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Case of Property Taxes in Punjab, Pakistan

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Case of Property Taxes in Punjab, Pakistan SUB-NATIONAL GOVERNMENT TAXATION: CASE OF PROPERTY TAXES IN PUNJAB, PAKISTAN Muhammad Mujtaba Piracha Doctor of Philosophy Institute of Development Studies University of Sussex August 2016 iii University of Sussex Muhammad Mujtaba Piracha Doctor of Philosophy Subnational Government Taxation: Case of Property Taxes in Punjab, Pakistan Summary Property taxes tend to be under-used globally, especially in developing countries. This is particularly true in Pakistan. To explore the reasons, I studied policymaking and administration in relation to the recurrent (annual) property tax in Punjab, Pakistan’s most populous and urbanised province. I used a mix of research methods, including extensive field observations of how the lower level tax staff of the Excise and Taxation Department go about their work. I found three major probable explanations for the very low levels of property tax collections: • Especially after a major decentralisation reform in 2001, responsibilities for collecting the property tax and the revenues it produces are both divided in complex ways between three levels of subnational government. Each level has low incentives to perform its tax collection functions. • Each level of subnational government obtains most of its income either from transfers from higher levels of government or from loans. It generally seems easier for them to increase their incomes by putting more effort into tapping these sources, rather than trying to improve their own tax collection performance. The lack of strong political pressures to increase spending has a reinforcing effect. • It has become administratively difficult for senior policymakers to increase property tax revenue collections through mobilising the organisational resources of the Excise and Taxation Department. Property tax collection has become locked into a system that combines (a) a high degree of informality in routine practices, (b) exclusive control of detailed information about tax collection potential and performance by lower level staff and (c) modest rent-taking and responsiveness to local pressures for leniency in tax collection at these lower levels. When higher-level officials in the Department attempt periodically to enforce the achievement of higher tax collection targets, they are mostly frustrated by these informal working practices and relationships. iv Table of Contents Summary ....................................................................................................................................... iii List of Figures and Tables ............................................................................................................ vi Acknowledgements ...................................................................................................................... vii Abbreviations ................................................................................................................................ ix Glossary of local terms .................................................................................................................. x 1 Why is property tax in Punjab so low? .................................................................................... 1 1.1 Introduction ...................................................................................................................... 1 1.2 The research question ....................................................................................................... 3 1.3 The low tax context of Pakistan ....................................................................................... 7 1.4 Property taxes in the context of taxation ........................................................................ 11 1.5 Investigating the puzzle: why is annual property tax collection in the Punjab so low? . 21 1.5.1 The research framework .......................................................................................... 21 1.5.2 Research strategy and approach .............................................................................. 29 1.5.3 Fieldwork and data collection ................................................................................. 34 1.5.4 Background assumptions ......................................................................................... 39 1.6 Findings, chapter outlines and research contribution ..................................................... 42 2 A cooperation problem: Property tax and inter-governmental politics ................................. 51 2.1 Introduction .................................................................................................................... 51 2.2 Literature review ............................................................................................................ 54 2.3 Despite getting a share of property tax revenues the provincial and town governments have low incentives to raise property tax ................................................................................. 56 2.3.1 The provincial government ..................................................................................... 58 2.3.2 Town governments .................................................................................................. 63 2.4 Bureaucratic interests reduce incentives for district governments to cooperate in property tax collection ............................................................................................................. 66 2.4.1 Bureaucrats resented the 2001 local government reforms ...................................... 67 2.4.2 The provincial government regains control of the devolved ETD field offices ...... 70 2.5 Inter-governmental politics and property tax collection ................................................ 73 2.5.1 A state of rivalry ...................................................................................................... 74 2.5.2 Relatively powerful local governments created in 2001 ......................................... 76 2.5.3 Provincial reaction ................................................................................................... 79 2.6 Conclusion ...................................................................................................................... 84 3 Low fiscal equilibrium – Income and liquidity of sub-national governments ...................... 86 3.1 Introduction .................................................................................................................... 86 3.2 From where do sub-national governments get their money? ......................................... 88 v 3.2.1 The provincial government ..................................................................................... 88 3.2.2 Town governments .................................................................................................. 91 3.3 Review of literature on inter-governmental fiscal transfers ........................................... 94 3.4 Effects of sub-national government sources of income on their own tax effort ............ 97 3.4.1 Transfers from the higher level of government ....................................................... 98 3.4.2 Borrowing by the provincial government ............................................................. 102 3.5 Sub-national government liquidity and the likelihood of increasing own source revenues ................................................................................................................................. 105 3.5.1 The provincial government ................................................................................... 106 3.5.2 The town governments .......................................................................................... 107 3.6 Conclusion .................................................................................................................... 110 4 Low fiscal equilibrium – lack of incentives to spend .......................................................... 111 4.1 Introduction .................................................................................................................. 111 4.2 Low levels of service delivery and operations and maintenance costs ........................ 114 4.3 Service delivery to the poor is a low priority for the government ............................... 117 4.4 Low pressure for public service expenditure from public servants .............................. 124 4.5 Ignoring pressures for expanded service delivery from aid donors ............................. 127 4.6 Conclusion .................................................................................................................... 130 5 The Informality of formal tax collection ............................................................................. 132 5.1 Introduction .................................................................................................................. 132 5.2 Review of literature on property tax administration and frontline workers ................. 133 5.3 Property tax administration in Punjab .......................................................................... 136 5.4 Tax collection at the local level .................................................................................... 139 5.5 An office meeting, target-setting and managing information ...................................... 150 5.6 Conclusion .................................................................................................................... 157 6 Enforcement:
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