Most UPs do not appear to be collecting holding tax from nonPart B of this report notes some other anomalies with the ARV calculation of holding tax, such as the reductions for owner-occupied premises and where there is a mortgage. These reductions benefit mainly the rich and are not justified in a proper property tax assessment system. Ideally, they should be eliminated. However, adopting the mass appraisal system avoids these anomalies.
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domestic properties, and some businesses refuse to pay on the groups that they are paying licence fees.4 The UP Ordnance (2003) refers to buildings and land. It is, thus, clear that non-domestic properties are covered. There is, therefore, no reason why UPs should not collect both holding tax and business licences from a business. Most non-domestic properties, apart from the smallest shops, will not be covered by the mass appraisal system, and the ARV method will need to be used. For most UPs, there will be few such properties, so the task of assessing them will be small. For a few UPs, especially those close to Dhaka, there may be many, substantial properties. Such UPs will need to apply the ARV method as it would be used in the nearby paurashava or city, perhaps using some outside assistance for the valuation. There are some issues in relation to major public infrastructure, such as railways, power plants and power distribution systems. These issues need to be resolved at national level, since such facilities are generally state-owned, and assessment presents considerable problems. However, one type of infrastructure that should be included under the holding tax is mobile phone masts.

3. Increasing Revenue from Business Taxes and Licences In addition to any Holding Tax on businesses, UPs may levy taxes on businesses (referred to as professions, trades and callings) that earn profit, under the Model Tax Schedule (MTS), 2003. Most UPs use this schedule as the basis for issuing licences to various types of business. However, there are some problems with the MTS: the rates of tax are very low (typically Taka 100-250 per year), and their value has been eroded by inflation since 2003; they are based on a somewhat archaic classification of businesses by type that does not take sufficient account of the scale or ability to pay of the business (e.g. a residential hotel pays T.250 regardless of size or quality); some types of business are not listed, notably NGOs (most of which are effectively businesses), along with some services and some professions; UPs have no choice about the tax rates they levy (although in practice they do not always follow the MTS). What is proposed is that the MTS should be radically revised so as to: increase tax rates substantially, at least to compensate for inflation since 2003; classify businesses according to simple indicators of size (see below); have broader classes of business, rather than trying to identify every individual type of business separately; ensure that all types of business are covered, including NGOs, professions and other services: allow a choice of rates for UPs. Table 2 below sets out a suggested revision to the MTS. This covers only certain types of business so far: others will need to be added. The proposed rates, and their relativities, will also need to be tested in the field. For most types of business, there is
There also appears to be an issue about exemptions from taxes for export industries. Although officially such exemptions only apply in a few export processing zones, it was claimed that some industries elsewhere refuse to pay local taxes on the grounds that they are producing for export.
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a classification (small, medium, large), with a definition of that class in terms of some easily measurable indicator (floor area, number of employees, number of machines).

Table 2: Suggested Revision to Model Tax Schedule Taxes in Taka per year. Business Type
Retail shop or Trader

Size / Classification
Very small Small Medium Large Very large Small Katcha Small Medium Large

Size / Class Definition

Kiosk, katcha structure <100 sq ft, pacca or semi-pacca 100-250 sq ft, pacca/semi-pacca 250-600 sq ft, pacca >600 sq ft, pacca

Low Tax Rate

200 350 700 1,400 3,500 300 500 1,200 2,500 7,000 350 3,500 5,000

Medium Tax Rate

300 500 1,050 2,100 5,200 450 750 1,800 3,750 10,500 500 5,200 7.500 1,050 2,400 6,000 500 1,200 3,000

High Tax Rate

400 700 1,400 2,800 7,000 600 1,000 2,400 5,000 14,000 700 7,000 10,000 1,400 3,200 8,000 700 1,600 4,000

Workshops & Factories

<200 sq ft, katcha structure <200 sq ft, pacca / semi-pacca 200-1000 sq ft pacca/semi-pacca 1000-5000 sq ft, pacca/semipacca Very large >5000 sq ft, pacca Alternative method for textile factories: rate per machine Brickfields Regular Large Small Medium Large Small Medium Large 1-2 people 3-10 people >10 people 1-2 people 3-10 people >10 people

Professional Services incl. NGOs Other Services (e.g. tailor, hairdresser, beautician) Education (private institutions) Hotels

700 1,600 4,000 350 800 2,000

University Kindergarten Coaching Basic / small Regular Luxury

Including training centres Less than 10 rooms, no AC > 10 rooms, no AC > 10 rooms, AC

4,000 1,000 2,000 1,500 3,000 6,000 200 500 10 20 8 16

6,000 1,500 3,000 2,250 4,500 9,000 300 750 15 30 12 24

8,000 2,000 4,000 3,000 6,000 12,000 400 1,000 20 40 16 32

Rickshaws 3-Wheelers Advertisements

CNGs Unilluminated Illuminated Unilluminated Illuminated

Three-wheeled public transport On UP land, rate per sq ft On UP land, rate per sq ft Not on UP land, rate per sq ft Not on UP land, rate per sq ft 15% of ticket price

Cinemas, other entertainments

12

The classification of businesses by size is not only fairer, since it reflects (to some extent) ability to pay, but it also enables more money to be collected. Under the present system, the level of tax that can be set is limited by the ability to pay of the smallest business in that class. With a range of sizes, more can be extracted from larger businesses. However, the classification of businesses has to be kept simple, with easily verifiable indicators, so that there is little or no room for doubt about how the business should be classified (with the attendant risks of under-declaration or collusion). This relatively simple classification means that the tax schedule cannot precisely reflect differences in ability to pay, or the full range of business sizes. Moreover, size may not be an accurate indicator of ability to pay. However, this method of taxation is not intended to replicate a profits or turnover tax, but merely attempts to make the system somewhat more equitable and to generate rather more money. The suggested MTS also gives UPs three options in terms of tax rates low, medium or high. The high rate is twice the low rate, with the medium rate being half way between. The UP will need to decide which tariff set to adopt. In areas where people are very poor, presumably the UP will choose the lowest rate, while UPs near Dhaka may feel able to choose a higher rate. UPs must apply that tariff set consistently to all businesses, otherwise the horizontal equity between different types of business will be lost. This arrangement will also give the opportunity for those UPs that adopt the low or medium rates to increase their revenue by moving to the next tariff set. In practice, for many UPs, there may be few businesses other than small shops. But for those UPs with a number of larger businesses, this system should enable them to collect significantly more revenues, especially if combined with improvements in revenue administration practice set out in the next section.

4. Improving Local Revenue Administration There is considerable scope for improving local revenue administration. At present, in many UPs, only 10-20% of the holding tax is collected, and many businesses do not have licences. While holding tax is never likely to achieve 100% collection, not least because so many people are poor, a number of UPs have demonstrated that it is possible to increase collection performance significantly. The following are the steps that UPs need to take in order to achieve a higher collection performance. a) Prepare a register of all properties in the UP, including non-domestic properties, and updating that register annually (see Annex 3 for a pro-forma). b) Use the mass-appraisal system to assess all except the larger non-domestic properties, for which the ARV method should be used. The register, with the assessed values should be made public so that people can see if there are anomalies, and any collusion between assessor and household can be revealed. This will inspire public confidence that the system is fair.5 c) Any reductions on the grounds of household poverty should be made explicitly (as per the pro-forma at Annex 3), ideally at a ward-level public meeting, and
People will still have the legal right of appeal, first to the UP, then to the UNO, and finally to the District Commissioner, if he/she considers the assessment is wrong or unfair.
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approved by the UP, so that all can agree which households should receive a reduction. This will also help to create trust in the fairness of the system. d) There should be a register for payments, listing for each plot and plot owner, the final assessment (i.e. the amount due for the current year), plus any arrears from previous years, the amount paid in the current year (with date of payment and receipt number), and the amount still outstanding (see Annex 4 for a sample proforma). Such a register enables the UP to identify immediately who has not paid, and the amount owed, thereby enabling effective follow-up of non-payers. e) Tax collection for the current year should start in July and be completed by 30th June. Collections should not spill over into the following fiscal year. Any amount outstanding at 30th June should be recorded as an arrear to be collected the following year (with or without penalty). This helps to clarify what should be paid and when, and helps with accounting for the years revenue. f) The present system of issuing receipts and recording money received in a register, with details of the receipt number and date, appears to work reasonably well, enabling cash received to be checked against receipts (so long as those checks are actually made). However, in addition to (or instead of) the chronological register of cash received, revenue receipts should be recorded in the register specified in (d) against the plot number, so that non-payers can immediately be identified.

g) Money collected should be paid into the bank promptly after checking cash against receipts issues. Ideally, this should be on a daily basis. Ideally, also, larger payments should be made directly to the bank, reducing the risk of loss or fraud. This would require a bill to be issued, which can be taken to the bank. This is now done in some cities and municipalities (e.g. Tongi), but for UPs it would only be realistic for the largest payments (say T.1,000 and above). h) Collectors should continue to be employed on the basis of commission. It is commonly claimed that 15% commission is not sufficient incentive. However, with the higher assessments, and other steps to improve collection performance, the amount collected should increase significantly, augmenting the incentive effect. Guidance issued by LGD allows a further 5% to be allocated to village police, and to reward the best performing collectors, but it is not clear whether this is being applied at all, and if it is, whether it has any effect. An alternative would be for the UP to directly employ collectors and pay them out of the revenue collected. However, that is almost certain to increase collection costs, as they would probably be paid more than the 15% commission. It might also reduce the motivation to collect. Thus, it is recommended that UPs continue to employ collectors on commission, but review how the incentives can be augmented. i) Spot checks by the UP Chairman or Secretary to see whether there is fraud by collectors (e.g. not giving a receipt or giving a fake receipt). For example, selective follow-up visits to the houses visited by collectors would reveal any fraud if households say that they have paid but do not have a proper receipt. Rotating collectors between wards part way through the year could have the same effect, but that would only be possible if there were several collectors. Prompt follow-up action where people have not paid. Households should be visited at least one a month for the first three months of the financial year until they have paid what is due.

j)

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k) After three months (i.e. end of September), compiling and displaying a list of defaulters (e.g. on the UP notice board and/or in other public places), or putting notices on the houses or defaulters; this should have the effect of shaming nonpayers into paying. It would also help to reveal any fraud by collectors or collusion between households and collectors. l) Motivating people to pay through public information campaigns at ward and UP level, explaining how developments already completed under LGSP and other programmes are threatened by people not paying their tax. Such meetings may carry more weight if supported by the UNO, so the UP Chairman should solicit the help of the UNO. Peoples willingness to pay can also be increased through opportunities to participate in decisions about how resources are to be used (e.g. budget prioritisation meetings), and where there is confidence that the taxes collected are used properly, through increased transparency about resource use.

m) As a last resort, taking enforcement action against those who can afford to pay but who refuse to pay. Initially this may take the form of a letter from the UP Chairman, threatening to seize movable assets. If that produces no result, then in a very few, carefully selected cases (people who are clearly able to pay), the UP Chairman should solicit the help of the police (and the UNO) in seizing some movable property from the defaulter. Although the assets seized might not be worth very much, the signal that it sends to other people is that the UP is serious about collecting tax. Hopefully, that will induce other defaulters to pay up. n) In the case of business tax / licences, the UP should prepare a comprehensive list of all businesses in the UP. This will require field inspection, and can be cross-checked against the holding tax register for non-domestic properties (ideally, using the same plot number and/or taxpayer identification number in both registers to facilitate cross-checking). The type of business should be recorded, together with the size category (consistent with the classifications in the suggested Model Tax Schedule Table 2), and the amount payable. All business, commercial and professional activities that are covered by the Model Tax Schedule should be listed, including NGOs. A pro-forma for such a register is included at Annex 5. o) A record should be maintained of payments of business tax / licences against each business in the register (as indicated in the pro-forma at Annex 5). This will show clearly which businesses have not paid for the current year. Where a business has not applied for a licence by the due date (say, 30th September), the collector should visit the business and require payment. If no payment is forthcoming, the steps outlined above in (k), (l) and (m) should be adopted. The ultimate sanction would be to close the business. p) Where possible, follow-up action in relation to a business tax / licence should be integrated with action to recover holding tax from the same property, so as not to duplicate effort. q) Simple computerised spread-sheets can help improve revenue performance, by tabulating clearly assessments, arrears, payments and outstanding balances. Cross-checks can easily be made, and defaulters lists produced, as can reports on performance. However, they require someone with knowledge of computers, and preferably more than one person, to reduce the scope for fraud by the system manager. Automatic checks should be built into the software to prevent fraudulent transactions. Also, paper copies of all records should be maintained to reduce the risk of loss of data through system failure or data corruption.

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r) Overall performance of revenue collection can be motivated by the inclusion in any grant system (including the LGSP grant allocations) of a performance indicator or indicators based on revenue performance. One indicator might be that the UP has compiled a holding tax assessment register and a business tax/licence register in the approved form. Another indicator might be performance of collection against assessment (i.e. effectiveness what proportion of the assessed tax has been collected). An alternative indicator might be the percentage increase in tax revenue.6 In addition, there might be competitions between UPs within a district to see which could collect the highest proportion of assessed tax, with small rewards for the Chairman, elected members and officials of the best performing UP.

5. Additional Revenue Sources Is it possible to identify additional revenue sources for UPs, either as local revenue sources, or national revenues that could be shared with local government, without creating serious problems of inequity, non-neutrality, high collection costs or difficulties of assignment to the right UP? The following have been suggested (some by the UPs themselves). Most are not new they have a basis in the existing system but are not generally used, for various reasons. More detailed discussion of them is included in Part B, section 11. a) Charges for services UPs can charge fees for services, such as citizenship and other certificates, but since UPs currently provide few services, revenue from charges is very small. The Local Government Committee has proposed that UPs be allowed to charge for (or receive a share of charges for) birth, death, marriage and divorce certificates. As UPs provide additional services, such as water supply and waste collection, they can levy charges to recover the costs. But these would probably at best only recover service costs, rather than generating net revenues. b) Leases for hats, bazaars, water bodies Leases for hats and bazaars are currently administered by Upazilas, with UPs receiving only a small share (5% to the UP where the hat/bazaar is located, 45% shared between all UPs in the Upazila). However, little if any of this money actually reaches the UP, being instead spent by the Upazila. UPs argue that, If these leases were restored to UPs to administer, they could obtain more revenue, and spending would be under their control. This is disputed by the Upazila UNOs who argue that UPs do not have the capacity to manage the leases properly. Under either arrangement, there are issues of transparency, over both lease tendering and use of money. But there is probably a greater chance of accountability to citizens for the use of the money if UPs are in control (see Part B for a fuller discussion of the arguments). UNOs could still have a role in monitoring UPs tendering arrangements. Even if Upazilas continue to administer the leases, the money should go directly to the UPs, with the bulk going to the UP where the hat / bazaar is located. Large differences in revenue potential between UPs should be handled (along with other sources of resource disparity) through the intergovernmental fiscal system, rather than by arbitrary reallocations within Upazilla.

The indicator should not be the total amount collected, since that would favour UPs with greater revenue potential.

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In the case of water bodies, there appear to be other complications in terms of the organisations to whom the water bodies have been leased, as well as the fact that water bodies may cross UP boundaries. The administration of water bodies needs further consideration, as recommended by the Local Government Committee. Another category requiring further consideration is the leasing of ferry ghats, currently administered at Zila level. c) Fees for the extraction of sand, stone, gravel UPs have suggested that they should have the right to levy fees for the extraction of sand, stone and other building materials. This would be appropriate, and is common practice in other countries, although there are problems of control of revenue collection and consequent risks of fraud. There may also be complications in terms of existing rights to the exploitation of this resource, which it was not possible to investigate in this study.7 d) Tax on advertisements The Model Tax Schedule already allows UPs to tax advertisements (signs, billboards, etc.), but few seem to do so, probably because the rates are too low. If rates were raised significantly, this would be an appropriate revenue source for UP, and could be collected relatively easily, particularly if collected alongside business licences. e) Building permits Paurashavas levy fees for permits for building construction, based on the area of the building. UPs could levy this also. However, the purpose of building permits is to regulate building and ensure that buildings are properly constructed (although it is not clear whether paursahavas are really regulating effectively). UPs do not have the capacity to regulate and supervise construction, so giving UPs this as a revenue source could undermine the regulatory aspect. If it were seen simply as a revenue source, separated from any regulatory aspect, then it could be appropriate. f) Tax on three-wheel public transport (CNGs) The MTS already allows for licensing of three-wheelers (and other forms of public transport) but the rate is too low to be worth collecting in most cases. If the fee (or tax) was raised substantially, it could be a source of revenue. However, the national Ministry of Transport, which currently regulates and taxes public transport, might object to such a change. Also, there might be a problem (as with rickshaws) for UPs adjacent to paurashavas, in that the vehicle has to take its licence from the paurashava in order to ply there. This could be resolved by a regulation requiring that a licence from the UP where the vehicle is based be recognised by the adjacent paurashava. (The tax could also apply to four-wheelers, but limited by engine size to avoid taxing large, inter-city buses.) g) Local tax on electricity This is a suggestion for a completely new revenue source, but one used in a number of countries, including Indonesia. The UP would be allowed to add a small percentage to the price of electricity sold in its jurisdiction. The electricity company would collect the tax as a surcharge on the regular electricity bill and remit the money to the UP. It would be very cheap and easy to collect, and would impinge mainly on higher income groups who consume much larger amounts of electricity. It would, of course, only be available in UPs where there is electricity, but as electrification is
The Local Government Committee report recommends that UPs should be given a 3% share of income from riverside sand and stone stack yards. If this is the same as fees for extraction of sand and stone, then a 3% share seems very small, and it depends who is receiving the rest.
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extended to rural areas, more UPs would be able to levy the tax. It would require a significant legislative change, and so it is one for consideration in the longer term. h) Tax on mobile phone masts Many UPs have suggested this as a revenue source. It could be achieved by the inclusion of mobile phone masts in the Model Tax Schedule.8 i) Increased share of Land Transfer Tax At present, the government shares 1% of the centrally collected Land Transfer Tax with UPs. It is a significant revenue source in many UPs, although there are issues about how the money is handled at Upazila level, before it reaches the UP. Doubling the sharing rate to 2% (as has been suggested by the Local Government Committee) would be the simplest way to increase local resources.9 However, this would need to be accompanied by more transparent channelling and accounting arrangements. j) A share of Land Development Tax Another proposal from the Local Government Committee is that a 3% share of the land tax (officially known as the Land Development Tax), levied on agricultural land, be given to UPs. Since this tax is clearly related to economic activity in the locality, this would be appropriate. It might also be appropriate for the sharing rate to be higher, say 5% or 10%, in return for assistance from the UP in revenue mobilisation. k) Use of state land One further suggestion made by many UPs is that they should be given the right to use state land in their jurisdiction for productive purposes such as forestry or fishing, and thereby to derive a revenue. This may well be appropriate, but requires more detailed consideration. In particular, there will be issues about the current use and management of the land by other government institutions.

6. Related Issues The study identified a number of related issues that need to be addressed if UPs revenue sources are to be enhanced and used effectively. Part B section 12 provides a more detailed analysis of these issues. The following is a summary of the key recommendations. a) Finance staff UPs need an additional staff member to handle the increased financial resources under the control of UPs (including the various transfer programmes). This was included in the recommendations of the Local Government Committee. This person need not be a qualified accountant but does need to be trained in basic accounting and financial management. S/he also needs to be provided with computer facilities.

Some UPs have also suggested taxing electricity distribution poles. This is more problematic, with issues about what should be included and how it should be assessed. It is suggested that the local tax on electricity would be a better way to tax this sector, since the burden would fall on local taxpayers (something which is less easily achieved in the case of mobile phone users, since, by definition, mobile phones are mobile). 9 Based on data for the seven UPs in Sirajganj for which the audited accounts for the last two years have been analysed, increasing the Land Transfer Tax sharing ratio from 1% to 2% would, on average, result in a 55% increase in local revenue (local revenue here defined to include the Land Transfer Tax share).

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b) Improved budgeting and expenditure management UPs need support to improve their budgeting and financial management. Budgets need to be realistic, based on the revenues that can actually be collected, so that budgeting decisions are based on the real available resources. Budget preparation should be open and participatory, at both ward and union level, giving residents confidence that tax resources will be used in their interests. Expenditure management needs to be strengthened to minimise the scope for misuse and to ensure value for money. c) Financial information and accountability Information about the tax base, tax collection and expenditures should be made publicly available (e.g. with a summary of actual revenues and expenditures presented at public meetings and displayed on the UPs notice board and in other public places). This will give residents confidence that their money is being used properly, making them more willing to pay their taxes. d) Fiscal transfers: transparent allocation, timely payment and local choice Until 2004, most or all transfers for UPs were disbursed at Upazila level, with little choice for, or accountability to, the UP. From 2004, the basic block grant has been channelled direct to UPs. Other transfers such as SLGDP and LGSP have also been transferred directly to UPs. But a substantial part of the ADP grant is still allocated at Upazila level with a high level of central prescription. This undermines local choice and accountability. Over time, a larger proportion should be paid directly to the UP, with requirements for open and participatory budgeting and local accountability. Although implementation for many of the projects may still need to be undertaken at higher levels (e.g. through LGED), the choices about resource use should be made at UP level, albeit perhaps within a menu of options set by the central government. There should be greater transparency about the basis for allocating transfers to UPs, with a clear formula. Agreed transfers should also be paid on time, so that approved budgets can be implemented and UP officials held accountable for use of resources. The design and implementation of the intergovernmental fiscal transfer system should be a priority task for the Local Government Commission, once established. e) Compatibility with Paurashavas and Cities, and scope for mutual learning UPs do not exist in isolation. Reforms are also needed, and are being implemented, in paurashavas and cities. Any reforms that are undertaken in one type of local government need to be compatible with those undertaken elsewhere, since it makes no sense to have different and potentially conflicting arrangements in adjoining jurisdictions. There is also scope for mutual learning from innovations and good practice across the types of local government. Steps should be taken, e.g. through associations of local governments, to disseminate examples of good practice. f) The impact of elected Upazila Parishads At present, Upazilas have no own revenue sources. This is not a problem while they remain a deconcentrated level of government. But the Governments intention is that elections will be held shortly for Upazila Parishads, whether before or after national elections. Once elected, Upazila Parishads will need local revenue sources. There is a danger that they will compete with UPs for revenue sources. This should be avoided. Any proposal to reallocate revenue sources like holding tax and business licences to Upazilas, or to share these between the levels, would fundamentally undermine the already weak financial position of UPs. Rather, it is suggested that Upazila Parishads should receive a share of the Land Development Tax, and possibly also the Land Transfer Tax.

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Part B: The Current Situation of Union Parishad Revenues This part is a revised and updated version of the main part of the report of the study on UP revenue sources conducted in July 2007. 7. Holding Tax a) The present system of levying Holding Tax Holding tax is the main revenue source for UPs. According to the UP Model Tax Schedule it is to be levied on constructed properties at a rate of up to 7% of the annual rental value. In many UPs, the tax is taken to apply only to residential properties, with business being taxed through licences. In others, the holding tax is applied to some or all non-residential properties. Thus, there remains an ambiguity about the application of the tax to non-residential property. In relation to holding tax on residential property, performance is generally very weak, with the majority of people not paying. However, in some UPs (notably in Sirajganj), revenue performance has improved as people are involved is decisions about the use of resources and as accountability for tax revenue is strengthened. Assessment According to the guidance issued by the Ministry of Local Government in 2003, assessment should be based on the annual rental value (ARV) of the property (including the land on which the property is sited, but not agricultural land). Even where the house is owner occupied, rental value can be determined based on rents for equivalent properties. Where rental value data does not exist, the capital value of the house can be estimated, using PWDs construction cost figures converted to rental value by applying a 7.5% rate of return and adding the ground rent for the land. The assessment is then calculated as 10/12ths of the annual rental value (allowing two months rent as the cost of maintenance). The tax rate is then applied at up to 7%. There is a ceiling tax rate of Taka 500 for any one property. The calculation set out in the Ministrys 2003 Strategy Paper (but which is based on established practice and applies also in paurshavas and cities) contains a number of anomalies. Firstly, it gives a reduction on the assessment for the interest costs where a property is subject to a loan or mortgage. This is not appropriate, since it creates an inequity simply according to the method of financing the house. It is also likely to benefit the better off who are more likely than the poor to use loan finance for their house. Secondly, it gives a 25% reduction for owner occupiers, on the grounds that they are not earning income from the house. However, in principle, the type of tenure is irrelevant to the value of the property, or to the costs to the local government of providing services to that property. This creates an inequity between types of tenure, benefitting owner-occupiers.10 If the holding tax is to remain the main source of UP revenue, it is suggested that these anomalies be removed. In practice, few UPs appear to be using this method of assessment, whether for lack of understanding of the rental value method or lack of data, or simply because it seems unnecessarily complicated. Even where UPs attempt to use the method, the final assessment is usually adjusted (often without any clear relationship to the
Nor can it be assumed that the resulting higher tax for rented housing is born by the landlords: as with any tax, the burden is shared between buyer and seller according to the elasticities of supply and demand; thus at least part of the burden of the high tax and probably the majority in the case of rented housing will be borne by the tenant.
10

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original figure) on the grounds that the household cannot afford to pay, or for some other reason. The resulting, adjusted assessments are generally much lower than the formula would have suggested, especially for the more valuable properties. There are, therefore, some doubts about the validity of the assessment, even when the official method is applied. Most UPs appear to be using a cruder system. This involves assessing houses against some general criteria: number of rooms, size of rooms, house construction materials, provision of tubewell and toilet. Typically, this results in assessment of Taka 10-20 for a one-room house of temporary materials to Taka 150-250 for a four roomed house of permanent materials. The resulting assessment may also be modified by assumptions about the occupiers ability to pay. Overall, this method of assessment may be acceptable, providing the criteria are clear and applied consistently and transparently, for example, in some form of public meeting. In the end, what matters is not the absolute value of the property but rather a fair distribution of the tax burden between households. But it does require that a clear set of criteria is consistently applied and that the process is sufficiently transparent. Each UP is supposed to have a register of all houses11, together details of the property and the owner or occupier and the assessed values. These lists were generally compiled more five years ago, and are now due for revision (in one case, the register had not been revised since 1991). It was claimed that adjustments are made each year for new houses or changes to houses. In the UPs visited, the registers were said to have been compiled either using data from a survey conducted by students, contracted by the UP and guided by the UP Secretary and councillors, or on a ward basis by UP councillors themselves. In some cases, it was claimed, the registers and assessments were compiled in public meetings. If that is so, it should ensure a degree of transparency and fairness. But there are risks that only certain people attend such meetings, so that others are less fairly treated, although given the very low levels of the assessments, a degree of unfairness may not be a major issue. Where the ARV method is used, the tax rate has to be set (up to 7%) and applied. Where the simpler system is used, the assessment comes directly to an amount per house, which may or may not have any relationship to a rate of tax on the annual rental value. The tax rate, and the fixed assessments, appear not to have been changed since the current tax rolls came into effect in 2002/03, apart from where there have been changes to individual properties. In most cases, the resulting tax assessments are very low: Taka 20 60 per year in most cases (equivalent to about US 30 80 cents), with some at Taka 100 or 200.12 Exceptionally there are assessments of Taka 400 or 500. However, in the UPs in Gazipur, on the fringe of Dhaka, there were a number houses assessed at the ceiling rate of Taka 500, including a number of multi-storey blocks of rooms for garment workers.13 Overall, the average assessment was probably around Taka 50, and the median around Taka 35.
It is claimed that these registers are complete, but it is possible that some properties are not included, whether because they are new or for some other reason. 12 As an indication of how low these tax assessments are, the typical assessment of Taka 20 60 corresponds to 0.15 0.4% of the annual minimum wage of a garment worker. In one UP that had not revised its assessments since 1991, there were assessments of Thaka 3 5, amounts which are now too low to be collectable. 13 Where such blocks consist of separate apartments, presumably each apartment can be taxed separately, but where the block consists of multiple rooms, for example for garment workers, then only one tax can be levied on the whole block. In one UP, such a block was
11

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Collection Bills are not issued for holding tax. This is not surprising, given the small amounts involved and the cost of issuing bills. Instead, either taxpayers come to the UP office to pay or tax collectors contracted by the UP go house-to-house to collect the tax. Payments can be in more than one instalment (normally two). Collectors (up to one per ward, but often only one for the UP) are paid 15% commission. This commission is supposed to be paid from the bank once the money collected has been deposited into the bank, although it seems likely that, in many cases, collectors deduct their commission before depositing the money. Collectors are issued with a ward register of properties and their assessed values, and with serially numbered receipt books. Every few days (or once a receipt book is used up), the cash is deposited at the UP office, and the receipt book and register are checked by the UP Secretary against the cash before the money is deposited in the bank. A chronological register is also kept of all payments received, together with the number of the receipt issued. In the UPs where a relatively high proportion of tax assessments is recorded as being collected, this leaves little scope for fraud or collusion. However, there are, no doubt, places where the system is not operating properly. There could be fraud in terms of collectors pocketing the tax payment and not issuing a receipt, or issuing fake receipts; or there could be collusion between taxpayer and collector to pay a smaller amount, again without a receipt. But unless there is a record of payments against assessments, it is not obvious which households have not paid. If no record of defaulters is ever produced or publicised, and if no action is taken against defaulters except follow-up by the same collector who had perpetrated the fraud, then the fraud may never be revealed. Such fraud can be countered by producing and publishing a list of defaulters, so that taxpayers who have paid without getting a genuine receipt will complain. It could also be countered by rotating tax collectors between wards so that follow-up of apparent defaulters reveals any fraud. However, rotating collectors may be difficult if the system is for them to collect from the ward where they live. The system used in most UPs does not make it easy to identify and hence follow-up non-payers. Collections are recorded in a chronological register. Although this records the plot number, it would require a separate exercise to check against the assessment register to identify who had not paid. In practice, lists of defaulters are not produced for purposes of follow-up, and there is no record of arrears. Although claims are made about follow-up action, it is doubtful if this really happens. Collection performance Collection rates are generally very low. It is likely that in most UPs, only 5% to 20% of households are paying. This is generally explained in terms of people being poor, problems of floods, and reluctance of elected Chairmen to take unpopular enforcement action. A few places have managed to increase collection rates significantly. Table 1 shows collection rates for UPs in Sirajganj district as a percentage of budgeted revenue, ranging from 1% to 91%. However, budgeted figures may not reflect the full potential revenue (especially if arrears are not included), so these figures may overstate the performance. Moreover, a significant proportion of the revenue may be paid by a few business or institutional payers. For example, one UP visited (Gopaya in Noshingde district) had managed to collect
reported to be earning a monthly rental of well over Taka 10,000, yet the maximum annual tax that could be levied was Taka 500.

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around half of amount holding tax due in 2007/08, but 70% came from just five institutional payers. The remaining 30% came from 580 other payers (17% of households), while 83% of households paid nothing. In another UP (Nurpur), receipts were issued to 400 households (12% of the total number of households), and money received amounted to 18% of the total assessment.

Table 3: Revenue Collection Performance as a Proportion of Budgeted Revenues for UPs in Sirajganj District
Revenues Collected as a Proportion of Budgeted Holding Fees for Revenue (2005/06) Tax Licences Bagbati 48% 9% Bahuli 31% 34% Bhangabari 19% 34% Belkuchi 34% 0% Beltail 12% 0% Bradhul 10% Gala 11% 0% Jalalpur 26% 11% Kalia Horipur 22% 30% Kaoakola 2% 200% Kayempur 43% 71% Khokshabari 23% 29% Khukni 4% 50% Koyjuri 58% 86% Nechra 31% X Narina 38% 70% Porjono 12% 0% Purnimagati 62% 73% Rajapur 51% 40% Ratankanbi 8% X Rupaboti 91% 97% Sialkol 18% 10% Sonatoni 1% 35% Notes 0% means there was a budget but no actual revenue X means there was no budget and no actual revenue XX means an actual revenue although no budget Other Local Revenues XX 173% X 0% 0% 386% 0% 1% 55% 4% 0% 7% X X X 24% 0% 30% 0% X X X 0% Lease Money XX 0% 20% 0% 9% 53% 0% 0% 11% 96% 0% X X 0% X X 0% 65% 2% 0% 0% X 0% Total Local Revenues 49% 39% 31% 24% 9% 23% 10% 7% 19% 5% 39% 21% 5% 56% 31% 38% 9% 55% 27% 6% 73% 17% 1%

Source: Compiled from audited accounts

Some UPs have managed to increase their revenue collection performance through building trust with residents: through open discussions about spending priorities in the budget, greater transparency and accountability over resources collection and use, and improved service delivery, as well as exhortations to pay the tax. Although collection rates may still be low, in many cases they have improved from virtually nothing. In many cases, it was claimed that there was no collection of holding tax before 2003. By contrast, in Tongi Paursahava (municipality), in an industrial suburb of Dhaka, revenue collection performance has improved dramatically, from 12% of assessed value in 1995 to 92% in 2007/08. Although this is hardly comparable to a rural UP, since Tongi has a huge revenue potential and residents are generally better off,

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nevertheless there are useful lessons to be learnt about how revenue collection performance can be improved. Further information on the Tongi case is provided in Annex 6. Follow-up and enforcement Follow-up and enforcement are probably the weakest links in the system. Some UPs claim to prepare lists of defaulters which are placed on the UP notice board, but there was little evidence of this. UPs may send a formal notice to the householder, which, it was claimed, can have the effect of inducing the defaulter to come to the office and negotiate for payment by instalments. In Tongi Paurashava, notices are affixed to properties of defaulters in order to shame owners into paying, and this was claimed to be highly effective. However, in most UPs, there is probably minimal attempt follow up of defaulters. With more than 80% of households not paying, and the amounts involved being so small, producing lists of defaulters may not be seen as worth the effort, except for the few large institutional or business properties. The UP can also refuse to provide defaulters with services, but since the UP does not really provide services, there is little to withhold. One UP had a stock of subsidised fertilizer provided by the government to help farmers affected by the floods in the previous year, and it was using the allocation of that to farmers to induce payment of the household tax. However, there are always risks that such practices end up as mere rent-seeking. Although UPs have powers to take action such as seizure of assets, they require the support of the UNO and the police. This does not seem to be readily forthcoming. On the other hand, it is doubtful whether many Chairmen would be willing to ask for help to take such action, which would be perceived as unpopular. However, pursuing nonpayers is important not just to increase tax yields but also for equity between taxpayers and non-payers. This is particularly so where it is the better off who resist paying. It seems likely that the failure to take any enforcement action sends the signal to residents that nothing will happen if one does not pay, leading to a downward spiral of revenue performance. Motivating taxpayers In the end, tax collection performance depends on voluntary compliance, and that depends on taxpayers having confidence that revenues collected will be properly used to provide services that benefit them. The Sirajganj project has demonstrated that increased opportunities for residents to participate in budgetary choices, combined with greater accountability and transparency over resource use, does build trust and willingness to pay. The same has also been demonstrated in Tongi Municipality (see Annex 6). Most UPs in Sirajganj have improved revenue collection over the past five or six years, albeit from a very low base and not always consistently, but some have certainly improved performance substantially. While that may be due, in part, to better systems of collection, it is also undoubtedly due to greater public confidence in the whole process and hence greater willingness to pay.

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8. Business Taxes and Licences Assessment In the UPs visited, business licences seem to be the main way in which businesses are taxed. Although most UPs claim to be following the tax rates laid down Model Tax Schedule, in practice many use a simple flat rate for all businesses. In one UP, the standard rate was Taka 100, in another 200. Such a simple approach is probably fair enough in a situation where there are relatively few traders, and they are all of a similar, small size. In another UP, in the peri-urban area of Dhaka, business tax was graduated from Taka 300 for a small, temporary shop to Taka 1,000 for a large shop, with most set at around Taka 500. Those rates do not match the Model Tax Schedule, and appear to be marginally more progressive than those in the Schedule. But since there did not appear to be any published assessment criteria (although it was claimed that the rates are well known), the resulting equity depends on how systematically, fairly and transparently the assessments are done. That UP had what appeared to be a comprehensive register of all traders 2,779 in total updated annually, of which 2,381 had paid their licences in 2006/07, generating over Taka 1.4 million in revenue. It was said that the relatively high compliance rate for that year (85%) had a lot to do with the current emergency situation, in which many unlicensed traders have been closed down by the police. Even so, it is probable that there are some perhaps many commercial and industrial activities in this UP that are not covered, since licences essentially relate to shops and traders. Moreover, the fee schedule adopted, although somewhat more progressive than the Model Tax Schedule, still does not capture the huge difference in scale of operation and ability to pay between, say, a large factory or hotel on the one hand, and an informal sector trader or small kiosk on the other. For most rural UPs, that is not really an issue, since they do not have any large enterprises. But the peri-urban UPs certainly do, and even in rural Sirajganj there are power-looms and small textile mills. One UP was proposing to levy a licence fee of Taka 500 on these workshops, compared to Taka 100 for all other businesses, even though these rates do not match the fee set in the Model Tax Schedule. Another UP levied Taka 100 per machine. The flat rate model does not require any assessment. Assessment only becomes an issue where higher amounts are levied on larger businesses. This can end up being rather arbitrary, in the absence of a proper regulatory basis. One UP in Gazipur is levying, in addition to flat rate licences on traders, a tax on some 300 local industries using the annual rental value method. This is the method that would be applied the neighbouring pourashava and city. By applying a 7% tax rate, the UP is generating around Taka 1 million per year. The rental value data was being obtained (so it was claimed) from the businesses concerned, on the basis of their rental agreements. That UPs also contains 142 brickfields, on each of which it levies a fixed fee of Taka 3,000, on the grounds that it was impossible to assess rental value for such establishments. In other places, the higher assessments are rather more arbitrary round numbers such as Taka 5,000 or 10,000. But these amounts are probably still fairly insignificant for the industries concerned (if they pay). Registers of businesses Some UPs visited have registers of businesses with descriptions of the type of business and associated assessments. Although the registers appear to be quite extensive, it is not clear whether they really capture all businesses. It is doubtful whether there is a regular and thorough survey to determine whether all businesses

25

are included in the register. The registers also concentrate mainly on shops and traders, and may omit some other types of business activity that are not so easily classified or licensed, such as services, professionals and NGOs . Some professsionals and non-retail businesses may be both better off and less willing to pay.14 In other UPs, there does not appear to be any attempt to compile a register of businesses. Rather, licences were issued if businesses applied. It was said that businesses may need a licence in order to open a bank account, but otherwise they may not bother to apply. In two UPs, it was said that the number of businesses was two or three times the number that had licences. There did not appear to be any serious attempt to require businesses to obtain licences. Collection and enforcement For business licences, collectors are not used, but businesses are expected to come and pay at the UP office. In some cases, payments are made directly to the bank, and the licence is issued by the UP on production of the receipt from the bank. This is a good method. Either way, though, it relies on the business taking the initiative; unless there is some threat of enforcement action, they may not bother. There does not seem to be any obligation for traders to display their licence, making identification of non-payers less easy. In practice, there do not seem to be any effective means of enforcement, although in one UP adjoining Dhaka, mentioned above, action by police under the state of emergency had obviously had a significant impact on the payment of licence fees. Some of the UPs claimed that most (even all!) businesses paid, but only one UP appeared to have a precise record of how many were registered and how many had actually paid. Furthermore, the records for licence fee payment, like Holding Tax, appear to be chronological (i.e. according to the date of payment), so that it is not easy to check payments against the register of businesses (if one exists) to see who has not paid. Ideally, every UP should compile a complete register of businesses, updating it using field survey, and use that to check off those who have paid, so that a list of defaulters can be prepared for follow-up action. Model Tax Schedule on Trades Professions and Callings (2003) This schedule sets out the annual amounts to be levied on different types of business. It includes over 150 different categories of commercial and professional activity, with special categories for contractors, educational establishments and nursing homes/clinics. Each category has a fixed rate, ranging from Taka 15 for a small laundry to Taka 500 for a highway inn or a brickfield. There are a number of problems with this list. Firstly, the rates are very low, especially for large establishments. Secondly, the classifications and relative rates seem somewhat arbitrary: why should a ceramics works pay less than a cigarette factory, or a travel agent less than a transport agency? Thirdly, the classification does not take any account of the scale of operation or the relative ability to pay. An establishment employing 100 people should presumably pay a lot more than a one employing two people, even if they are in the same class of trade. And a large, international hotel should presumably pay a lot more than a small, local hotel, even though both are residential hotels. Yet in most cases the schedule does not make

A further problem is the refusal of many professionals to pay these local taxes, arguing that they pay national income tax. However, this argument is irrelevant, since the local tax (or licence fee) is levied in recognition of the right to ply their profession in that locality, and it is a contribution to the costs of providing local services.

14

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any adjustments for scale, or only modest adjustments. For most UPs, such differences have little relevance, but for at least some UPs it certainly does matter. It would be possible to design a much more progressive scale of levies on businesses, that reflected albeit rather crudely the scale of operation and ability to pay. This is what has been done in Kenya with the introduction of the Single Business Permit, with a much more progressive scale of tariffs compared to the old business licence. Not only is this fairer but it permits much more revenue to be collected, since, under the previous system (as with the Model Tax Schedule in Bangladesh), the amount that can be levied is limited by the ability to pay of the smallest and poorest business within that class. However, when the current Model Tax Schedule was adopted in 2003, the then Minister rejected the proposal for higher tax rates. The Model Tax Schedule also sets out tariffs for non-motorised vehicles (Taka 20 for a rickshaw plus Taka 15 for a driving licence) and boats advertisements: Taka 6 (per sq ft per year) on UP-owned land, Taka 5 on other land, with higher rates for illuminated signed cinemas, theatrical performances, amusements: 10% of the ticket price exhibitions and fairs: 10% of any ticket price or sales. Whilst the rickshaw licences are collected in some UPs, the others listed above are not applied (although there may be some exceptions). Even licensing rickshaws is problematic where the UP is close to a pourashava, since the main custom for the rickshaws is in the urban area, so that rickshaw drivers have to take their licence from the pourashava, and are (understandably) unwilling to pay twice. Even when such licences are issued, the costs of producing the licence plate may well exceed the Taka 20 collected.15 In relation to the tax on advertisements, most UPs seem unaware of this as a revenue source, or how to levy it. Since cinemas and other forms of entertainment and amusement are almost invariably located in the urban areas, it is not surprising that UPs do not collect this revenue. Whilst there may be occasional fairs or entertainments within UPs, the problems of levying the tax on these are likely to outweigh the benefits in tax revenue.

9. Other Revenue Sources Leases for Hats, Bazaars and Water Bodies The operation of hats and bazaars (daily and periodic markets) is contracted out on a lease basis, as is the use of water bodies for fishing. Leases are issued annually on the basis of competitive tenders, with the previous years lease amount as a reserve price. Until recently, UPs managed these leases, but in 2002 the Government transferred the administration of leases to the Upazila. The stated reasons for this were, firstly, that UPs did not have the capacity to administer the leases properly and so were not getting the best deals; and secondly, that it was not equitable that certain UPs where large markets are located receive all the revenue while others without
15

As an indicator of how low this fee rate is, Taka 20 (for a year) corresponds to one, or perhaps two, average length rickshaw rides, or half the cost for the rickshaw driver to hire his rickshaw for one day, or less that 0.1% of his annual earnings.

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markets receive nothing. There is probably some validity in the first argument, although it is not clear that the shift to the Upazila has always resulted in greater revenues indeed, in some cases it appears to have resulted in lower revenues as a result of more organised cartels at that level. The second argument is highly questionable. In most developing countries, markets are a main revenue source for the rural local governments in which they are located. Inequalities in the resources of UPs that result from the location of markets are only part of much larger differences in fiscal capacity between UPs, and should be addressed through the intergovernmental fiscal system. Moreover, the differences between UPs as a result of the location of markets pale into insignificance beside the differences in revenue potential between UPs and pourashavas and cities, which are not addressed at all in the current intergovernmental fiscal system.16 The policy document on the leasing of hats and bazaars, issued by the Ministry of Local Government in 2002, specifies how the UNO at Upazila level is to administer the lease process, and prescribes management arrangements for the hats and bazaars involving the market stakeholders. It also specifies how the lease money is to be shared: 5% to the Ministry of Lands 20% for the salary of the UP staff 15% for the maintenance and development of the hat/bazaar 10% for the Upazila development fund 5% to the UP where the market is located 45% to be deposited in the Upazila development fund to be distributed between the UPs in the Upazila. This arrangement is a matter of greater dissatisfaction on the part of UPs. It seems that, while UPs do generally receive the 5% share, the treatment of the 45% seems to be much more at the discretion of the UNO. In principle, projects proposed by the UPs are considered by the Projects Committee at Upazila level, chaired by the UNO, and are then approved by the Upazila Development Committee (UDCC), of which all UP Chairmen are members. In practice, the decisions of both the Projects Committee and the UDCC are driven by the UNO, by the officers of the sectoral ministries at the Upazila level, including the Local Government Engineering Division (LGED), and by the local MP, who seems to wield inordinate influence over such decisions. While it is perfectly possible that this process works well to decide on priority projects across the Upazila, the lack of accountability to local residents is an issue. The figures analysed from UPs show wide variations in lease revenue between UPs and between years, suggesting that the system is not working satisfactorily, even for the 5% UP share. It is widely alleged that UNOs (and MPs) use their position to dictate priorities for the use of this money, including to finance Upazila operating expenditure. One reason for this may be that Upazilas lack any local revenues of their own to finance their operating costs, and so have to look for resources wherever they can. Rather worse, there are allegations that the money may be used corruptly through deals between the UNO and individual UP Chairmen, since there are no mechanisms by which UP Chairmen have to account for this money to their residents. Similar issues of accountability relate to the other percentage allocations of the lease money. In the case of water bodies, the entire revenue from the leases goes to the central exchequer, so that UPs do not benefit at all. Apparently there are requirements that
For one, thing, according to the 2002 regulations, the pourashava or city where the market is located receives 50% of the lease money, compared to 5% received by a host UP.
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these leases are allocated to organisations of unemployed youths. Although these leases are to be tendered, such requirements must limit the amount of competition. It is also suggested that these youth organisations are associated with political parties, with the scope for political manipulation that this entails. However, there was no opportunity to investigate the operations of the tendering and contracting system either for water bodies or for hats/bazaars. There is a strong demand among UPs that the leasing of hats, bazaars and water bodies (and ferry ghats, currently administered at the Zila level) should be returned to the UPs. There seems to be some support for this in the Local Government Division. There are good arguments for this, as noted above. This would help to increase accountability for the revenue, since UP Chairmen and elected members are democratically accountable (unlike the UNO), especially with the improved systems for accountability and transparency being instituted under the LIC-LGSP. But there will needs to be capacity building in relation to procurement and tendering arrangements, perhaps with powers of the UNO or Deputy Commissioner to intervene if correct procedures are not followed or there is insufficient competition for the tender. (There are already regulations allowing the Deputy Commissioner to order a re-tender if bids are considered to be too low, or, as a last resort, for officials to directly manage the hat/bazaar.). Restoring the lease money to UPs would increase UP revenue sources substantially, even allowing for maintenance costs on the hats/bazaars. Although the increase would be unevenly spread, this aspect should be addressed through the grant system. The alternative would be for the Upazila to continue to manage the leases but for the host UP to receive a substantially larger share of the proceeds, so long as this was combined with reforms to accountability for the use of the money. Land Transfer Tax Share UPs receive a 1% share of the revenue from the land transfer tax. This money is collected centrally and distributed to UPs. Thus it is really a transfer from central government, but since its distribution is by origin, and UPs are (in principle) free to use it at their discretion, it can be considered as a local revenue source. The amounts of money can be quite substantial, often exceeding all other local revenues, sometimes by a large amount. However, one issue with the LTT is that it is currently paid via the Upazila rather than direct to the UP. There the UNO deducts money to pay for part of the honoraria for the Chairman and Members (the remainder being paid out of locally collected revenue). Although the UNO is required to pass the rest of the 1% share of LTT to the UP, it seems that in some cases part of this is withheld to meet other needs of the Upazila. The lack of transparency over this flow of finance may also provide scope for misuse at the Upazila level. The Local Government Committee has recommended that the tax share for UPs be increased to 2%. This will need to be accompanied by more transparent channelling and accounting arrangements. Other local revenues No other significant revenue sources were found in the UPs visited. The audited accounts analysed did not provide any detail concerning the category of other revenues, although in all cases the amounts involved were tiny. Some but not all UPs have receipts from registration certificates (e.g. for citizenship). Some UPs have small revenues for rent on their properties, such as community halls. In some cases there are receipts from village court fees and fines, but these are trivial amounts.

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10. Some Issues with Local Revenue Administration Accounting for revenues and banking Proper systems need to be in place to ensure that revenues collected are accounted for and banked promptly. As noted above, the system for Holding Tax does permit cross-checking between assessments and receipts, although whether such crosschecks are always made is another matter. Also, as noted, there are loopholes for fraud where no list of defaulters is produced and collectors are not rotated. Secure systems also need to be in place for the issuing of receipt books and licences. All this places heavy demands on the one officer employed by the UP. Such cross checking arrangements could be made a greater deal simpler and more effective by some basic computerisation. A simple spreadsheet package could be used to maintain tax registers, calculate assessments, receipt payments, identify defaulters, cross-check payments against assessments (e.g. using Taxpayer Identification Numbers TINs) and prepare accounts and reports. There would need to be an initial investment in setting up the system and training staff to use it, as well as ensuring that data is safeguarded and not open to manipulation. But such basic accounting systems are now commonplace, even in local governments in developing countries, and their absence in UPs (and more generally in government offices) in Bangladesh is noteworthy. A particular issue concerns the prompt payment into the bank of all cash received, ideally on a daily basis. Having cash remaining with the collector, or in the UP office for several days, is a recipe for loss or misuse. It appears to be common practice for cash coming in to be used immediately for UP expenditures without passing through the bank account. In a cash economy such as Bangladesh, this is understandable, but it creates serious problems in accounting for receipts and expenditures, and opens the door for fraud. All cash received should be banked on a daily basis, and all expenditures, including the collectors 15% commission, should be made by cheques from the bank. Where possible, tax and licence fee payments should be made directly to the bank. This may, of course, be problematic, where there is no nearby bank, although apparently there is now a bank branch in most UPs. A particular problem arises when the Ward Member demands that the collector hand over the money to him/her for payment to the UP. This creates an obvious risk of leakage and should not happen. Similarly, villages may demand that tax revenue from their village is spent directly on services for them. However, tax money should not be handed over directly but rather banked first and then paid out from the bank account and in accordance with priorities established in the UP budget for village development projects. Revenue collection costs Data from the audit reports from Sirajganj district show reported revenue collection costs ranging from 2% to 22% of revenue collected. There insufficient detail to show whether these figures include all relevant costs, or why there should be such variation. Low figures may be because most revenue is paid directly to the UP office or the bank. High revenue collection costs may reflect costs for tax assessment surveys (although these were generally carried out before the years covered by the audit reports) and/or stationery costs (registers, receipt books, licence printing), although UP accounts often itemise office stationery separately. According to the Ministry of Local Governments Strategy for UP Tax Assessment and Collection, apart from the 15% commission to tax collectors, UPs may spend 3% to remunerate the village police in the ward concerned, 0.5% for the head of the village police

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group, and a further 1.5% for incentives for the best collection performance among the villages. Whether these amounts are being paid is not clear. In some UPs, it was suggested that the 15% rate of commission is too low to induce people to act as collectors. But the arrangement appeared to work in some other UPs, notably those where revenue collections were higher. The modest collection fee keeps revenue collection costs down while creating the incentive for collectors to collect. By contrast, employing collectors on a salary can quickly lead to high levels of collection cost, as happens in local governments in many countries. The low rate of commission may also encourage fraud, but the solution to that is to tighten up arrangements, as indicated above, to reduce the scope for fraud.

11. Possible New or Additional Revenue Sources for UPs From the earlier discussion, it is clear that UPs do have revenue instruments, and that these could be used considerably more effectively, through improved revenue administration systems, together with some revisions to the regulations governing the revenue sources. But should UPs also be given additional revenue instruments, and if so, what should these be? International experience shows that there are no ideal local taxes. All taxes have some negative effects, whether on equity or economic neutrality (undesirable incentives / disincentives), or both, and all taxes are unpopular. As noted earlier, the best taxes (VAT, income tax, profits tax, customs duties, natural resource taxes) are almost invariably assigned to central government, for good reasons in terms of the capacity to levy and collect taxes effectively and equitably. The range of options available for assignment to local government is invariably limited. UPs already have the most common form of local tax found internationally, a tax on domestic property, and as already discussed, this can be extended cover non-domestic property, in line with paurashavas and cities. They also already have a basic tax on businesses through the licence fee and/or the Model Tax Schedule. The other common local revenue source internationally, market fees, already legally belongs to UPs, in the form of lease revenue on hats/bazaars, and as suggested already, this should be restored to the UPs. So what other possibilities are there, either for local revenue sources, or national revenues that could be shared with local government, without creating serious problems of equity, non-neutrality, high collection costs or difficulties of assignment to the right UP? a) Land Transfer Tax UPs already receive a share of the Land Transfer Tax (LTT) a tax paid to central government and levied on the sale price of property (a tax referred to as stamp duty in many countries). It appropriate that UPs should receive a share, since the land is located in particular jurisdictions, and the activities of local government have an effect on the value of property within its jurisdiction. It would be extremely easy to increase the present 1% tax share to 2% or even 5%, since the mechanism for collecting and distributing the tax revenue already exists. Although this is not a very predictable revenue source, since it depends on the property transactions within that UP in the preceding year, doubling the percentage share, or more, could have a big impact. Based on data for the seven UPs in Sirajganj for which the audited accounts for the last two years have been analysed, increasing the Land Transfer Tax sharing ratio from 1% to 2% would, on average, result in a 55% increase in local revenue (local revenue here defined to include the Land Transfer Tax share). In other districts, where local revenue performance is probably poorer, this proportion could well be greater.

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b) Taxing motorised three-wheelers (CNGs) As motorised public transport becomes more common in rural areas, the limitation on UPs to licensing only non-motorised vehicles becomes more questionable. In fact, the Model Tax Schedule does include licence fees for CNGs and other public transport vehicles, but at very low rates. No UPs visited were attempting to levy this. At present CNGs, along with all other motorised public transport, are taxed by central government, so that the centre would need to reassign that taxing power to UPs (and paurashavas and cities). UP taxing powers could be extended to cover motorised three-wheeled public transport (CNGs). There are, however, a couple of problems with this suggestion, apart from any reluctance on the part of central government surrender the revenue source. First of all, the dividing line between three-wheelers and other motorised public transport is rather arbitrary, since UPs are also served by small four-wheeled vehicles. But it is clearly not appropriate for UPs to be taxing inter-city buses, and the dividing line between small four-wheeled transport and larger buses may be difficult to define. Secondly, the main beneficiaries from such a tax would be paurashavas and cities, since most such public transport would be based there and could not easily be taxed again by UPs. c) Charges for services The UP Ordinance does not specifically mention charges for services provided by the UP as a revenue source, beyond fees for licences and permits. This is not really an issue at present, since UPs do not provide any significant services. But even where they do provide a service, such as registration of births and deaths, they do not seem to levy any charge (at least, not officially). If and when they do provide a greater range of services, such as water supply, sanitation and waste collection, they would need to be able to charge for them. In the case of paurashavas and cities, services such as water and waste collection are generally paid for through an additional rate (tax) on the annual rental value of property. This could be extended to UPs.17 There are other services that the UPs might develop that could be revenue generating, or at least cost-recovering, if they were permitted. One suggestion (from UNDP) concerns the establishment of tele-centres where residents could access information such as market prices for crops. Such a service could be valuable for local residents, and the ability to levy small charges for the service could enable costs to be recovered. However, it would be unlikely to be a net generator of revenues. d) Leasing of government land for tree plantations, fish ponds, other productive uses This was a suggestion made in a number of UPs. There are apparently examples of successful (if unofficial) practice of engaging local communities in planting and nurturing trees on unused government land such as roadsides, and then selling the trees after ten or so years for a good price, shared between the UP and the communities or households concerned. The main problem has been that, when the trees are felled, the forestry department asserts that any income belongs to them, thereby removing any incentive for people to undertake such activities. If there could be an agreement for, say, a three-way split of any revenue between the communities/ households concerned, the UP and the forestry department, this could ensure sufficient incentive to local communities / households and provide some additional revenue for the UP. In the case of using government-owned water bodies for fish
17

However, it should be noted that international best practice is to charge for water according to consumption, rather than according to property value, as is currently the system in Bangladesh

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farming, there could be a conflict with existing users for whom it is an income source. While there is a good case for allowing UPs to make use of such facilities for revenue generating (and income generation for the people concerned), this would only create a net gain (to public finance and to society as a whole) if the water bodies were currently under unused or under-utilised. e) Electricity tax Most of the above suggestions involve a reassignment of revenue sources, and thus a zero-sum game in overall public finances, or else involve merely the recovery of costs from additional services. The only specific suggestion here for an additional tax is a local tax on electricity consumption. This is a tax, in addition to any VAT levied, that the UP could be allowed to add to the charge for electricity supplied by the state (or private) electricity company. This has several advantages for the UP. Firstly, the tax could yield quite large amounts, even if levied at only a low rate. Secondly, the revenue is extremely easy to levy and cheap to collect, since the electricity company would be collecting the charge anyway, so that the cost of adding a small amount of tax to be collected at the same time would be negligible. There would be a small cost in transferring the revenue to the right UP, although since all electricity bills relate to a physical address, such assignment of the tax is not difficult, especially with computerised billing systems. Thirdly, the tax burden would impinge mainly on the better off, since high income groups consume far more electricity than the poor. It would have a marginal effect of discouraging electricity consumption, but if the rate of tax was kept low (say 2% or 3%) then any such effect would be very small. And fourthly, the tax would be disguised in the electricity bill, and thus once established would be much less sensitive politically than a tax such as Holding Tax. Of course, it would only benefit those UPs where electricity is available, but that is now reported to be 70% of the country and extending fast. The main problem, apart from the obvious objection from the state (or private) electricity company, is that the Government is currently trying to extend the electricity network so that rural areas and low income groups can benefit. At a time of relatively high inflation, the Government is unlikely to favour a tax which they may perceive as undermining their policy of extending electricity supply (and perhaps even subsidising it). However, the international literature on infrastructure provision such as electricity argues that access to the infrastructure is more important than the price, as far as the poor are concerned. Thus any government investment and subsidy should go into extending the network and facilitating the connection to that network by the poor, rather than subsidising the consumption of electricity through lower prices. Thus, by extension, a small tax on electricity consumption should not adversely affect the Governments policy of extending coverage and increasing access to electricity. Of course, no new tax is popular, and no tax is without its defects. But if the Government is looking for a new revenue source to give to UPs (and presumably paurashavas and cities), which does not involve reassigning a revenue source already collected by the centre, then this is one of the few possibilities that can perform reasonably well against the criteria for a local revenue source. It is a tax that is used as a local revenue source in a number of countries, such as Indonesia, and has been demonstrated to work well. Nevertheless, it is acknowledged that a new tax such as this will not be readily accepted and so is only put forward as a suggestion if the Government is serious about wanting to find an additional revenue source for local government.

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e) Sharing national taxes It is commonly suggested that UPs should receive a share of national tax revenues.18 In principle this is right, and it is a common international practice that local governments receive a share of nationally collected taxes. Legal requirements to share a specified proportion of national tax revenues with local government ensures greater predictability of resources for local government and a share in elastic revenue sources such as income tax and VAT. Tax sharing is also less prone to political manipulation than transfers in the form of grants. However, it is strongly recommended that any such tax sharing should be on the basis of a pooling of national tax revenues and a sharing on the basis of a transparent and equitable formula. It would be quite inappropriate to share specific revenue sources such as VAT and income tax on the basis of origin. This is because, in a country like Bangladesh, such revenues are geographically highly concentrated: the vast majority of income tax payers are located in the capital city, and taxes such as VAT are collected through the headquarters of companies, also located mainly in the capital. Thus, Dhaka City Corporation would receive the vast bulk of any tax sharing by origin. Moreover, with taxes such as VAT (as a multi-stage tax), it is virtually impossible to track where the revenue was generated (as opposed to where the tax authorities collected it), and therefore to assign the revenue to the right local government. Thus, it is suggested that any tax sharing should be through formulabased transfers rather than by origin. In conclusion, there are possibilities for additional revenue sources for UPs, but with one exception, all encounter significant problems. The one exception is to increase the UPs share of the Land Transfer Tax from 1% to 2% or more; this would be extremely easy to do and have a big impact on the resources available to UPs, with only a marginal effect on national budgetary resources.

12. Some Wider issues This study is concerned with local revenue sources for UPs, but it is worth mentioning a number of related issues that have become apparent during the study. a) Intergovernmental Transfers There are a number of issues about the main form of intergovernmental fiscal transfer, the ADP transfers for development expenditures. These issues relate to local choice, transparency and accountability. They arise because of the absence of clear legislation governing intergovernmental fiscal relations, leading to uncertainty and opportunities for political manipulation (Chouwdhury, 2003, p.22). The recent move to providing UPs with a block grant paid directly into their bank accounts is very positive, especially when accompanied by greater citizen participation and greater accountability for expenditures. Such a block grant allows local choices about resource use in relation to local needs and priorities, without the scope for top-slicing by higher levels of government.19 However, there remain questions about the criteria used to allocate the block grant between UPs, and the transparency of any formula used.

The Local Government Committee has made this suggestion in relation to national revenues collected within UPs. This suggestion is problematic for the reasons outlined in this paragraph. 19 However, central presciption can even affect the UPs block grant: last year UPs were required to spend their block grant on sanitation. Whilst no doubt sanitation is an important priority, such specification makes nonsense of a block grant system.

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More problematic is the ADP grant paid through the Upazila. Here there are widespread allegations about political favouritism in the allocation of resources between UPs, including excessive influence by the MP. Certainly, the huge differences in allocations between UPs, and from one year to another for the same UP, cannot be justified by differences in objective needs between UPs or changes in objective circumstances. There is also a serious lack of transparency in the decisionmaking process about the use of ADP resources, particularly since there is no direct, democratic accountability at the Upazila level. Expenditures from the ADP are supposedly based on proposals made by the UPs, and approved by the Upazila Development Coordinating Committee (UDCC), of which the UP Chairmen are members. But this process is said to be dominated by the UNO, by government officials at the Upazila, and by the local MP. The chair of the UDCC rotates on a monthly basis between UP Chairmen, undermining the ability of the UP Chairmen collectively to ensure that their voice prevails and to demand accountability. Moreover, whatever accountability there is at that level may not filter down to the residents of the UP, since the UP Chairman is not obliged to account to them for decisions made at the Upazila level. All this not only means that expenditure priorities tend to be dictated from above, but also provides scope for money to be misused. Decision-making about the use of the ADP is further constrained by rigid prescriptions by central government about the sectoral allocation of expenditure. Whilst some guidelines and some restrictions may be helpful, such rigid specification is inappropriate and does not ensure optimum use of resources at the local level. Further problems are caused by some of the resources being provided in the form of food for work. It seems that beneficiaries are unwilling to work for payment just in the form of rice or wheat. As a result, the food usually has to be converted into money through sales at the warehouse in the Upazila. This is strictly illegal but nevertheless happens all the time, apparently. Such arrangements are clearly wide open to abuse. A further problem with the transfers is that the amounts are not known until well into the financial year, undermining the whole process of expenditure prioritisation and budgeting. Moreover, later tranches of transfer are often not paid until close to the end of the financial year, which also coincides with the onset of the monsoon, rendering it impossible to complete agreed infrastructure projects before the end of the financial year. The system of transfers through the Upazila needs a radical overhaul to increase equity, transparency, accountability and timeliness. However, any reforms need to be carried out consistently across the whole system of intergovernmental fiscal relations, including pourashavas and cities as well as UPs. b) Budgeting, accounting and financial management The Sirajganj project has brought about some improvements in budgeting by the UPs concerned, particularly in terms of greater participation by residents in prioritisation of expenditures. But much more needs to be done to ensure more responsive and transparent budgeting, and to establish effective systems of accounting and financial management. A large part of the problem is that the UPs have only one paid official, the Secretary, to carry out all the responsibilities, and s/he generally lacks any training in accounting. When auditors were appointed by the World Bank to audit UPs accounts in preparation for the LGSP, they first had to construct accounts for the UPs concerned, since most UPs had no capacity to do this themselves. In the absence of proper accounts and financial management systems, residents will not have confidence in the operations of the UP and so will be less willing to pay taxes. As UPs are expected to take responsibility for increasing volumes of funds, both through

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transfers and local resources, improved systems of budgeting, accounting and financial management are essential. One particular issue in budgeting by UPs is the forecasting of revenues. Not only are transfer amounts unknown until well after the financial year has started, and so budget estimates for these are little more than guesses, but revenues for market leases and the Land Transfer Tax are inherently difficult to predict, not least because they are not under the control of UPs. More seriously, revenue forecasts for the Holding Tax are generally quite unrealistic, as indicated by Table 3. Most UPs appear to budget their Holding Tax receipts based on the assessed amounts, without regard to the fact that only a proportion (often quite a small proportion) of the assessments will actually be collected. This may be made even worse by the inclusion in budgeted receipts of tax arrears, even though some of the arrears may be ancient and quite uncollectible. All this renders the budget an ineffective instrument for managing resources, since the resources are not there to finance the approved expenditures. This can lead to arbitrary changes being made to the budget during the course of the year, probably without proper agreement by UP Members. This reduces transparency and causes frustration on the part of residents who have participated in a decision-making process about expenditures that now cannot be implemented. Much better would be to forecast revenues based on what was actually collected in the previous year, while still maintaining targets for tax collectors based on tax assessments. In addition, there were a number of particular issues noted in many of the audit reports on UPs, including the following: cash receipts were often not banked, but were used to make cash payments, without any proper accounting, leading to risks of loss; the requirement for two signatures on all cheques was not being observed; some bank accounts were in the name of the Chairman instead of the UP. c) The need for finance staff and computerisation It is clear that UPs need an additional staff member who has some training in finance.20 Of course, providing a second person for each UP would cost quite a lot of money. But the increased volume of resources passing through the UP means that relying on one Secretary with no finance training is unrealistic. It is not suggested that the finance officer should be a fully trained accountant, but s/he should have at least come basic accountancy skills. A crash course would be needed to train such people. Computerisation, as already noted, would also provide great benefits in relation to both revenue collection and expenditure management. The cost of a simple computerised system is not great these days. Indeed, quite a number of UPs already have computers (600 was the figure quoted), although few are using them for financial management. UP staff would need to be trained in the use of the system, and any finance staff appointed would need to be computer literate. Proper safeguards would need to be in place to ensure that the computer systems could not be corrupted or misused always a risk if there is only one person who understands the system. d) Procurement regulations There appear to be a number of issues with the procurement and financial regulations issued by central government and their applicability in the context of rural
The Local Government Committee proposed that a finance person be appointed to each UP.
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UPs. For example, requirements for a minimum of three competitive quotes when there may not be that many suppliers locally; the requirement that all cheques me paid on account, when many local traders may not have bank accounts; and the low ceiling in the size of project that can be executed through community contracting rather than open tender (Taka 50,000), which has led, in the case of SLGDFP, to a preponderance of small schemes where larger schemes might have been more appropriate (see GHK 2003).21 e) What services the UPs provide One final issue is the whole question of what services UPs are actually providing a question that was raised repeatedly in the July 2007 workshop. In the evolution of sub-national government in Bangladesh, it seems that whatever service delivery functions UPs may once have had have now been centralised, and are delivered through deconcentrated offices of sectoral ministries. Some of these offices are located at UP level, with most at Upazila level, but there is no mechanism for local democratic control over these offices or accountability to local residents.22 At this point, apart from some basic responsibilities such as registration of births, marriages and deaths, the role of UPs is effectively limited to the development of new infrastructure, particularly local roads, bridges and culverts. The potential of UPs to deliver such infrastructure in a responsive and accountable manner is certainly important. However, in the long term, their credibility as an elected level of subnational government depends on having some control over the delivery of important local services such as primary education, primary health care, agricultural extension, water supply and sanitation, and so on.

The GHK (2003) report also shows how, under SLGDFP, community contracting produced a markedly better quality of output than conventional contracting. That study also includes a number of valuable insights into the management and operations of UPs, as well as lessons from the Sirajganj Project, which are well worth considering. 22 This issue is being addressed under the new UP Ordinance (2008), which envisages that line ministry staff located in UPs will come under the authority of the UP.

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Annex 1. Comments from the National Workshop, 11th September 2008 The following are the principal comments received at the workshop. [Any response by me in brackets.] 1. Resources are not just financial: it is important to consider human resources, particularly how volunteering can be mobilised, e.g. for monitoring projects, supporting service delivery, as an alternative to financial resources. 2. Sadly, most UP elected representatives are only interested in the status, not serving poor people. But with better motivation, UPs could increase revenue mobilisation substantially. 3. UPs should find ways to tap remittances from abroad or from those working elsewhere. 4. The suggestion for a local tax on electricity is not likely to be useable, as most places do not have electricity. 5. All forms should be produced in Bengali. 6. The proposed mass appraisal system is good but needs further refinement; in particular, building construction categories such as high quality and pacca bari need precise definitions. 7. There is an issue about land: the Holding Tax regulations refer to buildings and land (excluding agricultural land); but non-residential properties may have substantial amounts of land that should not be included under the tax. 8. Any kinds of reductions should be agreed by the Union Parishad, and reductions should be limited to 25% of the assessment. 9. Business taxes should be assessed using the Model Tax Schedule. 10. The following sectors / activities should be included under the business tax: road transport railways forestry agricultural firms, fish ghee, dairy firm, poultry firm, chicken hatchery power tiller, tubewell, deep tubewell banks and insurance companies NGOs and micro-credit institutions mobile phone masts electricity poles brickfields advertising billboards dish and cable businesses community centres and clinics kindergartens and coaching centres motorised vehicles [NB: Several of these present significant problems of assessment, as well as overlap with existing national taxes.] 11. Fees should be paid for all certificates.

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12. A percentage of the fee for marriage, dowry, divorce should be paid to UPs 13. Return to UPs the leasing of hats, bazaars, water bodies and sand/stone extraction. 14. Share of Land Transfer Tax should be increased (to 3% or 5%), and shares of Land Transfer Tax and Land Development Tax should be paid directly to the UP. 15. 10% of the national budget should be paid to UPs. 16. UP members (not just Chairman) to supervise tax collectors, and training should be provided. 17. Introduce a reward to regular or best taxpayers (e.g. an award for the best taxpayer in each ward), as well as incentives for best performing collectors. 18. Arrange mass campaigns and motivational activities for tax collection. 19. Disseminate information about annual income and expenditure in public meetings. 20. UPs should not provide certificates or other services to those who have not paid their tax. 21. Tax payments of more than Taka 1,000 should be made directly to the bank. 22. Progress on UP tax collection should be discussed at Upazila level coordination meetings. 23. Provide computer software for management of UP tax records. 24. Appoint a skilled, computer-literate accountant in each UP. 25. Revenue collection performance should be a factor in the allocation of grants to UPs. If a UP fails to collect at least 75% of revenue due it should be penalised in terms of the grant.

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Annex 2: Summary of Recommendations of the Committee for Accelerating and Strengthening Local Government (November 2007) as Related to UP Revenues [My comments in brackets] General recommendations to strengthen financial capacity of UPs, increase rates of payment of LGI taxes and fees, increase revenue sources, and provide grants including development grants; also, to provide intensive supervision of LGIs to ensure taxes are imposed neutrally and according to regulations. Specific proposals in relation to UP revenues: Ensure tax assessments updated every five years. Collection of outstanding taxes from government and private sectors. Government to decide whether Railway Authority should pay local taxes. LGC to recommend about future use of water bodies. Remove disparity in distribution between LGIs of income from leases on markets, and allocate development assistance to those receiving less. [This stops short of recommending restoring market leases to UPs; rather it is about changing the formula for distributing the revenue to compensate UPs with low revenues from market leases.] Raising the share of land transfer tax allocated to UPs from 1% to 2%. To investigate the problem of Upazilas retaining the UPs share of land transfer tax. To set up a programme to realise Land Development Tax [i.e. land tax] from various agencies, and to share 3% of the revenue with UPs. [Land Devt Tax yields about Taka 400 crore a year, so 3% would yield around T.25,000 per UP.] To give UPs a share of fees from marriage & divorce registration, and allow UPs to levy fees for birth and death registration. To allocate to UPs 2% of revenue from ferry services operated by various state bodies. [2% seems a very small percentage is it worthwhile?] To allocate to UPs 3% of income from riverside sand and stone stack yards. [Not clear if this covers all extraction of sand and stone; if so, conflicts with proposal to allow UPs to tax such extraction; 3% is a very small share who gets the rest?] LGIs to be allowed to set tax rates at a higher level if necessary. [Presumably implies option to set taxes above those in Model Tax Schedule, and set holding tax at >7%] Tax sharing of national revenues collected locally, in consultation with LGC. [e.g. VAT, land tax, road tax, etc., but nothing more specific stated]. Other relevant proposals: Development grants (ADP) to LGIs as a whole to be 10% of national budget, based on evaluations of their programmes and performance. [Currently ADP is 2.5% of budget] Appointment of accountant with computer skills for each UP. Government to meet costs of maintaining computer(s) in UPs. UP annual accounts to be presented to UNO. Updating of Account and Audit regulations of 1960. Prepare new Local Government Supervision Manual. Ensure peoples participation in budget formulation, plus right to information. LGIs to prepare and monitor Citizens Charters. LGED to keep LGIs informed about programmes in their jurisdiction.

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Number of wards in UPs to be increased from 9 to 15. [Cost?] Reserved seats for women to be increased to 40% but only for next three terms. Establishing permanent Local Government Commission (LGC). Structural changes in NILG to strengthen skills training for LGIs. To limit the number of directives issued by CG.

Not specifically mentioned but included in new UP Ordinance: that staff of sectoral ministries who are located at Union level will come under the authority of the UP.

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Annex 3. Holding Tax Assessment Register Holding Tax Rate Selected (3% / 5% / 7%) Residential Property Holding Name of Number Occupier / Owner 1 2 Year:

Occupation / Income 3

Number of Rooms 4

Construction Type 5

Basic Assessment 6

+25% if water on plot (private connection) 7 = 6 x 0.25

Total Assessment 8=6+7

Reasons for Any Reduction 9

Amount of Reduction (%) 10

Adjusted Assessment 11 = 7-10

Non-Residential Property Plot Name of Type of Number Occupier / Business / Owner Activity 1 2 3

Building Size (sq ft) 4

Construction Type 5

Construction Rate (PWD rate per sq ft) 6

Rental Value

7 = 4 x 6 x 7.5%

Or Actual Annual Rent x 10/12 8

Total Assessment

9 = 7 (or 8) x tax rate

All buildings should be included, either under residential or non-residential. Mobile phone masts can also be included. Reductions may be given for residential assessments for reasons of poverty, under the following conditions: all reductions should be agreed by the Ward Committee and approved by the UP the published assessment register for residential properties should indicate the reasons for the reduction (column 9) reductions should normally be limited to 50% of the assessment no more than 25% of the households in the ward should be given reductions

Annex 4. Collections and Arrears Record Year: Holding Number 1 Name of Occupier 2 Assessment 3 Tax Due for Current Year 4 Arrears 5 Penalty (if any) 6 Total Now Due 7 = 4+5+6 Amount Paid 8 Date Paid 9 Receipt Number 10 Amount Still Owed 11 = 8-7

Tax Due for Current Year (column 4) taken from Holding Tax Assessment Register (Annex 3, col.11 for residential, col.9 for non-residential). Total Now Due is the sum of Tax Due for Current Year + Arrears + Penalty (if any). Amount Still Owed at the end of the year (column 11) = Total Now Due (column 7) minus Amount Paid (column 8); this figure becomes the figure for Arrears (column 5) for the following year.

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Annex 5. Business Tax / Licence Register and Payments Record Tax rate selected: Low Rate / Medium Rate / High Rate Plot Number 1 Name of Business 2 Name of Owner 3 Type of Business 4 Size of Business 5 Year: Type of Construction 6 Assessment Amount Paid 8 Date of Payment 9 Licence / Receipt Number 10

The Business Tax / Licence Register should be compiled through a survey of all business premises in the UP. This register should be reviewed and updated each year through field inspection. Businesses include educational and health establishments, NGOs and any other non-government organisation or activity covered by the Model Tax Schedule. Size of business relates to the classification in the Model Tax Schedule.

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Annex 6: Revenue Performance in Tongi Municipality Tongi Paurashava (municipality) is adjacent to Dhaka City, within Gazipur District. It was created as a municipality in 1974 and is one of two special class municipalities. It has a population of about 300,000. It is an industrial area (more than 600 industries). As such, it has substantial local revenue potential. Its main revenue sources are: holding tax (levied at a rate of 7%) on domestic, industrial and commercial premises, with additional amounts for conservancy (4%) and street-lighting (3%); these together provide 25% of local own revenue (2006/07 actuals) water fees and charges (15% of own revenue) leases of hats/ bazaars plus rent of market stalls (13%) business licences (6%) building construction permits (5%) the share of the land transfer received from government, which is actually the largest element at 28% of own revenues.23 Tongi municipality receives only limited development grant money from central government (3%, or 13% if some special programmes are included), but it does receive development funds through the ADBs Urban Government Infrastructure Improvement Programme (UGIIP). Local revenues represent 61% of total receipts (44% if land transfer tax is treated as a transfer rather than a local revenue), or 83% if UGIIP is excluded from the total. Local revenue performance has improved substantially over the last twelve years, since the present Mayor has been in post. In 1995, collection of Holding Tax was less than 12% of the billed amount. In 2004/05, it was 60%, and by 2007/8 it had reached 92%. Most arrears have been cleared.24 In terms of other revenue sources, actual revenue has exceeded the budgeted figure in each of the past four years, being 153% in 2007/8. The following factors can account for the improved performance: a more open and transparent local governance, with opportunities for citizens to participate in decision-making about resource use, through ward-level meetings to prioritise projects and public consultations on the budget, all of which mean that taxpayers are more willing to pay their tax; increased availability of information about resource availability and use, including project sign boards, increasing accountability to taxpayers; improved service levels and responsiveness to citizens, e.g. through citizens charters, again making citizens more willing to pay for services; computerised billing for holding tax, which permits cross-checking and identification of defaulters; payment of holding tax and water charges through banks (any of ten banks in the municipality); effective follow-up of non-payers, with prominent notices displayed on the houses of defaulters (a three-stage set of notices, black, yellow, red); powerful messages conveyed in public meetings about the relationship between tax payment and service provision in each neighbourhood.
Land transfer tax is collected by central government and shared with local government on the basis of collections within the LGs jurisdiction; therefore it could be regarded as either a local revenue source or as a transfer from central government. 24 Some long-outstanding arrears may have been written off.
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