Asian Development Bank Government of the Punjab
Institutional Development / Public Financial Management
EXCISE AND TAXATION DEPARTMENT RAPID SECTOR REVIEW
FINAL REPORT
March 2010
PKD Consultancy Ltd, UK in association with The PRMP, P&D Department, Government of the Punjab
Excise and Taxation Department Rapid Sector Review ------
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CONTENTS EXECUTIVE SUMMARY...... 6 ES 1 INTRODUCTION...... 6 ES 2 REFORM OF THE E&T DEPARTMENT...... 6 ES 3 BUDGET PREPARATION...... 6 ES 4 FORWARD PLANNING...... 7 ES 5 COMMUNICATION...... 7 ES 6 PERFORMANCE MEASUREMENT AND MONITORING...... 7 ES 7 POLICY AND BUDGET PROCESS...... 8 ES 8 STAFF DEVELOPMENT...... 8 1.0 INTRODUCTION...... 10 1.1 PURPOSE OF THE REVIEW...... 10 1.2 AN OUTLINE OF THE REVIEW ...... 10 1.2.1 Departmental overview...... 10 1.2.2 Departmental performance and monitoring framework...... 10 1.2.3 Recent performance and budget/expenditure trends...... 11 1.2.4 Recommendations...... 11 1.3 ACKNOWLEDGEMENTS ...... 11 1.4 DISCLAIMER...... 11 1.4.1 Limitations to the scope of work ...... 11 2.0 DEPARTMENTAL OVERVIEW...... 14 2.1 ENVIRONMENT IN THE DEPARTMENT WORKS ...... 14 2.2 SECTOR OBJECTIVES ...... 15 2.2.1 Current Vision...... 15 2.2.2 Proposed Vision...... 15 2.2.3 Current Mission Statement ...... 15 2.2.4 Proposed Mission Statement ...... 16 2.2 E&T RESPONSIBILITIES ...... 16 2.3 ORGANISATION OF THE E&T DEPARTMENT...... 16 2.4 DISPERSED MANAGEMENT STRUCTURE...... 17 2.5 HUMAN RESOURCES...... 18 2.5.1 Sanctioned Posts...... 18 2.5.2 Composition of Staff by pay scale...... 19 3.0 KEY ISSUES FACED BY THE DEPARTMENT...... 20 3.1 COLLECTION LEVELS...... 20 3.2 IMPROVING ADMINISTRATION ...... 22 3.3 POLICY DEVELOPMENT ...... 23 3.4 COMMUNICATION ...... 24 4.0 SUMMARY OF E&T BUDGET ...... 26 4.1 BUDGET SUMMARY...... 26 4.2 BREAKDOWN OF BUDGET (OBJECTIVE)...... 27 4.3 BREAKDOWN OF BUDGET OVER MAJOR FUNCTIONAL AREAS ...... 29 4.4 DEVELOPMENT BUDGET – 2010/11 TO 2012/13 ...... 30 4.5 BREAKDOWN OF REVENUE RECEIPTS, 2006/07 TO 2008/09...... 30 4.5.1 Gross Revenues Collected by E&T...... 30 4.5.2 Revenues Analyzed by Year...... 32 5.0 E&T BUDGETING, PERFORMANCE AND MONITORING FRAMEWORK....34 5.1 BUDGET PREPARATION ...... 34 5.2 BUDGET MONITORING...... 35 5.3 REVENUE ESTIMATES ...... 35
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5.4 PERFORMANCE MEASUREMENT AND MONITORING ...... 35 5.5 MONITORING OF POLICY OBJECTIVES...... 37 5.6 MEDIUM TERM FISCAL FRAMEWORK...... 38 5.7 ADDITIONAL RESOURCES...... 38 5.8 GOVERNMENT PROPOSALS FOR BENCHMARKING ...... 39 6.0 CONCLUSIONS AND RECOMMENDATIONS...... 40 6.1 INTRODUCTION ...... 40 6.2 BUDGET PREPARATION ...... 40 6.3 PERFORMANCE MEASUREMENT AND MONITORING ...... 42 ANNEX 1 MEDIUM TERM POLICY FRAMEWORK...... 44 ANNEX 2 ANALYSIS OF E&T POSTS...... 54 ANNEX 3 MTFF – PROVINCIAL RESOURCE GENERATION...... 56 ANNEX 4 PROPOSED DEVELOPMENT BUDGET ...... 60
FIGURES Figure 2.1: Organogram – Excise and Taxation Department...... 17
TABLES Table 2.1: Financing Gap...... 14 Table 2.2: Public employees in tax administration by pay scale ...... 18 Table 2.3: Staff positions at E&T Department, 2009 ...... 19 Table 2.4: Composition of administrative staff by pay scale ...... 19 Table 3.1: Example UIPT Collection Target ...... 20 Table 3.2: Numbers of Registered Vehicles ...... 21 Table 3.3: Target, Motor Vehicle Tax - Revised Target & Actual Collection ...... 22 Table 4.1: Budget Summary, (Departmental) 2006/07 to 2009/10 ...... 26 Table 4.2: Graphical representation of budget ...... 26 Table 4.3: Budget – 2006/07 to 2007/08 ...... 27 Table 4.4: Budget – 2006/07 to 2007/08 ...... 27 Table 4.5: Budget – 2008/09 to 2009/10 ...... 28 Table 4.6: Budget – 2008/09 to 2009/10 ...... 28 Table 4.7: Functional Breakdown – 2006/07 to 2007/08...... 29 Table 4.8: Functional Breakdown – 2008/09 to 2097/10...... 29 Table 4.9: Gross Development Budget – 2010/11 to 2012/13 ...... 30 Table 4.10: Gross Revenue Collection – 2005/06 to 2008/09...... 31 Table 4.11: Revenue Receipts 2005/06 to 2009/10 ...... 32 Table 5.1: Example Monitoring Statement ...... 36 Table 5.2: Medium Term UIPT Provincial Policy – Achievements...... 37 Table 5.3: Budget Estimate for Additional Resources ...... 38
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Executive Summary
ES 1 Introduction
The purpose of the Rapid Sector Review is to provide a strategic focus to the decision- making process. It also intended to provide a link between the Excise and Taxation Department’s policy objectives and its budgets and expenditures and is undertaken in the context of the MTBF project.
ES 2 Reform of the E&T Department
The E&T Department is under considerable pressure to improve its performance by improving and modernising its administration. And reform is required in almost all areas of the Department – • Governance and Fiscal Issues. • Operational and Organisational Change. • Human Resources. • Tax Policy Development. • Information Technology. • Core Administration including budgeting. • Customer Services. If this reform is to take place then it will require the development of an action plan and expenditure of some $34m over a period of five years.1 The Department itself recognises the need for change and has been allocated additional budget in 2009/10 of Rps.100m but clearly this will only have a minimal impact in terms of major reform but that expenditure will have ongoing current expenditure consequences and will have to be reflected in future budgets.
ES 3 Budget Preparation
The budget preparation process is essentially a mechanical exercise with little involvement from senior staff and the primary focus is on inputs and not outputs and - • There is no correlation between expenditure and outputs. • There is no relationship between the budget and policy objectives of the Department. • Revenue estimates are prepared largely on the basis of unreliable manual information but their usefulness has to be questioned when targets are actually imposed by the Finance Department that are not realistically based on previous collection levels. • The overall budget is prepared in a piecemeal fashion at different levels in the Department and largely by junior staff.
1 Property Tax Decentralisation Program, 2009 (World Bank / IRRV)
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• There is no overall composite budget for the Department. This results in part from the effect of the dual-subordination organization introduced by the PLGO 2001. • The annual budget is prepared with a lack of information on costs of policies, programs and services. • There is no forward projection of budgets or the impact of future expenditures. • There is a lack of strategic focus and no attempt to reflect E&T priorities in the budgetary process. • Performance is judged largely by matching spending with budget appropriation. • The figures currently shown in the budgets do not reflect the overall cost of tax administration with the cost of the E&T field operations being reflected in the budgets of local government. This makes it impossible to measure value for money. • In order to introduce effective performance measurement and measuring outputs against budget the three budgets of the Department need to be brought together. • There is little real communication between the Finance Department and E&T.
ES 4 Forward Planning
The variations in budget estimates as compared to actual expenditure over the past four years suggest a lack of forward planning and little integrity in the preparation of the budget. In recent years the Department has not had a development plan, this taken with the in year variations in the budget over recent years indicates a lack of forward planning. There will, however, be a development budget for the financial year 2010/11 but the spread of that budget over three years suggests that there has been little thought given to the impact on cash flows over that period.
ES 5 Communication
Communication with the Finance Department needs to improve so that the two Departments are seen to be working together. There is a proposal2 for a Policy Support Unit to be set up in the E&T Department that has been agreed by the Finance Department and is included in the MTFF (Annex 3). This will help with the communication process as well as issues surrounding data collection and performance management.
ES 6 Performance Measurement and Monitoring
There is no performance management framework and little quality control exercised. The consultants have not seen any evidence of measuring performance and outputs against budget.
2 Fiscal and Financial Management Reforms, Excise and Taxation 2009 (GHK International / PRMP)
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ES 7 Policy and Budget Process
If the policy and budget process is to be seen as effective then financial planning needs to be linked to E&T’s strategic and planning processes - the budget should reflect the department’s key strategic priorities. Annual financial plans, integrating current expenditure plans and development programs, with cash flow, cash flow projections and profiling of the budget to meet anticipated expenditure trends should be developed in the context of a longer-term financial strategy, which supports the strategic plan. The senior management needs to • Consider the value for money achieved by allocating resources to different activities. • Have a thorough understanding of the financial implications of current and potential alternative policies, programs and activities. • Understand the whole-life costs associated with capital investment. Financial information needs to be integrated with non-financial performance and activity information. The financial information used both for setting the budget and internal accountability, monitoring and forecasting throughout the year should be derived from the same systems that are used to generate the reported results.
ES 8 Staff Development
Senior staff have to ensure that they have a clear understanding of their role and responsibilities and ensure that the preparation and monitoring of budgets in not just a ‘mechanical exercise’. Staff who are responsible for the preparation of budgets should suitably trained and where appropriately qualified. At least two members of staff should undertake professional accountancy training to at least accounting technician level and the accounting teams in the Office of the Secretary and the Office of the Director General should be amalgamated to ensure continuity of budget preparation, sharing of skills and the development of good accounting practices.
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1.0 Introduction
1.1 Purpose of the Review
As a precursor to the introduction of large scale reforms in the areas of functional reviews, business process re-engineering, piloting new HR systems and financial reforms relating to the introduction of a Medium Term Budgetary Framework (MTBF) the Government of the Punjab planned to undertake a series of Rapid Departmental Sector Reviews involving the Excise and Taxation, the Livestock and Dairy Development and the Higher Education Departments. The purpose of the Rapid Sector Reviews is to provide a strategic focus to the decision-making process. It also intended to provide a link between the Departments’ policy objectives and its budgets and expenditures. The Sector Review is undertaken in the context of the MTBF project. This report is concerned with the review undertaken in the Excise and Taxation Department The Sector Review involves undertaking an assessment of how policy objectives are defined and monitored in the Excise and Taxation Department, for instance with clear indicators of improved performance. The core of the Review is an assessment of whether the Department’s programs/projects and expenditures are supporting achievement of Department’s policies. It will cover both recurrent and development expenditures, looking at the composition of each and assessing the relationships between them.
1.2 An Outline of the Review
The Rapid Sector Review provides an overview of the following areas within the Excise and Taxation Department: -
1.2.1 Departmental overview • The context in which the Department operates; • Description of sector objectives e.g. sector policy and objectives, mission statement; • Overview of key issues and challenges being faced by the sector (including projects/program) in the medium and long term; • Relationship / Linkage with federal government vertical programs (if any) and activities; • A description of the responsibilities for setting and monitoring outputs and the mechanisms that exist or are being developed for reporting this information; and • A summary of budgets for 2006/07 to 2009/10 broken down over current and development expenditure and within major program, functional and economic classifications.
1.2.2 Departmental performance and monitoring framework For each key policy area:
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• A description of the policy areas to be addressed and the specific policy objectives that are intended to be achieved over the MTBF period; • A description of how progress is monitored against policy objectives. Assessment of monitoring indicators where they exist; and suggestion of indicators based on international experience where they do not.
1.2.3 Recent performance and budget/expenditure trends For each key policy area: • A summary of the current service provision in the policy areas including: • Recent and present output levels; • Demands on the program expectations according to sector strategy and especially the PRSP; • Assessment of the extent to which required service levels are being met including the quality of service delivery; and • Trends such as improvement/deterioration of infrastructure and human resources. • An analysis of expenditure trends for 2006/07 to 2009/10 including comparisons of current to development expenditures, wages and salaries to non wage and salaries, the relation of expenditures to outputs; • Analysis of budget implementation constraints by assessing the budget release, expenditure process; • Projection of future trends of recurrent and development budgets based on existing policies, i.e. already approved projects, the transfer of recurrent costs of projects on completion to the recurrent budget; • Identify budgetary linkages with national and district budget activities (where applicable).
1.2.4 Recommendations
1.3 Acknowledgements
The Consultant Team, Mr. Patrick Doherty and Mr. N.M. Waqar, would like to place on record the excellent cooperation it has received from the senior staff in the Excise and Taxation Department and in particular Mr. Shamail Ahmad Khawaja, Secretary Excise. and Taxation, Mr. Masood Ul Haq, Deputy Secretary (Technical), Mr. Amir Abbas Khan Deputy Secretary (Admin) and Mr. Akram Ashraf Gondal, Additional Director General.
1.4 Disclaimer
1.4.1 Limitations to the scope of work A wide range of internal and external factors will influence the nature and quality of the outputs from this project. Studies of this nature are influenced by the capacity of the client Department to provide appropriate resources to assist the data collection element of the project by the consultant. Also as the E&T Department does not collect performance and management data routinely, as part of the management process means that the output is affected by the non-availability of accurate and reliable base data. The consultant’s previous
PKD Consultancy Ltd Page 11 of 66 Excise and Taxation Department Rapid Sector Review ------experience suggests that this review is restricted by limited and sometimes conflicting information. The report relies to some extent on opinions given by officials of the department and other stakeholders, third party research material and any other secondary data that was available. The accuracy of the information and the data collected, and hence the report, is subject to the quality of the underlying sources and the timeliness of the data.
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the Federal Government every year during the period under consideration. In the last couple of years the current expenditures have exceeded budgetary targets because of higher than expected inflation and social protection initiatives putting pressure on the cash balance position of the province.
Figure 7 Current and Development Expenditures
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0 Excise and Taxation Department00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09 Rapid Sector Review
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Widening Financing Gap 2.0 Departmental Overview The increase in current and development expenditures accompanied by 2.1 shortfallsEnvironment in the Department Works in provincial and federal revenue in the last several years has led to an ever widening financing gap which has been covered through external borrowing, budgetary The increase in current and development expenditures accompanied by shortfalls in support assistance, drawl on public account and existing cash balances (Table 5). This provincial and federal revenue in the last several years has led to an ever widening financing gap which has been covered through external borrowing, budgetary support is evident of longer term fiscal stress in provincial finances and requires structural assistance, drawing on the public account and existing cash balances. adjustments in expenditures. Table 2.1: Financing Gap3 Table 5 Financing Gap (Rs. in Billion) 00-01 01-02 02-03 03-04 04-05 05-06 06-07 07-08 08-09
Total Resource 110.47 108.35 128.11 130.46 167.99 191.17 228.46 262.41 320.45
Total Expenditure 107.93 100.69 135.58 148.31 182.20 243.06 321.00 342.89 418.86
Financing Gap 2.54 7.66 (7.46) (17.85) (14.20) (51.89) (92.54) (80.48) (98.41)
As can be seen from Table 2.1 the Government of the Punjab is under fiscal pressure, as the budget deficit has constantly increased since the financial year 2002/03 in a period of declining economic growth (World Bank, 2008). Only higher public revenues can finance enhanced public spending – presently 14% of GDP without interest charges and defence. The need for higher tax revenues led to the formulation of a medium-term policy framework (Annex 1), its main goals were to extend the coverage of the Urban Immoveable Property Tax (UIPT), however, as of today 30 Town Municipal Administrations (TMA) still do not levy UIPT. Pakistan has been struggling to exploit its tax potential. Due to inherent flaws in existing policies and administrative structures, Pakistan, when compared to its regional neighbours, has one of the lowest tax to GDP ratios; currently 8.9%4. The recent State Bank Annual Report (SBP 2008-09) has pointed out that tax to GDP ratio instead of improving has come down in the last few years. This is the result of multiple factors including political instability, inconsistent policies, capacity issues and archaic administrative structures. In order to raise tax to GDP ratio the Government of Pakistan (GoP) has undertaken considerable reforms at national and sub-national levels. These include institutional re-organization and capacity building of the Federal Board of Revenue (FBR), reforms related to agricultural taxation in Provincial Board of Revenue (BOR), some reforms in Provincial Excise and Taxation Departments (which are responsible for collection of UIPT) as well as in the devolved local government institutions5. The Government of Punjab has remained engaged, particularly, in introducing large-scale tax policy and administrative reforms with the assistance of donor agencies, including the World Bank and the Asian Development Bank.
3 Medium Term Fiscal Framework 2009/10 4 Daily ‘Dawn’ (11th February 2010) quoting Shaukat Tarin, Finance Minister 5 For details: www.nrb.gov.pk
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A recent study6 carried out with the assistance of Asian Development Bank showed that provincial tax collection has not grown but actually reduced in real terms over the past seven years. All of the studies relating to the Excise and Taxation Department (E&T) have concentrated on the UIPT as the tax with the greatest potential for growth and they have all concluded that the UIPT as a source of revenue can be exploited to achieve higher levels of tax revenue and that essentially there are three ways to achieve this objective;7 - • Firstly, by making the tax administration more effective, • Secondly, by enhancing and widening the tax base, and • Thirdly, through improved incentives in the intergovernmental fiscal system.
2.2 Sector Objectives
2.2.1 Current Vision The current vision of the Department is to – • Mobilize fiscal resources through equitable and taxpayer friendly taxation; • Offer a reliable, transparent, hassle free and computerized registration of motor vehicles; • Transform in to an effective and self sufficient anti narcotics provincial agency; • Introduce automation and outsourcing of services; • Minimize interface with the public.
2.2.2 Proposed Vision The Department is in the process of revising its vision to – • Maximize fiscal space; • Create tax-paying culture; • Improve service delivery; • Motivate and provide enabling environments to E&T Human Resource; • HR at the central stage of the reform initiatives; • Build public trust; • Improve departmental image.
2.2.3 Current Mission Statement The current Mission of the Department is to – • Create a tax paying culture; • Modernise fiscal space • Improve service delivery and public trust as well as Departmental image.
6 Fiscal and Financial Management Reforms, Excise and Taxation 2009 (GHK International / PRMP) 7 Property Tax Decentralisation Program, November 2009 (World Bank /IRRV)
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2.2.4 Proposed Mission Statement As with the ‘Vision’ the Department is revising its mission statement to – • Mobilize fiscal resources through equitable and taxpayer friendly taxation and customer facilitation, plug in leakages, expand tax base, rationalize tax rates and exemptions, BPR. • Promote automation and outsourcing of functions and services to ensure IEE, economize and optimize delivery of public services through minimum public and governments’ officials’ interface. • Transform HR into a professionally sound, motivated team committed to dispense public friendly services and be a semblance of good governance.
2.2 E&T Responsibilities
The Excise and Taxation Department (E&T) has a complex and dispersed structure throughout the Punjab. It is responsible for the collection of several indirect and direct taxes and fees – PROVINCIAL TAXES • Cotton Fee. • Excise Duty. (Licenses/Permits/Passes of Liquor/Opium) • Entertainment Duty. • Hotel Tax. • Motor Vehicles Tax. (Registration/Token Tax/Transfer Fee etc.) • Professional Tax. • Property Tax (Devolved to the Tehsil and Town Councils under District Government) FEDERAL TAXES. • Income Tax (Collected at the time of collecting of Motor Vehicle Tax) • Capital Value Tax (Collected at the time of registration of Imported Motor vehicles if not paid earlier)
2.3 Organisation of the E&T Department
At the E&T Departmental level the technical issues are organised in three units: • Excises, including the motor vehicle tax and registration; • Taxes and fees; • Statistical data collection. The internal units of the Directorate General (DG) are: - • The inspectorate with Excise Intelligence bureau; • Enforcement and audit; • A system analyst (IT); • The opium factory, and • The headquarter administration and office management.
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The territorial units of the DG comprise nine divisions, covering 36 districts and in Lahore 12 zone offices. Within these units there are approximately 350 tax circles (149 in Lahore and 201 in the remaining Districts). Figure 2.1: Organogram – Excise and Taxation Department
2.4 Dispersed Management Structure
With the introduction of the Punjab Local Government Ordinance 2001 UIPT administration was devolved to local government but responsibility for the overall management control of UIPT remained with the Provincial E&T Department in the following areas – • Legislative Framework – research and analysis, development and ensuring clarity and consistency of interpretation and standardization of practices; • Oversight and Guidance – monitoring of activities of the devolved functions; • Audit – responsible for quality control. • Capacity Building – responsibility for capacity building in the interests of province wide consistency. So far as local government is concerned they became responsible for the following areas – • Policy Application – responsible for formulating their discrete and flexible tax policy responding to annual budgetary changes; • Valuation – It is intended that all valuation activities are carried by local government; • Billing and Collection – responsible for billing and collection of the UIPT; • Staff Training – responsible for the administration of staff training programmes; • Information Technology – objective was to establish comprehensive IT infrastructure.
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Assessment and collection of the property tax is operated at the Provincial level in terms of the management control, but formally the District level governments are responsible for the organisation and management. Practically none of the declared objectives of the devolved structure have been achieved. Also, whilst professional tax and motor vehicle taxes are also collected at District level they remain the responsibility of the Provincial E&T Department. This results in the enforcement staff having difficulty in determining priorities in relation to the actual collection process and divided loyalties in terms of the management structure. This confusion of responsibility – Dual Subordination - results in a mixed organisational and management structure and has led to an uneasy management structure and no clear lines of management responsibility or accountability. The E&T Department has staff in the field offices that are on the payroll of the District Governments, despite the fact that they, at least nominally, draw their logistical and management support from the Provincial Government. The E&T Department and its local offices do not report to District Councils / TMAs. The internal management structure is dominated by the Provincial Government rules without assigning real powers to sub-provincial level.
2.5 Human Resources
2.5.1 Sanctioned Posts The total number of sanctioned posts in the E&T Department is 3,184, of which some 8% are on the payroll of the provincial government, i.e. directly employed in the office of the Directorate General. (Table 2.2 below) - Table 2.2: Public employees in tax administration by pay scale
Punjab provincial Local E&T Pay scale Total Punjab E&T DG E&T Total government governments Districts
BS-1-4 86 830 169 837 256 667 38 118 156
BS-5-15 229 718 367 065 596 783 195 2571 2 766
BS-16 13 005 40 192 53 197 14 166 180
BS-17-22 31 986 30 222 62 208 12 70 82
Unspecified 633 54 496 55 129 0
Total 362 172 661 812 1 023 984 259 2 925 3 184
Source: Punjab Development Statistics, 2008; E&T Department The number of sanctioned posts was approved in 1994 and a breakdown of the posts in E&T by job type is shown in Annex 2.
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Two-thirds of the employee are ‘experts”, working as assessors, inspectors and local tax administrators (clerks). The remainder are support staff, e.g. drivers (70), caretakers (52), sweepers (43), etc. (Table 2.2 below) - Table 2.3: Staff positions at E&T Department, 2009
Staff Appropriated staff positions
Director General, Additional DG 2
E&T Directors 12
Excise and Taxation Officers 60
Assistant ETO (assessors) 161
E&T Inspectors 719
E&T Clerk/Constable 1,021
Subtotal technical staff 1,974
Additional technical staff, above BS-11: 190
Additional staff, BS-11 and below 1,019
Total 3,184
Source – Analysis of sanctioned staff posts
2.5.2 Composition of Staff by pay scale The organisation of the E&T Department is based on a territorial-hierarchical structure with mixed tax collection and enforcement functions. Comparing the employment structure of all government tiers in Punjab with the E&T Department by the basic pay scale, tax administration is dominated by the civil servants in BS-5-15 (58% in Punjab, 87% of E&T staff). The tax administration staff in all pay scale categories work mostly at the District Offices (92% of the total employees, compared to 65% for the Punjab generally. (Table 2.2 below) Table 2.4: Composition of administrative staff by pay scale
Out of this: working at sub-provincial level Pay scale Punjab total E&T Total Punjab E&T Total
BS-1-4 25.1% 4.9% 66.2% 75.6%
BS-5-15 58.3% 86.9% 61.5% 93.0%
BS-16 5.2% 5.7% 75.6% 92.2%
BS-17-22 6.1% 2.6% 48.6% 85.4%
Unspecified 5.4% 0.0% 98.9%
Total 100.0% 100.0% 64.6% 91.9%
Source: Punjab Development Statistics, 2008; E&T Department
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3.0 Key Issues faced by the Department
3.1 Collection Levels
The Department is under constant pressure to improve its collection levels and to improve its administration because of the financial pressures experienced by the Government of the Punjab (see section 2.1). Provincial tax collection is seen as extremely weak while the potential for raising provincial resources is high in the province8. Over the last several years a number of studies have suggested numerous measures on the tax policy and administration side but a weak governance structure and a lack of continuity in leadership to steer reform have resulted in negligible progress on the ground.9 It is widely perceived that efficiency in the tax collection process for all the taxes is low and this is reflected in relatively low collection levels and an increasing level of arrears overall. The reasons for this are varied and result from a combination of factors including poor management practices, untrained and poorly motivated staff, lack of resources, lack of a collection culture and a body of taxpayers that are reluctant to pay. It is a common view that the tax base has been severely eroded by legal tax avoidance and illegal tax evasion brought about by largely poor administration. This erosion is thought to have a variety of effects – • Tax revenues are lost, • The growth in the tax base is dampened, • The progressivity implied by the statutory rate structure is not achieved, • The costs of administration are increased, • Horizontal and vertical equity suffer because the effective tax rate faced by individuals is higher than it would be if collection were maximised. It is not surprising; therefore, that there has been pressure on the Department to improve administration on the basis that it will increase revenues, and improve the fairness of the system. In an attempt to encourage an improvement in efficiency the Department has been set collection levels that, in practice, they find difficult to achieve - as can be seen in the example in relation to UIPT shown below – Table 3.1: Example UIPT Collection Target
UIPT Target UIPT Actual Year Rps. (bn) Rps.(bn) 2007 - 08 3,422,000 2,467,419 2008 - 09 6,000,000 2,855,000 2009 - 10 6,600,000 N/A
8 Pakistan, Provincial Government Taxation, World Bank, February 2009 9 Fiscal and Financial Management Reforms, Excise and Taxation 2009 (GHK International / PRMP
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Basically unrealistic targets have been set by the Finance Department and agreed by the E&T Department when the records of actual collection since 2002 point to UIPT collection levels between Rps.2bn and Rps.2.8bn. It was, therefore, pointless to set the Department an unachievable target in anticipation of improved efficiency. This approach seems set to continue as the E&T Department has been given a target of Rps.6.6bn for 2009/10 in respect of UIPT collection, which is 10% higher than the previous year. There appears to be no clear logic to this when considered in the context of historical collection levels. Simply setting the taxation Department a higher target without dealing with the underlying problems will not create the circumstances or the motivation for better collection. The Punjab Government is not taking advantage of a significant taxable capacity in the Province, for example, • Property values have grown but property tax collections have not. Part of the problem is that the Province has given away much of its tax base in the form of preferential treatment – reliefs and exemptions - also there is a problem of underassessment and collection rates are low. No significant increases in tax revenues have taken place over the past seven or eight years because the tax structure is partly based on fixed rates that in themselves have not kept pace with inflation. • In the case of Professional Tax only those willing to pay the tax are included in the tax records and those unwilling to pay the tax are excluded e.g. lawyers as a body have refused to pay the PT and are not, therefore, included even though they are an assessable category. The same applies in some Districts to jewelers and to the proprietors of health gyms. In addition to revenue being affected by inefficient administration it is also subject to the economic climate as is witnessed in the case of Motor Vehicle Taxation – • The tax base for motor vehicles, particularly motor cycles has been expanding quite considerably in recent years as more new vehicles have been registered, however, over the past year because of rising prices and the general economic climate the number of new vehicles being registered is declining as can be seen from the following table – Table 3.2: Numbers of Registered Vehicles
No of Vehicles Registered No of Vehicles Registered Vehicles Category 2007 / 08 2008 / 09 Motorcycles 542,828 444,244 Motor cars 95,725 37,258 Others 453,099 548,703 Total 1,091,652 1,030,205
This decline in the number of registered vehicles is, of course, reflected in a reduction of income in 2008 / 09 as can be seen in Table 3.3 below –
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Table 3.3: Target, Motor Vehicle Tax - Revised Target & Actual Collection
Target Revised Target Actual Collection Year Rps.bn Rps.bn Rps.bn
2003 - 04 2,260,000 2,581,231 2,410,949
2004 - 05 2,535,000 3,100,000 3,162,971
2005 - 06 3,793,000 3,894,000 4,025,763
2006 -07 4,348,160 4,972,086 4,527,612
2007 - 08 5,915,819 4,672,000 4,335,359
2008 - 09 6,515,819 No revised target 4,104,245
These various factors taken together with the budget issues make the improvement in revenue collection a very key and high priority area for the E&T Department.
3.2 Improving Administration
The Excise and Taxation Department is in desperate need of modernisation. The function has been neglected in terms of investment in both human resources and modern technology. The consequence has been relatively poor coverage of the tax base and inefficient collection and administration and high levels of evasion in relation to all the taxes administered by the Department.. The key challenge facing the Department is turning it into a modern, customer facing organisation but this will require significant investment in terms of people, administration and information technology. Whilst the Department recognises its shortcomings and some changes are taking place e.g. the computerisation of motor vehicle licensing these developments are piecemeal and incremental and need to be a part of an overall structured, fully funded action plan. The vision for the Excise and Taxation Department should be that of a customer focused, efficient, service organisation that provides efficient tax collection and administrative services to stakeholders within the overall E&T structures. The Property Tax Division should be focused on achieving outcomes and benefits for stakeholders and customers through the transformation of the Division. Customers and stakeholders should be at the heart of all operational activities and improvement plans. Customers and stakeholders have increasingly sophisticated requirements and demand ever higher standards of service so building better relationships with customers in order to fully understand their needs should be a high priority. In order to achieve this E&T needs to become entirely focused on customers and stakeholders and their requirements, service delivery and employee communication at all levels.
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A recent World Bank study10 has developed a blueprint for a reform of the UIPT over a period of five years that would have a significant impact on the Department in the following areas – • Governance and Fiscal Issues • Operational and Organizational Change • Human Resources • Property Tax Policy Areas • Information Technology • Core Administration • Customer Services The Secretary E&T has expressed his support for the reform programme but the World Bank has estimated that the cost over the five-year period would be in the region of $34m
3.3 Policy Development
A key challenge facing the Department is the development of a coherent and consistent approach to the formulation of tax policy, which is basically an ad hoc process within the department. There is no consistent and systematic approach to policy formulation or to research and development. The result is that there is no in depth consideration of proposals that are made and no consistent collection of data on which to base decisions. The E&T Department is not in a position to make sound revenue forecasts or impact assessments of tax policy proposals or tax administration changes because of a lack of consistent collection and analysis of data for management purposes or for budgetary purposes and the senior management appears to have little support within the management structure in relation to policy development. In the budgeting process tax policy proposals are not properly researched and insufficient time is left for preparing the amendments and organisational changes. Implementation of the actions specified by the medium term UIPT policy framework is not connected to the budgeting process. When the amendments on the tax law are made as part of the Finance Act, then the parliamentary procedures are simplified, as no committee approvals are needed (“money bill”). Tax policy making is ineffective; the tax administration design is highly centralised but administration is fragmented and there is limited cooperation with other units of the provincial and federal government. The E&T Department is not in a position to make sound revenue forecasts or impact assessments on tax policy or tax administration changes. The lack of institutionalised policy development capacity at E&T Department on tax related policy and administrative issues results in few, if any, well-designed, assessed and feasible proposals.
10 Property Tax Decentralisation Programme (November 2009 – World Bank)
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Following the report from the PRMP11 the Department has developed proposals for the implementation of a Policy Support Unit.
3.4 Communication
Tax administration is assigned to two organisations in the Province: the Punjab unit of the Board of Revenue and the E&T Department. There is limited communication or exchange of information between the government units and, for example, in relation to UIPT, policy decisions are made by the E&T Department and the elected local governments are not involved either in the interpretation of the UIPT Act and other regulations, or in the staffing and management decisions even though the cost of staff is included in their budgets. Consequently the level of administrative and political accountability in the UIPT related decision-making is very low. At local government level there is no visible connection between UIPT and local service performance, due to the low level of this shared tax that apportioned to several local authorities and lacking real local control over tax administration.
11 Fiscal and Financial Management Reforms, Excise and Taxation 2009 (GHK International / PRMP)
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4.0 Summary of E&T Budget
4.1 Budget Summary
A summary of the E&T budget showing original budget, revised budget and actual expenditure is set out below in Table 4.1
Table 4.1: Budget Summary, (Departmental) 2006/07 to 2009/10
BE RE Actual BE RE Actual BE RE Actual BE Description 2006-07 2006-07 2006-07 2007-08 2007-08 2007-08 2008-09 2008-09 2008-09 2009-10
Secretariat 15,825 16,137 11,984 17,452 16,960 16,184 20,093 15,696 15,385 16,678 DG and ADG office 30,963 92,275 87,740 43,620 145,432 141,847 38,970 55,830 53,855 167,339 Opium Factory 2,126 2,061 1,765 2,433 1,782 2,100 2,679 1,072 2,433 3,351
Total 48,914 110,473 101,4891 63,505 164,174 160,1312 61,742 72,598 71,673 187,3683 Notes – 1. 2006/07 The revised and actual budget has increased over the original estimate because an amount has been Included in respect of the manufacture of additional opium tablets. 2. 2007/08 The Director General’s office received an additional grant of for the purchase of motor vehicles during the financial year. 3 2009/10 An additional grant of PKR100m has been included in salaries budget in order to increase resources in the Department. Table 4.2: Graphical representation of budget
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4.2 Breakdown of Budget (Objective)
The following tables show the budget over the objective headings for the years 2006/07 to 2009/10.
Table 4.3: Budget – 2006/07 to 2007/08
Budget Revised Budget Revised Object Actual Exp. Actual Exp. HEAD Estimates Estimates Estimates Estimates Code 2006-07 2007-08 2006-07 2006-07 2007-08 2007-08
Employees Related B01 32,364,000 33,222,000 27,826,279 45,842,000 42,034,000 37,813,399 Expenses
B03 Operating Expenses 15,314,000 51,722,000 49,445,353 16,336,000 118,190,000 117,187,313
Employees' Retirement B04 20,000 553,000 204,260 Benefit
Grants Subsidies and B05 800,000 2,300,000 Write off Loans
B06 Transfers 90,000 150,000 60,000 93,000 100,000 30,000
B09 Physical Assets 23,265,000 22,693,605 1,600,000 1,465,000
B013 Repair & Maintenance 1,126,000 1,561,000 1,260,461 1,234,000 1,450,000 1,315,450
Total 48,914,000 110,473,000 101,489,958 63,505,000 164,174,000 160,111,162
Table 4.4: Budget – 2006/07 to 2007/08
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Table 4.5: Budget – 2008/09 to 2009/10
Budget Revised Budget Object Actual Exp. HEAD Estimates Estimates Estimates Code 2008-09 2008-09 2008-09 2009-2010
Employees Related B01 42,962,000 46,088,000 43,402,816 155,507,000 Expenses
B03 Operating Expenses 17,573,000 26,547,000 26,262,031 29,404,000
Employees' Retirement B04 (91,548) Benefit
Grants Subsidies and B05 Write off Loans
B06 Transfers 83,000 158,000 110,000 93,000
B09 Physical Assets 1,140,000
B013 Repair & Maintenance 1,047,000 1,412,000 1,329,432 1,224,000
Total 61,665,000 74,205,000 71,012,731 187,368,000
Table 4.6: Budget – 2008/09 to 2009/10
The above Tables show clearly that actual (out-turn) expenditure over the past three years has consistently been higher than the estimated expenditure as a result of
PKD Consultancy Ltd Page 28 of 66 Excise and Taxation Department Rapid Sector Review ------additional allocations that have been made to the Department. In the years 2006/07 and 2007/08 the additional expenditure was in the area of operating expenses whilst the original estimate for 2009/10 shows an increase in Employee Related Expenses. This is the result of the Department being allocated an additional ‘one-off’ amount of Rps 100m to help improve the level of resources available to it. At the present time there are proposals for spending this additional allocation over a number of areas including additional staff and vehicles (see paragraph 5.7). On average employee related expenditure makes up some 83% of gross expenditure – this provides little or limited flexibility in the budget to determine transfers from one head of expenditure to another. These variations suggest a lack of forward planning and little integrity in the preparation of the budgets. It is also clear that the Department has not had a development budget, which again indicates a lack of forward planning. When additional capital resources were required it appears to rely on making applications for supplementary grants from the Finance Department. That is set to change as a development budget has been proposed for the years 2010/11 to 2012/13 (see paragraph 4.4) – this appears to be a result of the MTBF process.
4.3 Breakdown of Budget over Major Functional Areas
Table 4.7: Functional Breakdown – 2006/07 to 2007/08
Budget Revised Budget Revised Actual Exp. Actual Exp. Grant No Grant Description Estimates Estimates Estimates Estimates 2006-07 2007-08 2006-07 2006-07 2007-08 2007-08
21001 Opium Factory 2,126,000 2,061,000 1,765,195 2,433,000 1,782,000 2,079,756
21003 Provincial Excise 25,110,000 63,237,000 61,381,938 27,608,000 128,697,000 126,928,440
21007 MVT 2,783,000 25,700,000 23,865,387 12,726,000 11,246,000 11,200,193 Other Taxes and 21008 Duties 3,070,000 3,338,000 2,493,438 3,286,000 5,489,000 3,718,773
21010 Administration 15,825,000 16,137,000 11,984,000 17,452,000 16,960,000 16,184,000
48,914,000 110,473,000 101,489,958 63,505,000 164,174,000 160,111,162 Total
Table 4.8: Functional Breakdown – 2008/09 to 2097/10
Budget Estimates Revised Estimates Actual Exp. 2008- Budget Estimates Grant No Grant Description 2008-09 2008-09 09 2009-2010
21001 Opium Factory 2,602,000 2,679,000 1,971,945 3,351,000
21003 Provincial Excise 22,693,000 33,268,000 33,346,672 143,823,000
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21007 MVT 12,799,000 14,094,000 13,695,293 14,723,000
Other Taxes and 21008 Duties 3,478,000 8,468,000 6,613,821 8,793,000
21010 Administration 20,093,000 15,696,000 15,385,000 16,678,000
61,665,000 74,205,000 71,012,731 187,368,000 Total
4.4 Development Budget – 2010/11 to 2012/13
As is clear from the above tables the Department has undertaken little forward planning and when additional expenditure has been incurred over and above the original estimates it has been the result of additional grants being approved by the finance department. However, a development budget has now been proposed in respect of capital works over the next three financial years (Annex 4).
Table 4.9: Gross Development Budget – 2010/11 to 2012/13
Total Estimated Estimated Estimated Expenditure Expenditure Expenditure Rps.m Rps.m Rps,m Rps.m Year of Expenditure 2010/11 2011/12 2012/13 Office / Residential 563.223 281.611 140,805 140,805 Customer Service Offices 49,500 24,750 12,375 12,375 Total 612, 773 306,361 163,180 163,180
Source: Departmental Proposed Development Budget The proposals contained in the Development Budget are subject to approval but clearly there will a revenue impact of the various proposals and this needs to be taken in to account in the ongoing current budget if the proposals are approved. The introduction of a development programme is a major step forward for the Department in its financial planning. It is noted that the amounts allocated to years 2 and 3 of the development programme and exactly equal and equate to 50% of the total. This suggests more of a ‘guestimate’ process than an estimate process based an analysis of the costs.
4.5 Breakdown of Revenue Receipts, 2006/07 to 2008/09
4.5.1 Gross Revenues Collected by E&T The following tables (Table 4.10 and 4.11) show the Department’s performance on Revenue collection as compared to original and revised estimates from 2005/06 to 2008/09 and as can be seen revenues collected have not increased to any significant degree over the past four years but in spite of this budgeted income has been increasing and has effectively doubled over the past four years.
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Table 4.10: Gross Revenue Collection – 2005/06 to 2008/09 Revised and Actual Receipts 2005/2006 to 2008/09 Budget Revised Actual Estimate Estimate %age over BE %age over RE Rps. Rps. Rps. 2005/06 7,927.333 6,971.333 8,023.698 101.21% 115.09% 2006/07 10,165.772 9,230.272 8,636.806 84.96% 93.57% 2007/08 11,109.650 10,923.849 8,711.663 78,41% 79.75% 2008/09 15,140.569 8,500.000 8,428.038 55.67% 99.15%
Source: E&T Department records The major reasons for this are a lack of revaluation in UIPT and tax rates over all the taxes that have not kept pace with inflation leading to a loss of some RPS 3.3bn12 due to a failure to index the tax rates. The overall loss has been masked by the fact that there has been a growth in the number of motor vehicles registered over recent years but due to the economic climate registrations have been reduced over the past two years and this is reflected in the income shown in Table 5.10 for 2007/08 and 2008/09. The consultants have not seen any evidence that the administrative and political constraints that have kept provincial taxes relatively low in the Punjab will change, or are able to change, quickly. If long-term sustained growth in tax revenues is to be achieved there will have to be: • Improvements in tax administration – collections rates are low, replacement of manual systems, records are out of date, tax bases out of date - incomplete and require updating and a lack of skilled and motivated staff. • Removal of tax exemptions - that have narrowed the tax base and provided preferential treatment to certain classes of taxpayers. • Change in political will – there has been a lack of political will to increase tax rates. In addition, it appears that tax administration is not taking advantage of a significant taxable capacity in the Province – property values have grown but property tax collections have not, the number of motor vehicles has grown but motor vehicle tax revenues have not kept pace. In the case of motor vehicle revenues this has been partly disguised by the growth in the number of vehicles being registered but to some extent having largely fixed tax rates since 2001 has offset this growth in income. Part of the problem also is that the Province, in relation to UIPT, has given away much of its tax base in the form of preferential treatment – reliefs and exemptions - also there is a problem of underassessment and collection rates are low. Many of these issues have been identified in various consultancy reports and were recognised by the Provincial Government in the Medium Term Policy Framework but little action has ensued and now again in the Medium Term Fiscal Framework (MTFF),
12 Fiscal and Financial Management Reforms, Excise and Taxation 2009 (GHK International / PRMP)
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2009 – 2012 from which actions appear to be flowing e.g. a revaluation of properties subject to UIPT is scheduled for 1st July 2010.
4.5.2 Revenues Analyzed by Year Table 4.11: Revenue Receipts 2005/06 to 2009/10
Revised and Actual Receipts 2005-2006 %age BE RE Actual Code Description Achieved B026 Excise Duty 867.410 888.680 861.386 96.93% B028 Motor Vehicle Tax 3,894.644 3,894.653 4,025.763 103.37% B01301 Property Tax 1,888.000 1,888.000 2,188.648 115.92% B01601 Tax on Professions 300.000 300.000 232.630 77.54% B03055 Cotton Fee 685.000 685.000 430.495 63% Entertainment Duty 31.000 31.000 50.137 161.73% B03024 Hotel Tax 225.000 225.000 234.749 95.84% Others n/a n/a 0.650 n/a Revenue 7,891.054 7,912.333 8,023.808 101.40% NB. Percentage achieved is shown compared to revised estimate (excluding others) Source – Excise and Taxation Department and Final Accounts Revised and Actual Receipts 2006-2007 %age BE RE Actual Code Description Achieved B026 Excise Duty 1,026.165 1,030.536 841.884 81.69% B028 Motor Vehicle Tax 4,348.160 4,972.086 4,529.175 91.09% B01301 Property Tax 2,489.000 2,917.650 2,200.722 75.43% B01601 Tax on Professions 400.000 310.000 270.723 87.33% B03055 Cotton Fee 655.000 655.000 453.428 69% Entertainment Duty 35.000 35.000 60.915 196.50% B03024 Hotel Tax 250.000 250.000 279.551 111.82% Others n/a n/a 0.408 n/a Revenue 10,165.772 10,170.272 8,636.806 84.92% NB. Percentage achieved is shown compared to revised estimate (excluding others) Source – Excise and Taxation Department and Final Accounts Revised and Actual Receipts 2007-2008 %age BE RE Actual Code Description Achieved B026 Excise Duty 1,216.030 1,216.030 1,002.846 82.47% B028 Motor Vehicle Tax 5,915.819 5,915.819 4,260.328 72.02% B01301 Property Tax 3,422.000 3,422.000 2,467.419 72.10% B01601 Tax on Professions 370.000 370.000 283.987 76.75% B03055 Cotton Fee 500.000 500.000 380.852 76.17% Entertainment Duty 45.000 45.000 42.626 94.72% B03024 Hotel Tax 280.000 280.000 275.210 98.29% Others n/a n/a 1.584 n/a Revenue 11,109.650 11,748.849 8,714.852 74.17% NB. Percentage achieved is shown compared to revised estimate (excluding others)
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Source – Excise and Taxation Department and Final Accounts Revised and Actual Receipts 2008-2009 %age BE RE Actual Code Description Achieved B026 Excise Duty 1,333.950 1,300.000 1,058.624 81.43% B028 Motor Vehicle Tax 6,515.819 4,050.000 4,129.876 101.97% B01301 Property Tax 6,000.000 2,800.000 2,855.045 101.97% B01601 Tax on Professions 370.000 350.000 384.493 109.86% B03055 Cotton Fee 560.000 560.000 353.710 63.00% Entertainment Duty 70.000 70.000 49.003 70.00% B03024 Hotel Tax 290.800 290.800 252.682 87.00% Others 0 59.285 Revenue 15,140.569 9,420.800 9,142.718 97.04% NB. Percentage achieved is shown compared to revised estimate (excluding others) Source – Excise and Taxation Department and Final Accounts It is clear from the above tables that, particularly over the past three years, there is a mismatch between the original budget estimates and actual performance – this is largely due to the fact that the estimates are unrealistic when compared to previous years’ performance. However, there is still a shortfall in the actual collection as compared to the revised estimates – which are estimates prepared by the Excise and Taxation Department as against the original estimates that are imposed by the Finance Department.
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5.0 E&T Budgeting, Performance and Monitoring Framework
5.1 Budget Preparation
The overall budgets for E&T are prepared on a three part basis – • Secretariat – The budget for the Secretary’s office is prepared by the DDO and then forwarded to the Finance Department – the compilation of budgets is carried out as a clerical exercise rather than one of matching required outputs to the budget requirements to meet the desired outputs. • Director General’s Office – The budgets for the DG’s office and the Opium Factory are prepared within this office with no involvement from the Office of the Secretary. The budget is then sent to the Secretariat where it is complied with the Secretariat’s budget and forwarded to the Finance Department. No quality assurance or analysis of the Attached Department’s budgets is undertaken by the Secretariat. • Districts – Each of the Districts prepares their own budgets and forwards them to District Coordinator Officers, who in turn forwards them to the Finance Department. The Excise and Taxation Department has no effective control over these budgets even though they are, in practice, managing the staff and responsible for the collection of revenues in the Districts. The fiscal year commences 1st July and the budget cycle is fairly conventional –
April July Revised Estimates Budget Year Commences to FD
March October Discussions with Department BCC Issued
Febraury Nov-Dec FD Examines Estimates Estimates Prepared
January Estimates to FD
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5.2 Budget Monitoring
The budget is an authorization to spend once it is approved and the Department is required to monitor the budgets on a monthly basis and provide a statement to the Finance Department. Control is exercised on the basis that E&T is only allowed to spend up to 40% of the budget over the first six months. There is no attempt to profile the budget on a monthly basis by reference to the pattern of spending in previous years. Although authorization of the budget is on individual heads of expenditure limited virement is allowed for small amounts of expenditure. If the Department requires additional financial resources then it has to make a supplementary budget request to the Finance Department. As can be seen from the analysis of accounts in Section 4 supplementary requests appear to have been a regular feature of E&T’ s management of its budgets suggesting a lack of forward planning. The limit on approvals for supplementary grants by the Finance Department is Rps. 3m; above this amount approval is from the Chief Minister. Revised estimates for expenditure only are prepared in December and again in March and submitted to the Finance Department
5.3 Revenue Estimates
Revenue estimates are produced by the Office of the Secretary, however, there is no effective support mechanism for the senior staff within the Excise and Taxation Department and this became patently obvious to the consultants during the budget cycle when the Secretary and his team had to produce budget proposals in relation to revenues for 2009/10. The budget proposals were produced very much on an ad hoc basis based on data that had to be collated from manual records from each of the 36 Districts. There is no policy unit in the E&T Department and there is limited cooperation with other units of the provincial and federal government. The E&T Department is not in a position to make sound revenue forecasts or impact assessments on tax policy or tax administration changes as there appears to be no consistent collection and analysis of data for management or budgetary purposes and the senior staff has no support within the management structure in relation to policy development. The lack of policy development capacity and cooperation with the Finance Department on tax policy issues subsequently results in few, if any, well-designed, assessed and actioned proposals. In spite of the Department identifying, albeit with the available information, the level of revenue that it estimates it will collect it has been set unrealistic targets by the Finance Department over the past three years particularly in relation to UIPT and Motor Vehicle Taxes.
5.4 Performance Measurement and Monitoring
There is little or no measurement of performance either at a policy level, budget level, departmental level or at an individual staff level. There is no performance management framework in place that enables residents, politicians, managers and
PKD Consultancy Ltd Page 35 of 66 Excise and Taxation Department Rapid Sector Review ------other stakeholders to see how the Department ‘measures up’ in comparison to their own previous performance and, where relevant, in comparison with other organisations. That said whilst the collection of data is not systematic and when done – because of manual systems – the data is often seen as unreliable there is monthly monitoring of the collection figures from each district, which is followed up by discussions with individual managers when performance is seen to be falling – but this is the only area where data is consistently collected and maintained and collection is on a manual basis. An example of the monthly monitoring that takes place is shown in Table 5.1. The example is the gross collection for the Punjab but this same information is produced down to sub-office level within each District: - Table 5.1: Example Monitoring Statement
Excise & Taxation Department 2009 / 10: Month 4 Monitoring
Annual 4 Months 4 Months 4 Months % Shortfall Collection In Target Target Target Actual Shortfall 4 Months of Indicated by 2008-09 E&T
Property Tax 6,600.00 2,420.20 1,476.10 944.10 39% 1,188.40 3,300.00
Professional Tax 480.00 201.60 215.30 -13.70 - 163.70 480.00
MV Taxes 6,634.30 3,051.80 1,955.70 1,096.10 36% 1,567.20 4,000.00
Hotel Cess 356.90 119.00 69.90 49.10 41% 82.50 208.00
Cotton Fee 748.00 124.80 58.40 66.40 53% 49.40 352.00
Excise 1,450.00 483.40 245.50 237.90 49% 252.00 1,000.00
Sale of Opium 16.90 5.60 1.40 4.20 75% 2.10 16.90
Total 16,286.10 6,406.40 4,022.30 2,384.10 37% 3,305.30 9,356.90
Source – Excise and Taxation Department The information that is collected on a monthly basis has to be compiled largely from manual records and this is a huge task meaning that there is an overall lack of consistently collected accurate management information and little ability in the way in which information is currently held to undertake detailed and accurate analysis, for example in some Districts the UIPT exemptions for 5 Marla properties are recorded but in others they are not making it impossible to obtain an accurate estimate of the cost of the exemption. There is a question over the reliability of MVT data because the information / files is held by post offices and the Department relies on them to provide accurate and timely data.
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In relation to professional tax the data in terms of performance against target is questionable as not all those due to pay for the tax are registered and, therefore, results in performance more closely matching estimates.
5.5 Monitoring of Policy Objectives
The policy objectives set in 2007 (Annex 1) were to be completed by the year 2009/10 but as Table 5.2 below indicates this has not been achieved. In putting the medium term reform program in place progress was to be monitored by a steering committee and specific task force teams but we have not found any evidence that these groups met or that any monitoring took place. It is worth noting that whilst this program was put in place, at least nominally, the Department does not appear to have been provided with any additional resources to assist it in achieving its targets. Table 5.2: Medium Term UIPT Provincial Policy – Achievements
Key Components of the Medium Term UIPT Provincial Policy
Policy component Effect Timing for Achieved completion
1. Revision of the ARV tables for better market Improve equity & tax base 2010/11 W.e.f 01/07/10 calibration
2. Reduce different taxation of owner- Proposed for Improve equity & tax base 2009/10 occupied and rented properties 2010/11
3. Market calibration of ARV tables for Proposed W.e.f Improve equity & tax base 2008/09 industrial properties 01/07/10
4. Adjustment of ARV tables by inflation to Smooth tax changes 2008/09 No smooth tax changes
5. Overhaul of exemptions and funding of Broadening tax base 2008/09 No additional tax relief
6. Taxation of vacant urban land Broadening tax base 2009/10 No
7. Test and introduce Alternative models for Improve equity & tax base 2010/11 No establishing UIPT tax base
8. Taxation of Government property Broadening tax base 2010/11 No
9. New provincial tax relief to be funded by the Improve 2009/10 No Government intergovernmental equity
10. Taxation of transmission lines and Broadening tax base 2010/11 No pipelines (linear property)
11. Taxation of commercially used residential Improve equity & tax base 2009/10 No properties
12. Taxation of properties with rights of way Broadening tax base 2009/10 No
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Rights of Way – 13. Taxation of billboards and communication No Broadening tax base 2009/10 towers Communication Towers - yes
Still under 14. Reintroduction of a betterment tax Improve equity & tax base 2009/10 discussion
15. Local governments to formulate their own Local attention to tax 2008/09 No tax policies
16. Local governments to know their forgone Local attention to tax 2009/10 No revenues Source - Medium-Term Policy Framework of the Government of Punjab on the UIPT, 2007 to 2012
5.6 Medium Term Fiscal Framework
Whilst the Medium Term Policy Framework concentrated on UIPT only, the Medium Term Fiscal Framework casts a wider net for policy development initiatives for the period 2009 to 2012 as can be seen in Annex 3 and covers not only UIPT but also Motor Vehicle Tax, Professional Tax (and also Stamp Duty, Registration Fee and Mutation Fee and other levies.) These policies will cover the period up to 2012 and need to be fully costed, planned and reflected in the MTBF.
5.7 Additional Resources
The E&T Department has been allocated an additional Rps100m in 2009/10 to assist with additional resources required to implement the policy proposals relevant to them. The breakdown of resources and the estimated cost is as follows – Table 5.3: Budget Estimate for Additional Resources
Description Amount Rps (Millions)
1 Salary – (215 Additional Posts) 27,489 2 Vehicles 43,750 3 I.T. Equipment 1,010 4 P.O.L Charges 1,000 5 Media Campaign / Awareness Raising 15,000 6 Miscellaneous (Furniture & Equipment etc. 15,000 7 Total 103,249 Source – E&T Department Clearly the expenditure on staff and equipment including vehicles and IT will incur ongoing revenue costs and will need to be accounted for in future year budgets.
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As the provision of additional resources is related to the MTFF this should enable monitoring of the budget expenditure against whether the policy objectives are being met and to determine if value for money is being achieved..
5.8 Government Proposals for Benchmarking
The problem of a lack of performance management is not unique to the E&T Department and in recognition of this the Government of the Punjab has determined to set up a ‘robust monitoring system’13 that allows the performance of individual managers to be systematically measured. There is an intention to create performance measurement indices that are quantifiable, are able to capture core business processes of Departments and are easily measurable. In order to do this the Department has set up a core working group to develop the necessary process maps and identify the hierarchical structures necessary to create the performance measurement matrixes for individual managers. This group has been meeting regularly over the past several weeks. Once the data collection processes are in place the data will be held in a central information system, the database for which is currently being developed. Whilst this is a first step it only covers personal performance and not departmental performance, which will be necessary if there is to be a match between budgets and outputs.
13 Development of Key Performance Indicators – Paper dated 8th October 2009
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6.0 Conclusions and Recommendations
6.1 Introduction
As has been noted in this report the Department is under considerable pressure to improve its performance by improving and modernising its administration. A number of reports sponsored by the World Bank and the Asian Development have concluded that “Root and Branch” reform is required in almost all areas of the Department – • Governance and Fiscal Issues. • Operational and Organisational Change. • Human Resources. • Tax Policy Development. • Information Technology. • Core Administration. • Customer Services. If this reform is to take place then it will require the development of an action plan and expenditure of some $34m over a period of five years.14 The Department itself recognises the need for change and has been allocated additional budget in 2009/10 (see paragraph 5.7) of Rps.100m but clearly this will only have a minimal impact in terms of major reform but that expenditure will have ongoing current expenditure consequences and will have to be reflected in future budgets. If decisions are made to undertake a major reform process this will have a significant impact both on the current expenditure budget and the development budget that has been proposed for the next three financial years and ongoing. Decisions in relation to the funding of a reform programme will have to be considered and negotiations held with the World Bank.
6.2 Budget Preparation
The budget preparation process is essentially a mechanical exercise undertaken by relatively junior staff with little involvement from the senior staff and It is prepared on an incremental basis with the primary focus being on inputs and not outputs and - • It is clear that in relation to the E&T Department there is no correlation between expenditure and outputs nor is there any relationship between the budget and policy objectives. • In relation to revenue estimates these are prepared largely on the basis of unreliable manual information.by the senior staff but one has to question their usefulness when targets are actually imposed by the Finance Department that are not realistically based on previous collection levels. • The overall budget is prepared in a piecemeal fashion at different levels i.e. Secretariat; Office of the Director General and at District level and there is no overall composite budget nor any overall guiding and quality assurance
14 Property Tax Decentralisation Program, 2009 (World Bank / IRRV)
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process. This process results in part from the effect of the dual-subordination organization introduced by the PLGO 2001 (now under amendment). • The annual budget is prepared with a lack of information on costs of policies, programs and services. • There is no forward projection of budgets or the impact of future expenditures. • There is a lack of strategic focus and no attempt to reflect E&T priorities in the budgetary process. • Performance is judged largely by matching spending with budget appropriation. • Because of the budget preparation process being undertaken in three separate and distinct parts there is no clear overall cost of the Excise and Taxation Department available. This makes it difficult to measure value for money. • There is little real communication between the Finance Department and E&T who feel that they are dictated to and that they have little real say in the amounts allocated to them or the targets that are set for them. The variations in budget estimates as compared to actual expenditure over the past four years suggest a lack of forward planning and little integrity in the preparation of the budgets. It is also clear that the Department has not to date had a development budget, which indicates a lack of awareness for the need for forward planning. When additional capital resources are required it appears to have relied on making applications for supplementary grants from the Finance Department. It would appear that as a result of the training and the work undertaken by the MTBF team this approach is changing, The figures currently shown in the budgets do not reflect the overall cost of tax administration because of the dual-subordination issue, with the cost of the E&T field operations being reflected in the budgets of local government. In order to introduce effective performance measurement and measuring outputs against budget then the three budgets of the Department need to be brought together. Communication with the Finance Department needs to improve so that the two Departments are seen to be working together. There is a proposal15 for a Policy Support Unit to be set up in the E&T Department that has been agreed by the Finance Department and is included in the MTFF (Annex 3). This will help with the communication process as well as issues surrounding data collection and performance management. If MTBF is to be successful senior staff in the Department will have to ensure that they have a clear understanding of their role and responsibilities and ensure that the preparation of budgets in not just a ‘mechanical exercise’ and that consistent and regular monitoring of the budget takes place and that staff who are responsible for the preparation of budgets are suitably experienced and trained and where necessary appropriately qualified. It is recommended that at least two members of staff undertake professional accountancy training to at least accounting technician level.
15 Fiscal and Financial Management Reforms, Excise and Taxation 2009 (GHK International / PRMP)
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They can then be used to pass on their skills to other members of staff. Training needs to be ongoing. It is further proposed that the accounting teams in the Office of the Secretary and the Office of the Director General be amalgamated to ensure continuity of budget preparation, sharing of skills and the development of good accounting practices.
6.3 Performance Measurement and Monitoring
As there is no performance management framework almost by definition there is little quality control exercised and the consultants have not seen any evidence of measuring performance and outputs against budget. If the policy and budget process is to be seen as effective then financial planning needs to be linked to E&T’s strategic and planning processes – the financial plan (budget) is simply a quantitative expression of a plan of action or should be. As such, the budget should reflect E&T’s key strategic priorities. Annual financial plans, integrating current expenditure plans and development programs, with cash flow, cash flow projections and profiling of the budget to meet anticipated expenditure trends should be developed in the context of a longer-term financial strategy, which supports the strategic plan. In developing E&T’s strategic and corporate plans, top management needs to consider the value for money achieved by allocating resources to different activities. It also needs to have a thorough understanding of the financial implications of current and potential alternative policies, programs and activities. This should be based on an analysis of their cost profiles and cost drivers and of how those costs will behave in different circumstances. It also needs to understand the whole-life costs associated with capital investment. Financial information needs to be integrated with non-financial performance and activity information. Together, such information forms the basis for financial forecasts and enables value for money to be monitored. The financial information used both for setting the budget and internal accountability, monitoring and forecasting throughout the year should be derived from the same systems that are used to generate the reported results.
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Annex 1 Medium Term Policy Framework
Medium-Term Policy Framework of the Government of Punjab on the Urban Immovable Property Tax for the Time Period of July 1, 2007 – June 30, 2012 The 2001 Punjab Local Government Ordinance (PLGO) adopted the strategic goal of providing local governments with robust, buoyant and stable own-source revenues from the urban immovable property tax (UIPT), to finance their expenditures for provision of mandated communal services. The resent performance of the UIPT is unsatisfactory where some 30 TMAs have no rating area thus do not receive any revenue while others receive insignificant revenue from this tax relative to their expenditure needs. The Government hence has decided to formulate and implement a mid-term policy for enhancing the UIPT and turn it into a robust, buoyant and stable own-revenue source of local governments. Background and Setting Punjab is in the midst of decentralization reforms that aim to rationalize expenditure and revenue responsibilities, including granting to local governments responsibility for raising their own-source property tax (UIPT) revenues. In order to implement these reforms the Government has developed a coherent property tax policy framework underpinned by the following basic tenets: . The UIPT is to produce for local governments sufficient revenues for funding expenditures for provision of mandated public services; . In order to achieve a sufficient level of the UIPT revenues local governments should be able to formulate discrete and flexible tax policy responding to annual budgetary requirements; and . Local government tax policy discretion will be bound by limitations set in the provincially adopted and supervised UIPT regulatory framework. The medium-term UIPT policy of the Government focuses on a comprehensive revision and enhancement of the key tax policy instruments, sets tax policy benchmarks and milestones, adopts a time-bound action program for implementing the tax policy in the coming five year time period,. One of the objectives of this medium term tax policy is to substantially broaden the tax base to include all currently taxable properties and to broaden the scope of taxable properties in line with international practice. This would enable local governments to collect significantly more tax revenues in an equitable way while maintaining or even lowering tax rates. Another objective in line with devolution is enhancing tax policy flexibility of local governments regarding tax rates and tax relief. This flexibility would be exercised within a regulatory framework established at the provincial level by the E&T.
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Devolution of the UIPT, unlocking its potential, and dividing policy competencies between provincial and local governments, requires substantial capacity building and skills development in the areas of impact analysis, policy formulation methods, supervisory techniques etc. Much effort will therefore be directed in the first phase of this medium-term framework to the policy development area, while in the administration area much work is required to improve information, valuation processes, and data support to these processes. The above mentioned cross cutting issues will need to be resolved regardless of the final allocation of functions, decision competencies, and cost/revenue sharing structures. Key Elements of Medium-Term UIPT Policy Framework Recognizing the ambiguities and inconsistencies in the existing legal framework for UIPT, in the medium-term the Government of Punjab intends to develop and adopt new property tax legislation that will harmonize with the Punjab Local Government Ordinance (PLGO) and its objectives. This may necessitate changes to the PLGO as well. In the medium-term local governments are also expected to respond to Government efforts at devolving UIPT policy making to the local level – especially in regards to tax rates and tax relief. This will be enabled through development of a provincial policy regulatory framework providing local governments with clearly defined flexibility in this area and subjecting them to hard budget constraints to discourage “transfer seeking” behavior. The key issues of the regulatory overhaul of the UIPT and measures to be guided by the E&T Department, but applied largely by local governments, are summarized in the table below.
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Key Components of the Medium Term UIPT Provincial Policy
Policy component Effect Timing for completion
1. Revision of the ARV tables for better market Improve equity & tax base 2010/11 calibration
2. Reduce different taxation of owner-occupied Improve equity & tax base 2009/10 and rented properties
3. Market calibration of ARV tables for industrial Improve equity & tax base 2008/09 properties
4. Adjustment of ARV tables by inflation to Smooth tax changes 2008/09 smooth tax changes
5. Overhaul of exemptions and funding of Broadening tax base 2008/09 additional tax relief
6. Taxation of vacant urban land Broadening tax base 2009/10
7. Test and introduce Alternative models for Improve equity & tax base 2010/11 establishing UIPT tax base
8. Taxation of Government property Broadening tax base 2010/11
9. New provincial tax relief to be funded by the Improve intergov. equity 2009/10 Government
10. Taxation of transmission lines and pipelines Broadening tax base 2010/11 (linear property)
11. Taxation of commercially used residential Improve equity & tax base 2009/10 properties
12. Taxation of properties with rights of way for Broadening tax base 2009/10 underground cables
13. Taxation of billboards and communication Broadening tax base 2009/10 towers
14. Reintroduction of a betterment tax Improve equity & tax base 2009/10
15. Local governments to formulate their own tax Local attention to tax 2008/09 policies
16. Local governments to know their forgone Local attention to tax 2009/10 revenues
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1 Revision of the ARV tables for better market calibration The annual rental value tables as presently developed by the E&T are viewed as rather poorly reflecting market relationships between taxable properties. For example, location is characterized by few attributes and physical characteristics of buildings are hardly taken into account. By considering inclusion of additional property attributes that are highly relevant to the market pricing of property, the E&T will be able to better calibrate the rental values to market relationships. This should make it possible to capture more valuable attributes and thus increase the ARV tax base, and through this result in higher UIPT revenues, as well as increase its fairness and thus compliance. The activities to be undertaken by the E&T in discharging this task include: (i) analysis of the recent valuation samples in order to identify valid market attributes; (ii) supplementary market surveys reflecting the new attributes for ARV modification; and (iii) notification of the modified ARV tables for 2009/2010 taxation year. The time frame for the implementation of this measure is estimated to be two to three years since the beginning of the implementation framework (July 1, 2007). 2. Reduce different taxation of owner-occupied and rented properties Taxation of owner-occupied property is drastically lower than rented properties – by as much as a factor of 10. Such a big difference is not rational and should be substantially reduced. This will create more equitable treatment of these tenure forms and should also produce more revenues for local governments. The E&T will develop a policy regulatory framework supported by impact analysis and evaluation of maximum differentials, and local governments will themselves set tax rates to be applied to ARVs in the present valuation tables, as to effectively reduce different taxation of these tenure forms. At next UIPT revaluation a unified valuation table will be developed for both owner-occupied and rented properties and local governments will decide on different tax rates as a matter of policy. Preparation of regulatory framework and selection of tax rates will be completed for the 2008/2009 property tax year. Development of unified valuation tables for owner-occupied and rented properties will be done in conjunction with next UIPT revaluation. 3. Market calibration of ARV tables for industrial properties Valuation tables currently being used for industrial property have little to do with market calibration of that property category. The use of residential ARV tables for this purpose is an expression of tax policy, which distorts the valuation base. Such a policy should be done through tax rates and relief and not through an unrealistically defined value base. Separate new ARV valuation tables for industrial properties will be developed by the E&T based on supplementary surveys and market analysis. These will be introduced within one year and should thus be effective for the 2008 UIPT tax
PKD Consultancy Ltd Page 47 of 66 Excise and Taxation Department Rapid Sector Review ------year. The expected results are a more market realistic assessment base and, therefore, higher revenues from industrial property. 4. Adjustment of ARV tables by inflation to smooth annual tax changes Presently, changes in tax levies take place every 5 years during the revaluation years. In a growing market with inflationary pressure, this means that taxpayers are faced with very high jumps in tax demands during those years and no changes during the intervening years. In order to smooth these changes there is a need to consider annual adjustments of ARV tables for inflation (even if only half of the consumers’ price index applied). Such regular increases should result in higher revenues, more in tune with inflationary changes that impact local government expenditures, and taxpayers faced with smoother changes should be able to better comply with tax demands and thus contribute to higher collection rate. This will require E&T to study the impact of such a change and then the Planning and Development Department (P&D) to formulate amendment to the PLGO as necessary. The E&T correspondingly will develop a regulatory framework for inflation indexing, including billing procedures. Formulation and adoption of requisite regulations should take no longer than 9 months, while revised tax demands should be issued for the 2008 tax year. 5. Overhaul of exemptions and funding of additional tax relief It is widely acknowledged that the UIPT revenues are greatly weakened by the multitude of exemptions and reductions. Many of these are redundant and poorly related to both market values and ability to pay of taxpayers, which makes them rather contradictory vis a vis tax equity objectives. The exemption for plot size can be equitable obtained by a revised value-based exception with expanded tax base and higher revenues. The E&T will prepare a regulatory framework for introducing an alternative equity-based tax relief. This will also embody a principle that any new exemptions introduced by the local governments will not be compensated for by additional fiscal transfers by the Government. This way, local governments will need to weight the fiscal tradeoff between tax relief generosity and tax financing of their expenditures. Requisite change of property tax database will be ready for 2008/09 billing cycle. 6. Taxation of vacant urban land Desired expansion of the UIPT tax base will be enhanced by including vacant urban land that currently is not captured in the property tax net. Imposition of market calibrated taxation of urban land will also have desirable effects on inducing more efficient (intensive) use of valuable, more centrally located land. It is expected that revenues will increase, especially in the areas with much vacant urban land and strong real estate markets. The E&T will undertake impact studies and evaluation and develop a provincial policy framework for taxation of urban vacant land including the
PKD Consultancy Ltd Page 48 of 66 Excise and Taxation Department Rapid Sector Review ------issue of boundary delimitation of urban functional areas where urban land market is active. This change will likely necessitate legislative amendments. The E&T will also undertake a comprehensive survey of vacant urban land plots and set up the requisite data base. Local governments will then apply chosen tax rates to vacant land by simple using zero building value in the ARV tables. The time frame for survey of vacant urban land and policy framework development is about two years, so the effective introduction is to take place for 2009 UIPT taxation year. 7. Alternative models for establishing UIPT tax base The use of annual rental values as a property tax base has numerous disadvantages in the circumstances of rent controls and poor market information. Consequently, the current tax base may cause the UIPT to be insufficiently robust, buoyant and equitable. Like in other countries, there is a medium-term need for in-depth review of alternative property tax bases, which can be considered for UIPT. Typically, the alternatives can be found in moving towards capital values and/or market calibrated land and covered area. The Government might propose a redefinition of tax base and pertinent regulatory changes including a new UIPT law. This calls for prior undertaking of research and development work on tax base alternatives that will be coordinated by the E&T . This cycle will take about 3 years and will be funded by the Government development funds, including external funds. 8. Taxation of Government property Properties owned by Federal or Provincial Government benefit from communal services and thus should be taxed or pay grants in lieu of taxes. The expected result will be broadening of UIPT tax base and thus higher local government revenues. The P&D will undertake fiscal impact assessment of such an approach and possibly introduce requisite changes to the PLGO. The Government database on its property will be transferred to property tax database, and E&T will develop a regulatory framework for taxation of governmental property. The transfer of Government property database should take up to one year. Policy and regulatory framework development, including political consultation and PLGO amendment should take no longer than 3 years. 9. New provincial tax relief to be funded by the Government The principles of fiscal decentralization, as embodied through the UIPT devolution, require that local government revenue base cannot be eroded by generous property tax relief mandated by the senior Government at the expense of local UIPT revenues. Consequently, the Government should compensate local governments for forgone property tax revenues if it grants new tax relief through specific laws/ordinances. This way, local governments will have more stable and more predictable property tax revenues. The P&D, in collaboration with Department of Local Governments and
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Department of Finance will prepare requisite amendment of PLGO. The time frame for this reform will be up to 3 years and will correspond to general local finance reforms. The work will be funded by the Government budget. 10. Taxation of transmission lines and pipelines (linear property) Linear property, such as transmission lines and pipelines should be recognized as taxable property for the purposes of the UIPT. This will increase the tax base and allow local governments to increase their UIPT revenues. The P&D will undertake impact studies and formulate necessary amendment of the PLGO. The E&T will develop taxation policy on linear property including legal definitions and methodology of valuation. The E&T will undertake special survey of linear properties and create a specific taxation database. Local governments will develop their tax policies (tax rates, tax relief) for linear properties with provincial rules and parameters. It is foreseen that enabling regulation will take two years and property surveys and data base development will take another year, so that the change will be effective for the 2010 taxation year. 11. Taxation of commercially used residential properties Numerous residential properties being effectively used for commercial purposes that generates income to property owners. As practiced in many other countries, such use of residential property calls for applying commercial rates or values to them. This will produce a more market calibrated valuation base and higher local revenues. The E&T will develop a taxation framework for commercially used residential properties comparing alternative ways of capturing this phenomenon in the UIPT system; but also will undertake supplementary survey of taxable residential properties to discover possible commercial use of them. This work will take one year and a half and should be ready for implementation by the 2009 property taxation year. 12. Taxation of properties with rights of way for underground cables and circuits Properties with rights of way for underground cables and circuits receive additional rental income and thus have higher rental market value. This is not reflected in the current ARV valuation tables, since no information on this property characteristic is included in tax survey. The inclusion of this characteristic will make ARV tables better reflect market relationships and will expand the UIPT tax base leading to generation of higher revenues and improving tax equity. The E&T will develop methodology and procedures for including the information on rights of way for underground cables and conduits in ARV tables. It will undertake supplementary survey of taxable properties and update the UIPT tax data base. This work will take two years and the use of supplemented ARV tables should be ready for the 2009 property taxation year. 13. Taxation billboards and communication towers
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Billboards and communication towers are independent taxable properties yet they are not reflected in the current ARV valuation tables and no information on this property characteristic is included in the present tax survey. The inclusion of this property type will make ARV tables better reflect market relationships and will expand the UIPT tax base leading to generation of higher revenues and improved tax equity. The E&T will develop the methodology and procedures for including information on billboards and communication towers in ARV tables. It will undertake a supplementary survey of these items and update UIPT tax database accordingly. This work will take two years and the use of supplemented ARV tables should be ready for the 2009 property taxation year. 14 Reintroduction of a betterment tax Local government revenues are needed not only to cover operating service provision, but also to recover costs of pertinent infrastructure improvements. One of the sources of such financing is the imposition of betterment taxes on those properties that benefit from site specific infrastructure improvements (value capture). The E&T will undertake impact analysis and development work on reintroduction of a property betterment tax and propose enabling legislative changes. The E&T will then prepare regulatory framework for local governments on procedures for analyzing the impact of infrastructure improvements on respective taxable properties. It will also issue guidelines for local governments to adopt procedures for levying the new betterment tax. Local governments will set betterment tax rates according to the guidelines in the provincial policy framework in this area. The work will require 2-3 years and will be funded from the Government budget. 15. Local governments to formulate their own tax policies
Although the existing regulatory framework provides some flexibility to local governments in formulating their UIPT policy regarding tax rates and relief, they have not taken advantage of this prerogative. The provincial government’s UIPT policy framework will create incentives for local governments to actively formulate their tax policies through showing more direct fiscal linkages between their UIPT revenues and chosen tax rate and relief structures. This will provide greater flexibility of local governments in mobilizing necessary level of UIPT revenues. The E&T will develop the provincial regulatory framework with guidelines for formulation of local policies on tax rates and relief. The framework will include limitations on tax ranges and relief, which will define flexibility space for local governments. Local governments will develop their own tax policies subject to the provincial framework. This process will take three years with the provincial framework being developed in one and half years and local policies formulated subsequently, so that effective local policy be implemented in the 2010
PKD Consultancy Ltd Page 51 of 66 Excise and Taxation Department Rapid Sector Review ------property tax year. The provincial regulatory work will include considerable capacity building and skills training at local government level. 16. Local governments to know their forgone revenues In formulating their own UIPT policies, local governments will be required to explicitly account, report and communicate forgone revenues stemming from locally adopted tax relief (exemptions, abatements). This revenue gap will be subject to hard budget constraints, so that local governments will not be able to compensate these amounts with expectations of greater provincial fiscal transfers. The expected result will be more responsible property taxation policies of local governments. The Department of Local Government will develop a regulatory framework for the pertinent methodology, requisite procedures and regulatory changes for estimation of the forgone revenues, and the Department of Finance will develop guidelines and regulations on hard budget constraints. The E&T will analyze impact of these regulations on local government tax policies formulated in the provincial UIPT local government policy framework that will include capacity building and skills training for local governments. These activities will take two years, beginning July 1, 2007 with new regulations being implemented in the 2010 UIPT taxation year.
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Annex 2 Analysis of E&T Posts
S. No. Description Sanctioned Strength
1 Director General, Excise & Taxation, Punjab (BS-19-20) 1 2 Additional Director General, Excise & Taxation, Punjab (BS19) 1 3 Directors (BS-19) 12 4 Systems Analyst (BS-18) 1 5 Senior Excise & Taxation Officer (BS-18) 12 6 Excise & Taxation Officer (BS-17) 48 7 Assistant Director, E&A (BS-17) 6 8 Programmer (B-17) 3 9 Superintendent (BS-16) 19 10 Assistant Excise & Taxation Officer (BS-16) 161 11 Senior Scale Stenographer (BS-15) 5 12 Computer Operator (BS-14) 3 13 Key Punch Operator (BS-12) 24 14 Stenographer (BS-12) 50 15 Assistant (BS-14) 66 16 Chemical Assistant (BS-14) 1 17 Excise & Taxation Inspector (BS-14) 719 18 Senior Auditor (BS-14) 11 19 Accountant (BS-14) 1 20 Data Entry Operator (BS-11) 90 21 Senior Clerk (BS-9) 105 22 Junior Clerk (BS-7) 594 23 Laboratory Assistant (BS-5) 1 24 Patwari (BS-5) 3 25 Driver (BS-4) 70 26 Head Constable (BS-7) 33 27 Excise & Taxation Constable (BS-5) 988 28 Daftri (BS-2) 3 29 Lady Detective (BS-1) 5 30 Naib Qasid (BS-1) 17 31 Mali (BS-1) 17 32 Chowkidar (BS-1) 52 33 Sweeper (BS-1) 43 34 Water Carrier (BS-1) 1 35 Sepoy (BS-1) 2 36 Labourer (BS-1) 8 37 Factory Guard (BS-1) 8 Total 3,184 Source – E&T Department 2009
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18 Medium Term Fiscal Framework 2009-12 ANNEX 3 MTFF – Provincial Resource Generation Provincial Resource Generation (This is an extract from the Medium Term Fiscal Framework, 2009-12) Provincial Resource GenerationProvincial tax collection is extremely weak while the potential for raising provincial resources is high in the province (Table 7). Since the last several years Provincial tax collection is extremely weak while the potential for raising provincial severalresources is high in the province (Table 7). Since the last several years several studies studies have suggested numerous measures on tax policy and administration sidehave suggested numerous measures on tax policy and administration side but weak but weak governance structure and lack of continuity in leadership to steer reform havegovernance resulted in str negligibleucture and progress lack of on continuity the ground. in leadership to steer reform have resulted in negligible progress on the ground. Table 7 Major Provincial Own Resources (Rs. in Billion) Budget Estimates Actual Receipts
2008-09 2008-09
Provincial Tax Revenue* 40.36 25.05 Property Tax 6.00 2.39 Motor Vehicle Taxes 6.93 4.40 Stamp Duty 10.00 6.85 Land Revenue 4.60 4.65 Registration 3.50 2.19 Others 9.33 4.58 Receipt from Services (Users fee) 13.57 13.93
Extraordinary Receipts 17.12 0.25
The Government of Punjab has now adopted a different approach by launching a comprehensive The Government review of of Punjab 6 major has receipts now adopted of the a Excise different and approach Taxatio n by Department launching a comprehensive(E&TD) and the review Board of of 6 Revenue major receipts (BOR) namely of the ExciseUrban Immoveable and Taxation Property Department Tax (UIPT), Motor Vehicle Tax (MVT), Professional Tax, Registration Fee, Mutation Fee and (E&TD) and the Board of Revenue (BOR) namely Urban Immoveable Property Tax Stamp Duty. (UIPT), Motor Vehicle Tax (MVT), Professional Tax, Registration Fee, Mutation Fee and To overcome the lack of continuity in steering tax reform Government of Punjab has Stampplanned to set up separate ‘Policy Support Units’ in the E&T and BOR for a consistent Duty. research based advice and feed back to the departments on both policy and administration To overcome aspects. the lack Tax of administration continuity in steering reforms tax will reform include Government process ofreview, Punjab hasimp plannedroving IT to infrastructures, set up separate building ‘Policy up Support the staff Units’ capacity, in the E&T development and BOR of for a a performance management framework / benchmarking and outsourcing of certain tax consistent research based advice and feed back to the departments on both policy and functions. They are briefly described below: administration aspects. Tax administration reforms will include process review, (a) Urban Property Tax improving IT infrastructures, building up the staff capacity, development of a (i) Launch of properties survey after 8 years performance management framework / benchmarking and outsourcing of certain tax (ii) Revision of valuation tables after 8 years to be effective from January 2010 functions. They are briefly described below: (iii) Including newly developed urban areas in the last 10 years in the
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jurisdiction of urban property tax. (iv) Proposal for reduction in differential between rented and self occupied properties from 1:10 to 1:6 (v) Review of exemptions on various properties (vi) Re-organizing the Excise and Taxation Department on functional lines clearly distinguishing between assessments, collection, valuation and billing. (vii) Introducing a system of internal audit. (viii) Provision of adequate staff and changing the ratio between low grade staff and high grade officials in favour of the latter. (ix) Provision of additional offices and transport facilities (x) Explore collection of tax receipts through the entire commercial banking system (xi) Replacement of manual systems of bill generation by automated bill generation systems. (xii) Introducing performance benchmarks (xiii) Improving sharing of information with other tax collecting agencies
(b) Motor Vehicle Taxation Inflation has also eroded the real collection of in the motor vehicle tax during the last five years. While the number of vehicles has increased exponentially, tax collection has stagnated. It is proposed that the motor vehicle tax rate will be increased keeping in view the prevailing economic climate and the purchasing power of the potential buyers. Other administrative measures include: • Review of payment of annual token tax through the post office system and replace it with collection through the banking system that is more computerized. • Open more satellite offices for motor vehicle taxes in order to facilitate the taxpayer. • Establish a database of vehicles in Punjab which so far does not exists and prevents monitoring of token tax collection and identification of defaulters. • Ensure enforcement through on spot checking by traffic wardens.
(c) Stamp Duty/Registration Fee/Mutation Fee A proposal is under consideration to combine the registration fee and the stamp duty as one tax. The underlying motive of combining these two levies is to bring the cooperative housing societies in to the tax net as presently they are exempted from the registration fee. The Finance Department is also of the view that property transactions can only be a source of adequate revenue if the overall burden of taxes does not discourage reporting true value. However, at the moment property transactions in urban areas are being taxed at a rate of 6% if we include all taxes, which is considerably high and encourages under valuation of properties. A better
PKD Consultancy Ltd Page 57 of 66 Excise and Taxation Department Rapid Sector Review ------alternative would be introduction of a Capital Gains Tax for which necessary legislation needs to be formulated so that it is least discretionary and transparent. On the administrative reform side following steps are being taken: (i) Devising proper method of valuing transactions and having valuation tables close to market value. (ii) Valuation tables also need to account for valuation of building structures. (iii) Record of Rights in rural areas is out dated and needs to be updated. (iv) Increase the number of the Stamp Inspectors by having one Inspector per district to ensure 100% audit of all stamp transactions. (v) Remove duality of control between the district governments and provincial government of tax collection officers that is resulting in weak accountability structures. (vi) No tax policy forum exists in the Board of Revenue that can make reasonable tax potential and collection projections. (vii) A human resource policy based on adequate staffing, objective appraisals, channel of promotions and rewards for performance needs to be developed in the Board of Revenue. (viii) Registration record needs to be computerized to facilitate monitoring as well as taxpayer facilitation.
Professional Tax Real professional tax collection has also gone down due to inflationary pressures. Punjab Government is considering abolishment the professional tax and introducing the provincial GST on services, with the concurrence of the Federal Government.
Revision of User Fees and Other Levies The provincial government is charging a number of user fee for provision of services and other regulatory fees and levies. Brief details of this are available in the Statistical Annexure to this MTFF. While a lot of examination has been done of provincial taxes there has been no review or examination of the rationale of user fee and other such levies of the provincial government. This requires a professional assessment based on the cost of services being provided by the government in return for the fee being collected and to examine if the collection level is realistic and covers at least a part of the cost of service provisions. In the immediate future a study needs to be conducted of this lesser explored area of resource generation.
Extraordinary Receipts Extraordinary receipts primarily comprise privatization receipts and cannot be considered a regular source of revenue. However, since the privatization process has been halted for the last 5 years there is a back log of properties (comprising primarily of land) that can be disposed of by the provincial government. The provincial government during the MTFF period would raise the level of the Privatization Board to
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DEVELOPMENT PROGRAMME 2010-2011 Construction of Office-cum-Residential Complexes
Cost Cost GS Approval/Revision Total Total Projection Projection S.No Name of Scheme Tehsil District No Date (in for 2011- for 2012- Cap. million) 2012 2013
LAHORE DIVISION Construction of Centralized Motor Branch at Thoker Niaz Beg. Lahore on piece of land measuring 16 Kanal already approved 1 by Chief Minister Lahore Lahore Un-approved 79.200 39.600 19.800 19.800 Punjab on 22-10- 2008 vide para 15 of Summary moved by E&T Department (copy enclosed) Covered Area 72000 sq. ft. Total 79.200 39.600 19.800 19.800 SAHIWAL DIVISION Construction of 2 Main Office Building Pakpattan Pakpattan Un-approved 8.523 4.261 2.130 2.130 Okara Total 8.523 4.261 2.130 2.130
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FAISALABAD DIVISION Addition in E&T 3 Faisalabad Faisalabad Un-approved 7.000 3.500 1.750 1.750 Office, F/Abad With MTMIS Hall Decentralization of 4 Faisalabad Faisalabad Un-approved 6.000 3.000 1.500 1.500 Motor Branch, F/Abad Provision of Suigas 5 in E&T Office Faisalabad Faisalabad Un-approved 0.600 0.300 0.150 0.150 F/Abad Construction of E&T 6 Chiniot Chiniot Un-approved 8.000 4.000 2.000 2.000 Office at Chinot Construction of 7 Residence for Chiniot Chiniot Un-approved 6.000 3.000 1.500 1.500 E.T.,O Chiniot Total 27.600 13.800 6.900 6.900 RAWALPINDI Addition in E&T 8 Rawalpindi Rawalpindi Un-approved 3.400 1.700 0.850 0.850 building. Rawalpindi Total 3.400 1.700 0.850 0.850 BAHAWALPUR Construction of 2 Residences for the 9 AETOs at Bahawalpur Bahawalpur Un-approved 4.000 2.000 2.000 2.000 Bahawalpur Headquarter Construction of Excise and Taxation Ahmadpur 10 Bahawalpur Un-approved 3.000 1.500 0.750 0.750 Sub Office, East Ahmadpur East Construction of 11 Excise and Taxation Hasilpur Bahawalpur Un-approved 3.000 1.500 0.750 0.750 Sub Office, Hasilpur
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Construction of 12 office of Rahim Yar R.Y. Khan R.Y. Khan Un-approved 8.000 4.000 2.000 2.000 Khan Construction of 13 Sadiqabad R.Y. Khan Un-approved 4.000 2.000 1.000 1.000 Sadiqabad Construction of 14 Khanpur R.Y. Khan Un-approved 4.000 2.000 1.000 1.000 Office of Khanpur Construction of Two Residences for the 15 AETOs Liaqatpur R.Y. Khan Un-approved 3.500 1.750 0.875 0.875 Bahawalnagar (Hqrs) Construction of Two Residences for the 16 AETOs Bahawalnagar Bahawalnagar Un-approved 2.000 1.000 0.500 0.500 Bahawalnagar (Hqrs) Construction of Excise of Taxation 17 Chistian Bahawalnagar Un-approved 3.000 1.500 0.750 0.750 Sub Office, Chishtian Construction of Excise and Taxation 18 Fortabbas Bahawalnagar Un-approved 3.000 1.500 0.750 Sub Office, Fortabbas Construction of Excise and Taxation 19 Haroonabad Bahawalnagar Un-approved 3.000 1.500 0.750 0.750 Sub Office, Haroonabad Total 40.500 20.250 11.125 10.375
GUJRANWALA DIVISION Construction of 20 Building MVR Gujranwala Gujranwala Un-approved 60.000 30.000 15.000 15.000 Centrerlized
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location like Farid Kot House in Gujranwala Construction of Sub 21 Kamoke Gujranwala Un-approved 30.000 15.000 7.500 7.500 Office Construction of Sub 22 Wazirabad Gujranwala Un-approved 30.000 15.000 7.500 7.500 Office Construction of Sub 23 Q.D. Sing Gujranwala Un-approved 30.000 15.000 7.500 7.500 Office Construction of Sub 24 Gakkhar Gujranwala Un-approved 30.000 15.000 7.500 7.500 Office Online Service in 25 Gujranwala Gujranwala Un-approved 20.000 10.000 5.000 5.000 MVT Construction of Excise and Taxation 26 Sub Office, Shakargarh Shakargarh Un-approved 4.000 2.000 1.000 1.000 Shkargarh Rating Area Office building for 27 District Office Narowal Narowal Un-approved 10.000 5.000 2.500 2.500 Narowal Construction of 28 office of the Excise Hafizabad Hafizabad Un-approved 10.000 5.000 2.500 2.500 & Taxation Officer Residence of 29 Hafizabad Hafizabad Un-approved 10.000 5.000 2.500 2.500 ETO/AETO District Office M.B. 30 Din M.B. Din M.B. Din Un-approved 120.000 60.000 30.000 30.000 (Office/Residence) Tehsil Office, Phalia 31 M.B. Din M.B. Din Un-approved 30.000 15.000 7.500 7.500 (Office/Residence) Tehsil Office 32 Malakwal M.B. Din M.B. Din Un-approved 20.000 10.000 5.000 5.000 (Office/Residence)
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Total 404.000 202.000 101.000 101.000
563.223 281.611 140.805 140.805 Grand Total
DEVELOPMENT PROGRAMME 2010-2011 Establishment of Customer Service Centres etc (ADP 2010-11 Projection Projection GS Approval/Revision Proposed) S.No Name of Scheme Tehsil District for 2011- for 2012- No Date Total Local 2012 2013 (in Cap. million) LAHORE DIVISION Construction of Customize cum 1 residential complex and Lahore Lahore Un-approved 9.900 4.950 2.475 2.475 Customer Service Centre at Lari Adda Lahore
Construction of Customer Service Centre 2 Lahore Lahore Un-approved 9.900 4.950 2.475 2.475 at Bakar Mandi near Niazi Adda, Lahore
Construction of Customer Service Centre 3 Lahore Lahore Un-approved 9.900 4.950 2.475 2.475 at Nasir Abad Ferozpur Road, Lahore
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Construction of Customize cum residential complext and 4 Lahore Lahore Un-approved 9.900 4.950 2.475 2.475 Customer Service Centre at Allama Iqbal Town, Lahore Construction of Customize cum residential complext and 5 Lahore Lahore Un-approved 9.900 4.950 2.475 2.475 Customer Service Centre at G.T. Road near Shalimar Garden, Lahore
Total 49.500 24.750 12.375 12.375
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