Local Governance Support ProjectLearning and Innovation Component (LGSP-LIC)

Local Government Division Ministry of Local Government, Rural Development and Co-operatives Government of Peoples Republic of Bangladesh (GoB)

Framework for a Strategy of UP Revenue/Resource Mobilisation Piloting

by

Professor Musleh Uddin Ahmed, Ph D

Consultant, UP Revenue/Resource Mobilisation Piloting
January 2010

LGSP-LIC is implemented with support from

Copyright 2010 by Local Government Division Disclaimer: Views expressed in this report are those of author/s and do not necessarily reflect the views of Local Government Division (LGD), Ministry of Local Government Rural Development and Cooperatives, Government of Bangladesh, any other ministry of GoB and UN agencies including UNDP and Local Governance Cluster of UNDP Bangladesh.

SL I II III The Institutional Context

Content Introduction and Background to the Assignment Legal Status of UP Revenue Mobilization

Page 1 2 4 5 5 6 10 11 11 14 17 18 19 20 12 25 29 33 34

UP Revenue Context of UP Present Revenue Context of Bangladesh IV a b c V a. b VI VII VIII IX Table 1 Table - 2 Annex- 1 Annex- 3 Sources of Revenue Income System of Tax Assessment Revenue Collection and its Performance Improving Tax Assessment System, Administration and Collection Procedure Holding Tax Assessment by Improved method of Mass-Appraisal System Improving Revenue Ad ministration and Collection Procedure Rationale and Challenges of UP Revenue Strategy Purpose and Objective of the Strategy Sampling of Ups for Piloting Piloting Areas and Activities of Enhancing UP Revenue/ Resource Mobilization Holding Tax Assessment Piloting: Mass Appraisal System Indicative Framework of UP Revenue Factors Piloting Action Plan for UP Revenue Mobilization Piloting Collections and Arrears Record

Annex 2 Holding Tax Assessment Register

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ABBREVIATIONS AND ACRONYMS ADP ARV CC CIDA Dafadar DANIDA DDLG DF DP EC GOB IACD IEC KaBiKha IRC LCG LGD LGI MLGRDC LGSP-LIC MDG MoF NSAPR NGO NGOAB PO PRSP PWD SLGDFP SSC TOT UCO UFT UNCDF UNDP UNO UP UZP VAT VGF WB WDC Annual Development Programme Annual Rental Value City Corporation Canadian Agency for International Development Village Police Head Danish International Development Assistance Deputy Director of Local Government District Facilitator Departmental Partners European Commission Government of Bangladesh Integrated Approach for Community Development Information, Education and Communication Kajer Binimoya Khaidya (Food For Works) International UP revenue Centre- The Netherlands Local Consultative Group Local Government Division Local Government Institutions Ministry of Local Government, Rural Development and Cooperatives Local Governance Support Project Learning and Innovation Component Millennium Development Goal Ministry of Finance National Strategy for Accelerated Poverty Reduction Non Government Organization NGO Affairs Bureau Partner Organizations Poverty Reduction Strategic Paper Public Works Department Sirajganj Local Governance Development Fund Project Scheme Supervision Committee Training of Trainers Upazila Cooperative Officer Union Facilitation Team United Nations Capital Development Fund United Nations Development Programme Upazila Nirbahi Officer Union Parishad Upa Zila Parishad Value Added Tax Vulnerable Group Feeding World Bank Ward Development Committee

iii

I.

Introduction and Background to the Assignment

Bangladesh has a long history of local government and the postindependence constitution provides for the creation of local government bodies at every administrative level. Article 59 and article 60 has given the main foundation of the role, structure and functions of local government. But in reality, the only representative local government institution that has had a continuous existence since the 1880s is the Union Parishad (UP), which has its limitations and resource constraints. Bangladesh is governed by a parliamentary system of government. The country is administratively divided into six divisions, and each division is divided into zilas (districts), totalling 64 in all. The zilas are divided into 483 Upazilas (sub-districts), the lowest unit of administration. These Upazilas are further divided into 4,498 unions which are not administrative unit but functioning as grass root level local government unit where local UP revenue is entrusted to elected bodies. A strong local government is indispensable for ensuring sustainable development, achieving the targets of poverty alleviation, attaining the targets of millennium development goals (MDG) by 2015, and developing democratic institutions in the country. Inadequate resource allocation to local government, lack of capacity of proper tax assessment and resource mobilization, and poor mechanism for citizen engagement lead to ineffective local government systems in most of developing countries like Bangladesh. UNDP is strongly committed to promote effective decentralization and a strong local government system in Bangladesh as a contribution to achieving the MDGs. As a part of initiative for strengthening local government system in Bangladesh, Sirajganj Local Governance Development Fund Project (SLGDFP) was designed by UNDP and UNCDF and implemented by the Local Government Division (LGD) of the Ministry of Local Government, Rural Development and Cooperatives (MLGRDC) during the period of 2001-2007. This project has demonstrated the positive impact of developed block grant funding on infrastructure and service delivery at the local level, as well as performance improvement of Union Parishads (UP) in areas such as planning, finance, resource mobilization and management. This project has significant impact in involving community in UP affairs, as well. After successful completion of SLGDFP, the government has started Local Governance Support Project (LGSP) in 2006 with financial support from UNDP, UNCDF, World Bank, EC and DANIDA. UNDP and UNCDF are supporting one components of LGSP, which is Learning and Innovation Component (LIC). This LIC of the LGSP aims to promote poverty reduction and Millennium Development Goals (MDG) achievement through building the basic service delivery capacities of Union Parishads. LGSP-LIC will field test in more realistic conditions the successful innovations already pioneered in the Sirajganj project and
1

feed these second generation innovations into the national LGSP. The Learning and Innovation Component (LIC) is being implemented in six different pilot districts, Barguna, Feni, Habiganj, Narshingdi, Satkhira and Sirajganj, one from each of the six administrative divisions of the country. 388 unions under these districts will be covered progressively over the five year duration of the project. The total budget of the project is US$ 18.118 millions and funded by UNDP, UNCDF, EC and DANIDA. During 2007-08, LGSP-LIC commissioned a study and some analytical work on UP own-source revenues was conducted.1 This was aimed at gaining a better understanding of local government taxation and revenue collection procedures, processes, constraints, and the scope for increasing such own-source revenues. The study identified the rationale for piloting improvements in UP ownsource revenue collection. Firstly, the fiscal resources generated by UP own-source revenues are almost entirely discretionary in nature UPs can use their tax and other revenues to finance anything for which they have a legally-prescribed mandate. This provides UPs with the opportunity to fund expenditures which are otherwise excluded by block grants (e.g. additional part-time staff, maintenance costs, etc.). Secondly, a key indicator of the extent to which UPs are seen by local citizens to be providing appropriate public goods and services is (to a very large extent) how far they are able to mobilise own-source revenues. Paying taxes is largely a function of voluntary compliance on the part of tax-payers and that will usually reflect public satisfaction with UP performance. II. The Institutional Context The Governments commitment to improving local UP revenue is set forth in the National Strategy for Accelerated Poverty Reduction (NSAPR, Bangladeshs PRSP). Indeed, the NSAPR identifies local UP revenue as one of eight priorities in the medium term strategic agenda for Bangladesh. It recognizes the need for simultaneously pursuing the agendas of political and functional decentralization, putting the emphasis on partnership between local government bodies and other local actors, and, projecting the importance of newer agendas of decentralized service-delivery and promotion of local economies. The focus is not only on local governments as project implementing bodies but on local UP revenue as a political and institutional process which can contribute to the required scaling up of the rate of poverty reduction through more effective resource mobilization and enhanced development choices available at local level and better inclusion of all social groups in these choices. The NSAPR also recognizes the importance of linking union parishads to critical
1

See Nick Devas (July 2007): Local Revenue Sources for Union Parishads: Report of a Study; and Nick Devas (September 2008): Enhancing Revenue Sources for Union Parishads 2

new functional arenas such as micro-infrastructure, early child development, consolidated implementation of safety net programmes, and local economy promotion. With regard to the financing of UPs, the NSAPR envisions potential in consolidating a performance-linked second resource channel (outside of ADP) for union parishads. Such a resource channel has already been initiated and substantial increase in resource allocation can be planned for with due lesson-learning from the experience so far. Importance of local government has been also recognised by National Rural development Policy and Poverty Reduction Strategy Paper I (PRSP). Similarly, the second PRSP underlines the roles and importance of local government to intervene the some important areas of multi-dimensional nature of poverty. The present government has taken some initiatives for a greater participation in local governance and wider involvement of local government representatives. The government has passed the Local Government (City Corporation) Act, 2009 in parliament on October 15, 2009. The Local Government (Paurashava) Ordinance (1998) was revised in 2008 and has created further scope for more power and authority to the Pourashava bodies as well as changed the designation of Chairman and Ward Commissioners as Mayor and Councillors. The Present Political Government passed the Local Government (Pourashava) Act, 2009 in the parliament. The Upazila Parishad (UZP) has been re-established after around 19 long years. The Upazila Parishad election was held under Upazila Parishad Ordinance 2008 promulgated by Caretaker Government. But the elected government formed in 2009 did not ratify the ordinance of 2008; as a result, the UZP Ordinance 2008 lost the forces of law. The Upazila Parishad Act 1998 has been freshly re-enacted and enforced with few amendments in 2009 after 10 years of inaction. The UZP Chairs and Vice-Chairs and the Parishad got its legitimacy under UZP Act 1998 as adopted in 2009.

After the independence of Bangladesh, the first major initiative to enact an ordinance for union parishads was taken in 1983 and the Local Government Ordinance (Union Parishad), 1983 was promulgated by the then military government. Only minor changes have been made in the ordinances/acts over time.2 The Caretaker Government gave much importance to Union Parishad as a key tier of local government and local development and revised the existing ordinance to provide more authority, responsibility and financial resources to UPs. This ordinance has further strengthened UPs capacity for a good public service delivery. The elected government has ratified the ordinance as Local Government (Union Parishad) Act, 2009 only with few amendments have been made by the parliament.
2

See Musleh Uddin Ahmed. Local self-government System in Bangladesh, in Prof. Abul Kalam (ed.), Bangladesh Internal Dynamics and External Linkages, Dhaka : University Press Limited, August, 1996. pp. 73-89. 3

III. Legal Status of UPs Revenue Mobilization In Bangladesh, the Union Parishad is the oldest local government institution. The UP is an elected body composed of 13 members; one from each of the nine wards, three women members (from reserved seats one from each of three wards) and the chairman elected by the total electorate of the UP. The Union is staffed by a full time Secretary, appointed by the Deputy Commissioner who is head of district administration and local police (1 Dafadar and 9-12 Gram Polices). The UP Secretary is responsible for accounting and record keeping and all kinds of registration e.g. birth, death etc. Very recently, government has posted an Accountant cum Computer Operator at UP.

The Local Government (UP) Act, 2009 assigned it with 38 functions. The functions of UP are wide ranging. In reality, the UPs are mostly involved in the selection and implementation of schemes, sanitation programs (latrines), local level revenue collection, registration of births and deaths, social safety net activities such as, distribution of relief goods and Vulnerable Group Feeding (VGF), preparation of list of widows for pension distribution and organization of food/cash for work activities (popularly known as Kabikha); maintenance of law and order including conflicts resolution and administration of justice (village court). The Act also empowers the UPs to monitor the functions and activities of the Union-level officials of the service delivery departments of the central government and report on their performances to the higher authorities located at the Upazila.

Section 53(ii) and section 65 of the Local Government (Union Parishad) Act, 2009 mandated the UPs to generate revenue/resources from some particular sources by imposing taxes, rates, fees, tolls fines and other charges within their administrative boundaries and the section 68 authorised the UPs to collect the taxes to meet their expenditure and finance their own development activities.3 Section 66 of the act also empowered the government to formulate the new Model Tax Schedule. But the present UP Model Tax Schedule was formulated in 2003 under the Section 55 of the Local Government (Union Parishad) Ordinance, 1983 which has described the imposition of holding tax (buildings and land), fixed amount taxes on 93 items of business, trades and professions, taxes on advertisement, cinemas and some vehicles.4 The detail tax assessment system and collection

procedure has discussed in the section 22 to 30 in chapter III of the Union Councils (Taxation)

GoB. Bangladesh Jatiya Shangshad, The Local Government (Union Parishad) Act, 2009. Dhaka, Bangladesh Gazette, 15 Oct., 2010 4 GoB. Bangladesh Jatiya Shangshad, The Union Parishad Model Tax Schedule, 2003 Dhaka, Bangladesh Gazette, 06 Dec., 2003. 4

Rules, 1960 and the Instructions of the Guidelines on Tax Assessment and Collection Strategy issued by the Local Government Division of the Ministry of LGRDC in 2003.5

IV. Present UP Revenue Context of Bangladesh a. Present Sources of Revenue Income Revenue/resource mobilization is one of the major concerns for UP to deliver quality of services to the citizens. Currently the UPs have three sources of following formal revenue income. Besides these, UPs have many other opportunities to explore and generate revenue from optional and nonconventional sources. Own revenue: Own revenue consists of the holding tax (buildings and land), tax on trades, businesses, professions, advertisement cinemas, exhibitions and vehicles, registration and other fees, tolls, charges .fines. etc. Shared revenue: Shared revenue includes the 1% of the land transfer tax collected by the Land Registration office at Upazila level, 50% of market le0asing fees for one selected market within the UP and ferry concession fees. Transfer from central government: Transfer from central government includes the block grant allocation at Upazila level as part of the national ADP (subsequently shared among all UP) and the UP direct block grants; grants for salaries and administrative costs; discretionary grants from government for development expenditure and grants/loans from donor funded programs/projects. The major own sources revenue income of UPs are as follows: Holding Tax on buildings and non-agricultural land within the UP, levied on the basis of the tax assessment of holding tax (buildings and land) at the rate of 7% of the annual value of the buildings or land; Taxes on business, trades and professions with fixed amount imposed on 93 items, Taxes on advertisements, cinemas, vehicles fairs and exhibitions; Taxes on commercial activities within the UP Lease money from huts and bazaars, currently administered by Upazilas, with UPs receiving a share; 1% share of the nationally collected Land Transfer Tax; Fees for various certificates (birth, citizenship, etc.); Other local income (bank interest, rents from UP property, etc.);
5

GoB. S.R.O No, HSLG/S-VIII/BD-71/59/76. The Union Councils (Taxation) Rules, 1960.and GoB, Local Government Division of the Ministry of LGRDC, Instructions of the Guidelines on Tax Assessment and Collection Strategy issued in 2003 . 5

 Regular transfers from central government: both the block grant direct to the UP and the ADP grant that is managed at Upazila level; Special transfers under various government and donor-funded programmes, such as LGSP and LGSP-LIC. Own and shared revenues are deposited in the UP revenue accounts which are managed by the Chairman and the Secretary (co-signatory). The payments are executed by either the Secretary or the Chairman and recorded in the concerned accounting books. There are no requirements for reporting the financial statements and bills related to own and shared revenues to Upazila Accounting Officer. The ADP block grant at the Upazila level is transferred by the Chief Accounts Officer (CAO) of the Ministry of Local Government, Rural Development and Cooperatives to the bank account at the Upazila level that acts as the treasury. Once the projects are approved, the Project Implementation Committee (PIC) and Project Supervision Committee (PSC) are formed. The Accounts Officer directly or indirectly (through the Upazila Engineer) executes the payments of bills. The Accounts Officer does not report back to Controller General of Accounts (CGA) Thus, funds are never transferred to UP. In the case of direct UP block grants introduced in 2004, the funds are transferred from the bank that performs the treasury function at the Upazila level in four instalments in the course of the fiscal year on the basis of UP requests countersigned by the Upazila Nirbahi Officer (UNO). At the end of the year the UP has to provide the Accounts Officer with the receipts of payments together with a financial statement. The last allotment is transferred only when the Accounts Officer has reconciled the previous ones. The Accounts Officer does not report back to CGA. Direct funding to Union Parishads is quite a new phenomenon in Bangladesh. The Sirajgang Local Governance Development Fund Project (SLGDFP) (funded by UNDP and UNCDF) first piloted the concept in Union Parishads that were covered under the project. Inspired by the successes of this new approach, the government has been providing Block Grants directly to UPs since 2004. It is envisaged that the LGSP will cover all the UPs in Bangladesh in phases. The performance based direct fund transfer has been the most important salient feature of this project. In the same vein, some other projects in different sectors with financial support from various development partners have been launched. b. System of Tax Assessment According to the section 22 in chapter III of the Union Councils (Taxation) Rules, 1960 and the Guidelines on Tax Assessment and Collection Strategy issued by the Local Government Division of
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the Ministry of LGRDC in 2003, assessment should be based on the 7% of the annual value of the property with the maximum ceiling of Taka 500 for any one property (including the land on which the property is situated, but not agricultural land). Tax is to be assessed and levied on the basis of the Annual Rental Value (ARV) on constructed properties, buildings (building includes any shop, house, hut, outhouse, shed, stable or enclosure built from any material and used for any purpose) or land (excluding agricultural land) at a rate of up to 7%. ARV can either be determined from actual rents if the building is rented (or if it is not, from rental data for comparable buildings), or calculated from construction costs. Regulations specify the way the tax would be calculated. Even where the house is owner occupied, rental value can be determined based on rents for equivalent properties. The rate of 7% of the annual rental value (ARV) can be applied to assess the holding tax (buildings and land) for wholly let-out buildings or for wholly occupied buildings as well as partly rented and partly occupied buildings. Where rental value data does not exist, the capital value of the house can be estimated, using Public Works Departments (PWD) construction cost figures converted to rental value by applying a 7.5% rate of return and adding the ground rent for the land. The assessment is then calculated as 10/12ths of the annual rental value allowing deduction of two months rent as the cost of maintenance, if it is rented house and also deductions of annual interest of the loan if the house is built with bank loan. After deduction of two months rent plus annual interest, tax would be calculated at the rate of 7% of ARV. If the house is occupied by the owner than the provision for the deduction of further one-fourth of the rental value after deducting 2/12ths of the annual rental value i.e., allowing two months rent as the cost of maintenance house and also deductions of annual interest of the loan if the house is built with bank loan before the assessment is made at the rate of 7% of ARV.

Holding tax is the main revenue source for UPs. In many UPs, the tax is taken to apply only to residential properties, with business being taxed through licences. In other UPs, the holding tax is applied to some or all non-residential properties. Thus, there remains an ambiguity about the application of the tax to non-residential property. In relation to holding tax on residential property, performance is generally very weak, with the majority of people not paying. However, in some UPs (notably in Sirajganj), revenue performance has improved as people are involved in decisions about the use of resources and as accountability for tax revenue is strengthened.

For many Ups visited, this system is quite complicated, and they generally lack the skills to implement it. Some UPs use assessors (typically students) to prepare the valuations based on the

official formula.6 However, in many cases this assessment are quite abbsent. In many cases, arbitrary adjustments are made, whether on the basis of assumptions of household income or for other reasons, so that the final assessments bear little relationship to the formula. In other places, UPs are making much simpler assessments based on the number of rooms, type of construction and facilities (water supply, sewerage etc.). These assessments may be sufficiently fair, especially, if they are made in a transparent way. However, the problem with either arrangement is that assessments are often not made systematically and adjustments for household income or poverty may not be made transparently. As a result, there may be significant inequities in the assessment system. This can undermine peoples trust in the system, and therefore their willingness to pay. The calculation set out in the Ministrys 2003 guideline (but which is based on established practice and applies also in paurshavas and cities) contains a number of anomalies. Firstly, it gives a reduction on the assessment for the interest costs where a property is subject to a loan or mortgage. This is not appropriate, since it creates an inequity simply according to the method of financing. It is also likely to benefit the better off who are more likely than the poor to use loan finance for their house. Secondly, it gives a 25% reduction for owner occupiers, on the grounds that they are not earning income from the house. However, in principle, the type of tenure is irrelevant to the value of the property, or to the costs to the local government of providing services to that property. This creates an inequity between types of tenure, benefiting owner-occupiers.7 If the holding tax is to remain the main source of UP revenue, it is suggested that these anomalies be removed. In practice, few UPs appear to be using this method of assessment, whether for lack of understanding of the rental value method or lack of data, or simply because it seems unnecessarily complicated. Even where UPs attempt to use the method, the final assessment is usually adjusted (often without any clear relationship to the original figure) on the grounds that the household cannot afford to pay, or for some other reason. The resulting, adjusted assessments are generally much lower than the formula would have suggested, especially for the more valuable properties. There are, therefore, some doubts about the validity of the assessment, even when the official method is applied.

An NGO, Comilla Shastha Sheba Foundation, has started offering a service to UPs in one district (perhaps more) to make assessments of holding tax. They offer to compile the UPs assessment register using the proper ARV method, at no cost to the UP. They generate some revenue by offering to households a plot number plate, but this is optional. From the one example seen, it appears that the assessment register is properly compiled, although how accurate or uniform are the valuations is difficult to tell. Such a service could well be appropriate for UPs to use, although it is at present only available in a limited area Nor can it be assumed that the resulting higher tax for rented housing is born by the landlords: as with any tax, the burden is shared between buyer and seller according to the elasticitys of supply and demand; thus at least part of the burden of the high tax and probably the majority in the case of rented housing will be borne by the tenant. 8

Most UPs appear to be using a cruder system. This involves assessing houses against some general criteria: number of rooms, size of rooms, house construction materials, provision of tube well and toilet. Typically, this results in assessment of Taka 10-20 for a one-room house of temporary materials to Taka 150-250 for a four roomed house of permanent materials. The resulting assessment may also be modified by assumptions about the occupiers ability to pay. Overall, this method of assessment may be acceptable, providing the criteria are clear and applied consistently and transparently, for example, in a open budget meeting. In the end, what matters is not the absolute value of the property but rather a fair distribution of the tax burden between households. But it does require that a clear set of criteria is consistently applied and that the process is sufficiently transparent. Each UP is supposed to have a register of all houses8, together details of the property and the owner or occupier and the assessed values. These lists were generally compiled more five years ago, and are now due for revision (in one case, the register had not been revised since 1991). It was claimed that adjustments are made each year for new houses or changes to houses. In the UPs visited, the registers were said to have been compiled either using data from a survey conducted by students, contracted by the UP and guided by the UP Secretary and councillors, or on a ward basis by UP councillors themselves. In some cases, it was claimed, the registers and assessments were compiled in public meetings. If that is so, it should ensure a degree of transparency and fairness. But there are risks that only certain people attend such meetings, so that others are less fairly treated, although given the very low levels of the assessments, a degree of unfairness may not be a major issue. Where the ARV method is used, the tax rate has to be set (up to 7%) and applied. Where the simpler system is used, the assessment comes directly to an amount per house, which may or may not have any relationship to a rate of tax on the annual rental value. The tax rate, and the fixed assessments, appears not to have been changed since the current tax rules came into effect in 2002/03, apart from where there have been changes to individual properties. In most cases, the resulting tax assessments are very low: Taka 20 60 per year in most cases (equivalent to about US 30 80 cents), with some at Taka 100 or 200.9 Exceptionally there are assessments of Taka 400 or 500. However, in the UPs in Gazipur, on the fringe of Dhaka, there were a number houses assessed

It is claimed that these registers are completed, but it is possible that some properties are not included, whether because they are new or for some other reason. As an indication of how low these tax assessments are, the typical assessment of Taka 20 60 corresponds to 0.15 0.4% of the annual minimum wage of a garment worker. In one UP that had not revised its assessments since 1991, there were assessments of Taka 3 5, amounts which are now too low to be collectable. 9

at the ceiling rate of Taka 500, including a number of multi-storey blocks of rooms for garment workers.10 Overall, the average assessment was probably around Taka 35 to Taka 50.

c. Present Revenue Collection and its Performance Bills are not issued for holding tax. This is not surprising, given the small amounts involved and the cost of issuing bills. Instead, either taxpayer comes to the UP office to pay or tax collectors contracted by the UP go house-to-house to collect the tax. Payments can be in more than one instalment (normally two). Collectors (up to one per ward, but often only one for the UP) are paid 15% commission. This commission is supposed to be paid from the bank once the money collected has been deposited into the bank, although it seems likely that, in many cases, collectors deduct their commission before depositing the money. Collectors are issued with a ward register of properties and their assessed values, and with serially numbered receipt books. Every few days (or once a receipt book is used up), the cash is deposited at the UP office, and the receipt book and register are checked by the UP Secretary against the cash before the money is deposited in the bank. A chronological register is also kept of all payments received, together with the number of the receipt issued. In the UPs where a relatively high proportion of tax assessments are recorded as being collected, this leaves little scope for fraud or collusion. However, there are, no doubt, places where the system is not operating properly. There could be fraud in terms of collectors pocketing the tax payment and not issuing a receipt, or issuing fake receipts; or there could be collusion between taxpayer and collector to pay a smaller amount, again without a receipt. But unless there is a record of payments against assessments, it is not obvious which households have not paid. If no record of defaulters is ever produced or publicised, and if no action is taken against defaulters except follow-up by the same collector who had perpetrated the fraud, then the fraud may never be revealed. Such fraud can be countered by producing and publishing a list of defaulters, so that taxpayers who have paid without getting a genuine receipt will complain. It could also be countered by rotating tax collectors between wards so that follow-up of apparent defaulters reveals any fraud. However, rotating collectors may be difficult if the system is for them to collect from the ward where they live. The system used in most UPs does not make it easy to identify and hence follow-up non-payers. Collections are recorded in a chronological register. Although this records the plot number, it would
10

Where such blocks consist of separate apartments, presumably each apartment can be taxed separately, but where the block consists of multiple rooms, for example for garment workers, then only one tax can be levied on the whole block. In one UP, such a block was reported to be earning a monthly rental of well over Taka 10,000, yet the maximum annual tax that could be levied was Taka 500. 10

require a separate exercise to check against the assessment register to identify who had not paid. In practice, lists of defaulters are not produced for purposes of follow-up, and there is no record of arrears. Although claims are made about follow-up action, it is doubtful if this really happens. Collection rates are generally very low. It is likely that in most UPs, only 5% to 20% of households are paying. This is generally explained in terms of people being poor, problems of floods, and reluctance of elected Chairmen to take unpopular enforcement action. A few places have managed to increase collection rates significantly. It is observed that collection rates for UPs in Sirajganj district as a percentage of budgeted revenue, ranging from 1% to 91%. However, budgeted figures may not reflect the full potential revenue (especially if arrears are not included), so these figures may overstate the performance. Moreover, a significant proportion of the revenue may be paid by a few business or institutional payers. For example, one UP visited (Gopaya in Narshingdi district) had managed to collect around half of amount holding tax due in 2007/08, but 70% came from just five institutional payers. The remaining 30% came from 580 other payers (17% of households), while 83% of households paid nothing. In another UP (Nurpur), receipts were issued to 400 households (12% of the total number of households), and money received amounted to 18% of the total assessment. V. Improving UP Assessment System, Administration and Collection Procedure a. Holding Tax Assessment by Improved Method of Mass-Appraisal System What is proposed for piloting in some UPs is a simpler and more transparent assessment system, commonly known as mass appraisal. 11. A simple table is provided in the following showing house construction types and numbers of rooms (construction type will need to be defined precisely enough so as to minimize scope for manipulation). From that, it is very easy to assess a particular house. It uses five grades of construction and up to four rooms. For houses with more than four rooms, a rate per sq ft can be used. It includes one category of shop (up to 100 sq ft), being the most common type of non-residential property in UPs. The assessment figure might be increased by 10%. (private water supply and toilets would not be included in the assessment) where UP provided water supply (tube well or piped) is available on the plot,

11

See Nick Devas (July 2007): Local Revenue Sources for Union Parishads: Report of a Study; and Nick Devas (September 2008): Enhancing Revenue Sources for Union Parishads 11

Table 1: Holding Tax Assessment Piloting: Mass Appraisal System

Tax Rate: 3% Tax in Taka 1 Room 2 Rooms 3 Rooms 4 Rooms For more than 4 rooms, rate per sq.ft. (1) Small shop or stall (up to 100 sq ft) (2) UP provided Water facility on plot (3) High Quality 150 250 350 450 15 350 Pacca 100 150 220 300 10 220 Semi-Pacca Tin Roof 80 120 160 200 7.5 160 Add 10% 50 80 110 150 5 110 Katcha 30 50 80 100 3 80

Or
Tax Rate: 5%
Tax in Taka 1 Room 2 Rooms 3 Rooms 4 Rooms For more than 4 rooms, rate per sq.ft. (1) Small shop or stall (up to 100 sq ft) (2) UP provided Water facility on plot (3) High Quality 250 420 580 750 25 580 Pacca 170 250 370 500 17 370 Semi-Pacca 110 200 270 330 12.5 270 Add 10% Tin Roof 80 130 180 250 8 180 Katcha 50 80 130 170 6 130

Or
Tax Rate: 7%
Tax in Taka 1 Room 2 Rooms 3 Rooms 4 Rooms For more than 4 rooms, rate per sq.ft. (1) Small shop or stall (up to 100 sq ft) (2) UP provided Water facility on plot (3) High Quality 350 580 820 1050 35 820 Pacca 230 350 510 700 23 510 Semi-Pacca 190 280 370 470 17.5 370 Add 10% Tin Roof 120 190 260 350 12 260 Katcha 70 120 190 230 7 230

Notes: (1) Government order will require to remove the ceiling of Taka 500 and be prefixed at the maximum Taka 1000 for four room house with extra amount charged for more than four rooms and other facilities provided by the UPs.
12

(2) If house/building has more than one storey, consider all storeys as separate unit. (3) For shops, industries and other businesses larger than 100 sq ft (10m2), and multi-storey residential blocks, either this method or annual rental value method may be used. (4) Add 105 tax for water facility on plots means UP supplied or served water. (4) Katcha here means mud and thatch. Tin-roof is taken as being between katcha and semi-pacca. High quality means pucca construction with a high standard of finishing work.

Table 1 shows the assessment values at various tax rates: 3%, 5% and 7%. Tabulations for 4% and 6% could easily be prepared if required. The UP would choose which tax rate to set and therefore which table to adopt. The assessments in the table are based on estimates of the annual rental value using the construction cost figures produced by GoBs Public Works Department (PWB). However, they are not precise valuations but they nevertheless provide a consistent basis for assessment. (Precise valuations are not required, of course: what matters is consistent treatment between all properties, so that the tax burden is distributed fairly.) One requirement for the new system to work properly is to remove the present tax ceiling of Taka 500 per building/land (non agricultural land). This ceiling is a serious anomaly because such a ceiling benefits only the rich and this ceiling was introduced in 1961 about 50 years ago. Inflation has eroded the value of Taka 500, so that annual rental values of larger properties, and particularly non-residential properties, are well above that ceiling. A particular issue arises with multi-storey blocks of rooms, where the assessment should be many times higher than Taka 500.12

There seems to be some ambiguity about whether holding tax applies to all property or only to houses. Most UPs do not appear to be collecting holding tax from non-domestic properties and some businesses refuse to pay on the groups that they are paying trade licence fees.13 The LG (UP) Act, 2009 refers to buildings and land. It is, thus, clear that non-domestic properties are covered. There is, therefore, no reason why UPs are not collecting both holding tax and business licences from a business. Most non-domestic properties like shops will be covered by the mass appraisal system. There are some issues in relation to major public infrastructure, such as railways, power plants and power distribution systems. These issues need to be resolved at national level, since such facilities are generally state-owned and assessment of these sectors creates considerable problems. b. Improving Revenue Administration and Collection Performance
12

This ceiling mainly benefit the rich and are not justified in a proper property tax assessment system. Ideally, they should be eliminated. However, adopting the mass appraisal system avoids these anomalies. 13 There also appears to be an issue about exemptions from taxes for export industries. Although officially such exemptions only apply in a few export processing zones, it was claimed that some industries elsewhere refuse to pay local taxes on the grounds that they are producing for export. 13

It should be pointed out that there are the problems of local revenue in UPs and that many of the problems faced here are common to local governments around the world. Most of what is proposed here is far from new14 . Much of it is about enabling UPs to implement what they are already supposed to do, or to adopt good practices which have already been adopted in some UPs. There is considerable scope for improving UP revenue administration. At present, in many UPs, only 1020% of the holding tax is collected and many businesses do not have licences. Collection of holding tax is never likely to achieve 100% achievement because so many people are poor, but a number of UPs have demonstrated that it is possible to increase collection performance significantly.

The following are the steps that UPs need to take in order to achieve a higher collection performance.

a) Prepare a register of all properties in the UP, including non-domestic properties, and updating that register annually (see Annex -2 for a pro-forma). b) Use the mass-appraisal system to assess all the holdings. The register, with the assessed values should be made public so that people can see if there are anomalies, and any collusion between assessor and household can be revealed. This will inspire public confidence that the system is fair.15 c) At present, reductions to assessments are often made on the grounds that households are poor. It is suggested that any reductions should be made explicitly (as per the pro-forma at Annex- 2), ideally, at ward level, if possible, and approved by the UP. It is also suggested that the reductions should be limited to 25% of the assessment and should be given only to the most needy, not to everyone, so that everyone contributes at least something. This will also help to create trust in the fairness of the system. Furthermore, it is proposed that not more than one quarter of households be given a reduction. Annex - 3 provides a pro-forma for a revised assessment register, showing the basic information on the property (plot number, owner, occupation or income source, number of rooms, type of construction, whether or not there is an individual water supply on the plot). From this, the basic assessment can be made from the assessment table (Table-1). There is then a column for reasons, if any, for a reduced assessment. The last column shows the final assessment, taking account of any reduction (may be 25% that

14

See Nick Devas (July 2007): Local Revenue Sources for Union Parishads: Report of a Study; and Nick Devas (September 2008): Enhancing Revenue Sources for Union Parishads 15 Citizens will still have the legal right of appeal, first to the UP, then to the UNO, and finally to the Deputyt Commissioner, if he/she considers the assessment is wrong or unfair. 14

may have been given. This assessment register should be a public document which anyone can consult. d) There should be a register for payments, listing for each plot and plot owner, the final assessment (i.e. the amount due for the current year), plus any arrears from previous years, the amount paid in the current year (with date of payment and receipt number), and the amount still outstanding (see Annex-3 for a sample pro-forma). Such a register enables the UP to identify immediately who has not paid, and the amount owed, thereby enabling effective follow-up of on-payers. e) Tax collection for the current year should start on 1st July and be completed by 30th June. Collections should not spill over into the following fiscal year. Any amount outstanding at 30th June should be recorded as an arrear to be collected the following year (with or without penalty). This helps to clarify what should be paid and when, and helps with accounting for the years revenue. f) The present system of issuing receipts and recording money received in a register, with details of the receipt number and date, appears to work reasonably well, enabling cash received to be checked against receipts (so long as those checks are actually made). However, in addition to (or instead of) the chronological register of cash received, revenue receipts should be recorded in the register specified in (d) against the plot number, so that non-payers can immediately be identified. g) Money collected should be paid into the bank promptly after checking cash against receipts issues. Ideally, this should be on a daily basis. Ideally, also, larger payments should be made directly to the bank, reducing the risk of loss or fraud. This would require a bill to be issued, which can be taken to the bank. This is now done in some cities and municipalities (e.g. Tongi), but for UPs it would only be realistic for the largest payments (say Tk.1, 000 and above). h) Collectors should continue to be employed on the basis of commission. It is commonly claimed that 15% commission is not sufficient incentive. However, with the higher assessments, and other steps to improve collection performance, the amount collected should increase significantly, augmenting the incentive effect. Guidance issued by LGD allows a further 5% to be allocated to village police, and to reward the best performing collectors, but it is not clear whether this is being applied at all, and if it is, whether it has any effect. UPs may spend 3% to remunerate the village police in the ward concerned, 0.5% for the head of the village police group and a further 1.5% for incentives for the best collection performance among the villages An alternative would be for the UP to directly employ collectors and pay them out of the revenue collected. However, that is almost certain to increase collection costs, as they would
15

probably be paid more than the 15% commission. It might also reduce the motivation to collect. Thus, it is recommended that UPs continue to employ collectors on commission, but review how the incentives can be augmented. i) Spot checks by the UP Chairman or Secretary to see whether there is fraud by collectors (e.g. not giving a receipt or giving a fake receipt). For example, selective follow-up visits to the houses visited by collectors would reveal any fraud if households say that they have paid but do not have a proper receipt. Rotating collectors between wards part way through the year could have the same effect, but that would only be possible if there were several collectors. j) Prompt follow-up action where people have not paid. Households should be visited at least one a month for the first three months of the financial year until they have paid what is due. k) After three months (i.e. end of September), compiling and displaying a list of defaulters (e.g. on the UP notice board and/or in other public places), or putting notices on the houses or defaulters; this should have the effect of shaming non-payers into paying. It would also help to reveal any fraud by collectors or collusion between households and collectors. l) Motivating people to pay through public information campaigns at ward and UP level, explaining how developments already completed under LGSP-LIC and other programmes are threatened by people not paying their tax. Such meetings may carry more weight if supported by the UNO, so the UP Chairman should solicit the help of the UNO. Peoples willingness to pay can also be increased through opportunities to participate in decisions about how resources are to be used (e.g. budget prioritisation meetings), and where there is confidence that the taxes collected are used properly, through increased transparency about resource use. m) As a last resort, taking enforcement action against those who can afford to pay but who refuse to pay. Initially this may take the form of a letter from the UP Chairman to give the signal that it sends to other people is that the UP is serious about collecting tax. Hopefully, that will induce other defaulters to pay up. n) In the case of business tax / licences, the UP should prepare a comprehensive list of all businesses in the UP. This will require field inspection, and can be cross-checked against the holding tax register for non-domestic properties (ideally, using the same plot number and/or taxpayer identification number in both registers to facilitate cross-checking). The type of business should be recorded, together with the size category (consistent with the classifications in the suggested Model Tax Schedule Table 2), and the amount payable. All business, commercial and professional activities that are covered by the Model Tax Schedule should be listed, including NGOs.

16

o) A record should be maintained of payments of business tax / licences against each business in the register (as pro-forma will be developed). This will show clearly which businesses have not paid for the current year. Where a business has not applied for a licence by the due date (say, 30th September), the collector should visit the business and require payment. If no payment is forthcoming, the steps outlined above in (k), (l) and (m) should be adopted. The ultimate sanction would be to close the business. p) Where possible, follow-up action in relation to a business tax / licence should be integrated with action to recover holding tax from the same property, so as not to duplicate effort. q) Simple computerised spread-sheets can help improve revenue performance, by tabulating clearly assessments, arrears, payments and outstanding balances. Cross-checks can easily be made and the list of defaulters can be produced. However, UP require someone with knowledge of computers, and preferably more than one person, to reduce the scope for fraud by the system manager. Automatic checks should be built into the software to prevent fraudulent transactions. Also, paper copies of all records should be maintained to reduce the risk of loss of data through system failure or data corruption. r) Overall performance of revenue collection can be motivated by the inclusion in any grant system (including the LGSP-LIC grant allocations) of a performance indicator or indicators based on revenue performance. One indicator might be that the UP has compiled a holding tax assessment register and a business tax/licence register in the approved form. Another indicator might be performance of collection against assessment (i.e. effectiveness what proportion of the assessed tax has been collected). An alternative indicator might be the percentage increase in tax revenue.16 In addition, there might be competitions between UPs within a district to see which could collect the highest proportion of assessed tax with small rewards for the Chairman, elected members and officials of the best performing UP.

VI. Rationale and Challenges of UP Revenue Strategy This is an opportune moment to be proposing improvements for enhancing UP revenues, for a number of reasons. Firstly, the Committee for Accelerating and Strengthening Local Government reported in November 2007. Among its recommendations, it identified the revenue sources of UPs which are given below17: ensuring that local tax assessments are updated every five years; improving revenue collection performance of local governments;

16 17

The indicator should not be the total amount collected, since that would favour UPs with greater revenue potential. This list is based on the English language summary of the Committees report. 17

 increasing UPs share of the Land Transfer Tax from 1% to 2%, and ensuring that the money from this source is passed on to UPs; giving UPs a 3% share of the Land Development Tax; reviewing the distribution of revenues from leases on huts and bazaars to ensure a fairer distribution; giving local governments more discretion about local tax rates; increasing the share of ADP (annual development program grant) for local government (as a whole) to 10% of the national budget; Apportioning to local government a share of national taxes collected locally. Secondly, the Government has recently promulgated a new Local Government (Union Parishad) Act, 2009, to replace the 2003 Ordinance. This takes account of many of the recommendations of the Local Government Committee. It is reported that it will be followed by a revision to the Model Tax Schedule for UPs, very soon. Thus, the present study can provide a direct input into that process. Thirdly, Government has shown its support for UPs by channelling some block grant allocations directly to UPs, starting from 2004. This has enabled UPs to have greater choice and control over resources used locally. In addition, from 2008, substantial funds are being channelled through UPs in poorer regions of the country for rural works programmes to reduce poverty. Fourthly, the LGSP is channelling substantial resources to UPs. This programme started in 2007 in 1,050 UPs, and will gradually extend to all UPs (at least, those UPs which meet minimum performance qualifications). LGSP builds on the earlier experience of the Sirajganj Local Government Development Programme which, among other things, was successful in increasing local revenues in a number of UPs. As part of LGSP, the Learning and Innovation Component (LIC), funded by UNDP, UNCDF, EC and DANIDA, is developing and disseminating good practices and innovations to UPs in six districts. Under this component, there is scope for pilot projects in a number of UPs to experiment with revenue enhancing reforms. This strategy provides suggestions for what could be included in these pilots. VII. Purpose and Objective of the Strategy The traditional, theoretical argument for decentralization and local government is about matching the expenditure on local services that benefit the residents of a jurisdiction with the willingness of residents to pay taxes to finance those services. Thus, the key political choice for a local
18

government is about how much to tax local residents in order to pay for the public services they receive, so that local residents have an electoral choice about how much to be taxed for what level of local services and how properly this tax to be assessed. The objective of the strategy areas follows: a) Assess current UP performance (strengths, weaknesses, complexities etc.) with regard to the assessment, administration and collection of own-source UP revenues b) Develop a provisional strategy for enhancing on a pilot basis the revenue base and revenue collection performance of UPs c) Identification of new and additional expanding revenue sources for UPs self sufficiency and better service delivery including other local taxable income including fees, rates, charges and fines d) Improvements to local revenue administration procedure and collection arrangements including proper documentation, register maintenance and collection process e) Identification of motivational and awareness building program as well as incentive system for own source revenue collection
f)

Improvements in robust follow-up and enforcement process including monitoring and evaluation strategy

g)

Some related reforms including intergovernmental transfers, policy advocacy with government and local financial resource management.

VIII. Sampling of UPs for Piloting For the purpose of raising revenue mobilization in capacity building of Ups for better service delivery piloting activities will be undertaken in thirty Ups of six LGSP-LIC districts (5 UPs from each of 6 LGSP-LIC districts.) The selection of the piloting Ups will be Identified by the Consultant with LGSP-LIC Project Team, UNDP, UNCDF & finalization on the basis of the outcome and completion of baseline survey. The following criteria would be followed for selecting the five Ups in each LGSP-LIC district. a. First UP will be selected from each Upazila on the basis of higher revenue target achievement as well as proper assessment on the basis of assessment procedure b. Second UP will be selected which is situated in semi-urban in nature and near to the UZHQ c. Third UP will be selected where revenue collection was not so high and not systematic assessment maintained d. Fourth UP will be selected where other sources collection was higher than holding tax if any or other sources collection was higher than any other UP in the districts
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e. Fifth UP will be selected where holding tax assessment procedure is properly followed but the citizens are not willing/ reluctant to pay even with the UPs initiative for collection target achievement

IX. Proposed Piloting Areas and Activities of Enhancing UP Revenue/Resource Mobilization The capacity building of local government units especially UP is enormous as they are responsible to manage their own affairs independently by providing service delivery with the mobilization of own sources of revenue/resources effectively. So that it is necessary to make them able to finance their activities through proper orientation and support. For this, LGSP-LIC conducted a study during 2007-8 aimed at gaining a better understanding and identifications of constraints in local government taxation system and revenue collection procedures and the scope for enhancing UP own-sources revenues/resources. With these experiences and the current field study/experiences, LGSP-LIC has developed a strategy paper by identifying some piloting areas and activities for enhancing UP revenue/resource mobilization. : Summary of the Activities of Piloting proposals below could be tested in 30 UPs.

Benchmark of pilotingThe benchmark of piloting includes identifying some samples of 60 UPs for baseline survey before starting the activities of piloting on 30 UPs of 6 LGSP-LIC districts. For this, the baseline survey will be conducted by a firm/ NGOs and the findings will be presented at the dissemination workshop at the national level. After this, a. Inception workshops for piloting activities will start at every six LGSP-LIC district of Barguna, Feni, Habigonj, Narshingdi, Sathkira and Sirajgonj followed by b. Inception workshops at all the 30 LGSP-LIC UPs of 6 districts.

Effective and Improved Method of Holding Tax Assessment by introducing mass appraisal system

1.

Introducing a simplified mass-appraisal system for assessing holding tax for houses, based on number of rooms and construction type, and retaining a choice over tax rates (up to the equivalent of 7% of annual rental value) .by providing training through manual development to secretary , Tax Collector, WDC and UFT for proper use of mass appraisal/ self appraisal system

20

2.

Arrange brainstorming meeting/discussion with the citizens on the mass appraisal/self appraisal system

3.

Exposure visit

For this, following things should be considereda. Making assessments more systematic and transparent, with any reductions on the grounds of poverty being made explicitly and recorded transparently.

b. Clarifying that holding tax can also be levied on non-domestic property, including structures like mobile phone masts.

c. Requiring every UP to carry out a re-assessment of holding tax over the next twelve months, compiling a complete register of properties, together with their assessments.

4.

Expanding the Revenue Base for UPs self- sufficiency and better service delivery Arrange Training/ Workshop with elected functionaries and officials to identify

Different sources of revenue other than holding tax by introducing a training manual

5. Arrange Training/ organize discussion meeting/ open budget session to the UP elected representative, officials, WDC members, UFT members as well as some citizens for promoting understanding between service delivery and tax payment

For this, give a direction to impose certain ceiling of tax on three-wheeled CNGs, mobile towers, advertisements (bill-boards), coaching centres, tutorials, private clinics and hospitals, community centres etc; impose fees for particular services rendered, as well as rural electricity, professional varieties, leasing of government land for tree plantation, extraction of sand, stone and other

building materials; impose charges for services that the UP provides directly to beneficiaries and impose fines for late payment of arrear taxes.

6.

Simplifying

the

classification

of

businesses

while

also

making

the

list

more

comprehensive, to include all services, professions and NGOs, introducing a simple and obvious classification of business size, to reflect ability to pay, thereby improving equity as well as increasing the revenue that can be generated and allowing a limited range of choice for the UP
21

about the level of business taxes, with three approved levels of tax (low, medium and high) and Requiring every UP to compile, within twelve months, a register of all businesses in their jurisdiction Better Revenue Administration and Collection Arrangements

7. Develop materials for Training on systematic documentation, maintenance of registers and up dated pass book for transparent revenue administration and collection a. technical support for effective tax collection by introducing improved assessment form in massappraisal system; b. up dated Pass book maintenance for transparent tax collection; c. collection registers showing current years collection arrears due; record keeping for present and arrear collection; d. pay slip for regular tax collection; effective follow-up of non-payers, with prominent notices displayed on the houses of defaulters (a three-stage set of notices, black, yellow, red); and e. requiring every UP to compile, within twelve months, a register of all businesses in their jurisdiction, each with a tax assessed according to the Model Tax Schedule

8. UPs to maintain records of tax payment against assessment so that it is immediately obvious which properties or businesses have not paid, and records of arrears can be compiled a. Collections to start on 1st July and finish on 31 st June, with any non-payments by then being recorded as arrears. b. Prompt banking receipts, with larger payments being made by the payer directly to the bank. c. Prompt follow-up action in the event of non-payment within the first three months, with lists of defaulters being prepared and publicised after that. d. Spot checks and selective visits (e.g. by the UP Chair or elected members) to non-payers, both to motivate payment and to reveal any collusion or fraud by collectors.

9. Improving UP budgeting and expenditure management, including realistic budgets, based on the revenue that can actually be collected and greater opportunities for citizens participation in decisions about resource use 10. Enhancing accountability for resource use, through publicly available information on finances, and project monitoring by residents

22

 Motivation, Awareness Campaign and Incentive System for Own-Source Revenue Collection 11. Greater efforts to mobilise payment through information at ward-level and UP-level public meetings, citizen participation in decisions about resource use, public display of financial information, and proper accountability for the use of revenues, leading to greater willingness to pay.

12.. Motivational and awareness building campaign with citizens at UP and ward level for paying tax linking better service delivery by organizing brainstorming/ discussion/ interacting meeting with chairman, members and secretary for UPs capacity building;

13.. Awareness campaign to empower and to increase access of information through IEC strategy to motivate tax-payers that revenues collected will be properly used to provide services that benefit them

14. The grant system should incorporate rewards based on performance of revenue collection against assessments (or based on increased revenue collection)

15. Introduce cash/kind award for targeted tax collection achievement to the best tax collector/secretary/reward to the regular tax payer; introduce special

award/prizes/rewards/appreciation to the best chairman/member (public representatives) for targeted tax collection achievement in every division and a system of appreciation to the best tax payer at UP and ward level during open budget session in various forms Robust follow-up and enforcement process

16. Introduce a M&E strategy for piloting of UP revenue mobilization through training on M&E Strategy to DF, DDLG and UCOs;

17. knowledge sharing on the basis of periodic monitoring and evaluation; and gradual introduction of simple computerised spreadsheets at UP for managing and monitoring local revenue collection

.18. Gradual introduction of simple computerised spreadsheets for managing and monitoring local revenue collection.

23

Policy Advocacy a. Policy advocacy to the government and ministry level in order to influence policy makers (i.e., LG Division of the Ministry of LGRDC) for updating the Model Tax Schedule, 2003. b. Advocacy, Networking, Liaison with government and local administration for returning the right of leasing Jolmohal and Hutbazar for leasing by UP up to the certain level of ceiling with UNO monitoring the tendering process ( now UP is getting 20% for the salary of the UP staff, 5% to the UP where the market is located and 45% to be deposited in the Upazila development fund to be distributed between the UPs in the Upazila). c. Advocacy program for increasing the IPTT tax to 2 percent from existing one percent, enhancing the UPs share of the Land Transfer Tax from 1% to 2%, introducing 3% (or higher) share of the Land Development Tax for UPs in return to their assistance with mobilising the tax and to identify one possible new revenue source for UPs is a small local tax on electricity (collected through the electricity company as a percentage addition to the electricity bill) d. Advocacy to appoint each UP a finance officer, with at least basic training in

accounting and financial management and to take measures that Upazila Parishads new revenue sources should not be at the expenses of UPs revenue sources e. Increasing transparency and reliability in the allocation of intergovernmental fiscal transfers, with more of the transfers being paid directly to UPs and greater scope for local (UP) choice about the use of transfers f. Ensuring that any reforms of UPs revenues with mutual learning about good practices, and improved performance being shared between local governments units

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Table 2: Indicative Framework of UP Revenue Factors for Piloting Strategy Plan for Enhancing UP Revenue/Resource Mobilization Piloting
(National Consultant for UP Revenue Mobilization Piloting: Professor Musleh Uddin Ahmed, Ph D) Outputs/Areas/ Themes of Piloting Strategic Intervention/ Activities of Piloting Expected Result Target Group Responsibility Time Line

Description of what is being Piloted and Purpose of the Pilot and Determining Pilot Activities 1. Benchmark of 1.1Conduct Baseline Survey by Firm/NGO 1.1 Baseline Survey data made available Piloting 1.2 Dissemination workshop on Baseline 1.2 Stakeholders/Policy Planners given findings information about the Baseline data 1.3 Inception workshop of Piloting at every District Level (01 day each in 6 LGSP-LIC district) 1.4 Inception workshop at selected 30 LGSP-LIC UP level in every six LGSPLIC districts (01 day) 2.1 Manual Development for systematic tax assessment by simple mass-appraisal system for assessing holding tax containing transparent tax assessment procedure, outlining categories and process for documentation 2.1.1 Training to UP Secretary, Tax Collector, WDC member and UFTs on proper holding tax assessment 2.2 Arrange meeting/discussion to motivate the citizen on mass appraisal/self appraisal system of assessing UP revenue for getting adequate services 1.3 Idea generation/Brainstorming to initiate appropriate activities for piloting 1.4 Idea generation/Brainstorming to initiate appropriate activities for piloting 2.1 Improved and effective methodology of mass-appraisal tax assessment system in place

30 LGSP-LIC UPs, 15 LGSP UPs & 15 Non LGSP-LIC Ups LGD, Development partners, UNOs, DDLGs, DFs, UCOs & some selected UP Chairman Selected UP Chairman, DDLG, DCOs, UCOs, UNOs and related stakeholders Secretary, Tax Collector, WDC member, UFTs and Community Secretary, Tax Collector, WDC member & UFTs

UNDP & Project UNDP & Project

March-April, 2010 May, 2010

DDLG & DF

May, 2010

DDLG, UCO & DF

May, 2010

2. Effective and improved methods of tax assessment

Consultant

Continue

2.1.1 Tax assessment process disseminated and related capacity of personnel involved enhanced 2.2 Citizens oriented about the method of tax assessment, mentally prepared to accept new system and appropriate documentation procedure put in place for citizen to crosscheck validity 2.3 On-field experiences gathered, improve sensitization and strengthening peer learning

Secretary, Tax Collector, WDC member & UFTs UPPC , SSC and Citizens

Consultant

May, 2010

UCO

May, 2010

2.3 Exposure Visit

3. Expanding the revenue base for

3.1 Arrange training/workshop to motivate the UP elected functionaries, secretary and tax collector on identification

3.1 Idea developed for the importance of UP revenue mobilization from different own sources towards local capacity building on

UP Chairman, Members, Secretary, Tax Collector, WDC & SSC member, UFTs and Community UP Chairman, Members, Secretary and Tax Collector

UCO, DF & UFT

May, 2010

UP

Continue

25

Ups sufficiency better delivery

self and service

of different sources of revenue other than holding tax

revenue self sufficiency

3.2 Organize discussion meeting/open budget session for UP functionaries and citizens for promoting understanding of the optional sources for wider range of UP revenue

3.2 Understanding of roles and responsibilities of UP towards its community and the rights of citizens towards their UP improved

UP Chairman, Members, Secretary, Tax Collector, WDC & SSC member, UFTs and Citizens

UP

Continue

4. Better revenue administration and collection

arrangements

3.3 Organize orientation/brainstorming 3.3 Self-awareness and perception for session for imposing certain ceiling of fees getting quality of services by paying to establish close linkage between UPs revenue timely and regularly improved particular service directly rendered to beneficiaries and revenue income 3.4 Introduce the classification of 3.4 Quantum of tax volume enhanced businesses bringing all types of business under tax net 4.1 Manual development on systematic 4.1 Tax collection performance by documentation and maintenance of registers introducing proper assessment form, up for transparent and systematic revenue dated pass book maintenance, collection collection. registers showing current years collection and arrears due, record keeping for present and arrear collection and pay slip for regular and transparent tax collection. Improved 4.1.1 Training to Chairman, Secretary, Tax 4.1.1 The related capacity of personnel collector & UFTs involved in documentation and maintenance of revenue collection registers enhanced

Citizens

UP

Continue

LGI, UPZ, DC office, LGD & other agencies. UP Chairman, Secretary, Tax Collector & UFTs

LGD

Continue

Consultant

Continue

Secretary, UFTs

Tax collector &

DDLG & DF

June 2010

4.2 Manual Development for better collection performance (i.e., banking transaction, installment basis payment) 4.2.1 Training to Secretary, Tax Collector and UFTs

4.2 Capability for the efficient/better use of cash book, bank transaction etc increased 4.2.1 Tax collection performance and related capacity of personnel involved enhanced

Secretary, UFTs Secretary, UFTs Secretary, UFTs

Tax collector &

Consultant

Continue

Tax collector &

UCO & DF

July 2010

4.3 Introduce Public discloser mechanism 4.3 Actual tax collection status made for revenue self sufficiency linked to UPs available with general public capacity building (open budget, bill board, information dissemination etc.) 4.4 Effective follow-up of non-payers, 4.4 Number of defaulters are expected to with notices prominently displayed on the decline houses of defaulters (a three-stage set of notices, black, yellow, red)

Tax collector &

UCO & DF

August 2010

UP Secretary

UP

Continue

26

5. Motivation and Incentive system for own source revenue collection

5.1 Motivational and awareness building campaign for UPs capacity building with citizens at UP and ward level for paying tax linking better service delivery by organizing brainstorming/discussion/ interacting meeting with chairman, members and secretary

5.1 Awareness to pay tax for getting better service benefit and revenue capacity building by achieving collection target fulfillment created 5.1.1 Sense of responsibility and duty of client oriented responsiveness towards community increased 5.2 Public awareness about their rights and duties improved, citizens perception about tax payment made crystal clear and access

Chairman, Secretary, collector, WDC, UFT

Tax

UP

Continue

5.2 Introduce awareness campaign to empower and to increase access of information through IEC strategy to motivate tax-payers that revenues collected will be properly used to provide services that benefit them 5.3 Introduce cash/kind award for targeted tax collection achievement to the best tax collector/secretary 5.4 Introduce special award/prizes/ rewards/appreciation to the best chairman/member (public representatives) for targeted tax collection achievement in every division 5.5 Introduce a system of appreciation to the best tax payer at UP and ward level during open budget session in various forms 6.1 Introduce a M&E strategy for piloting of UP revenue mobilization through training on M&E Strategy to DF, DDLG and UCOs 6.2 Knowledge sharing on basis of periodic monitoring and evaluation.

Citizen

LIC Team

Continue

to information raised

5.3 Initiatives for higher collection through vigorous performance taken place by tax collection functionaries 5.4 Public representatives are encouraged to take initiatives for higher volume of tax collection .

Secretary & Tax Collector

UP

Continue

Chairman & Member

DDLG, UCO & DF

Continue

5.5 Tax payers feel honoured and thus motivated to pay more setting examples to others 6.1 Tax collection processes are better monitored and made more accountable

Citizen

UP

Continue

6. Robust followup and enforcement process

DF act as facilitator, DDLG,UNO & UCO closely involved in monitoring DF, DDLG and UCOs

Consultant

Continue

6.3 Gradual introduction of simple computerised spreadsheets for managing and monitoring local revenue collection.
7. Policy Advocacy 7.1 Advocacy program for national and ministry level in order to influence policy makers (e.g., LGRD&C. LG Division etc.) for updating the Model

6.2 Personnel involved are better prepared for followup action and a more effective and efficient mechanism developed to share responsibilities 6.3 Efficiency increased, system simplified and productivity enhanced

LIC team

Continue

LIC Piloting UP

LIC Team

LIC team

7.1 Support for updating the model tax schedule incorporating some new sources of UPs own sources revenue income mobilized

UNDP

UP

2010 2011

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Tax Schedule, 2003 to at least reflect inflation since 2003. 7.2 Advocacy, Networking, Liaison with government and local administration for returning the right of leasing (Hatbazar, Jalmohal etc) -a return of Jalmohal and Hatbazar for leasing by UP up to the certain level of ceiling (with UNO monitoring the tendering process) 7.2.1 Advocacy program for - Increasing the IPTT tax to 2 percent from existing one percent - Increasing the UPs share of the Land Transfer Tax from 1% to 2%: - Introduce 3% (or higher) share of the Land Development Tax for UPs in return to their assistance with mobilising the tax 7.2.2 Advocacy to - Appoint each UP a finance officer, with at least basic training in accounting and financial management . - take measures that Upazila Parishads new revenue sources should not be at the expenses of UPs revenue sources 7.2.2 Accountability in UPs budgeting and expenditure management, including realistic budget making based on the revenue that can actually be collected with taking care of greater opportunities for citizens participation in decision making about proper use of resource improved LGD 7.2 UPs rights of enhancing share of own sources revenue increased Citizen

Continue

7.2.1 Transparency and reliability in the allocation of intergovernmental fiscal transfers with more of the transfers being paid directly to UPs and greater scope for local (UP) choice about the use of transfers increased

LGD

*Note: Budget, Timeline and Responsible Party would be finalized after discussion with the UNDP, LGD and Project Authority.

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Annex-I: Action Plan for UP Revenue/Resource Mobilization Piloting

Outputs/ Areas/ Themes Strategic Intervention/Activities 1Q 2010 2Q 3Q Time Frame 4Q 1Q 2011 2Q 3Q 4Q
Responsibil ities *budget (in US $) tentative

1. Benchmark of Piloting

2. Effective and improved methods of tax assessment

1.1 Conduct Baseline Survey by Firm/NGO 1.2 Dissemination workshop on Baseline findings 1.3 Inception workshop of Piloting at every District Level (01 day each in 6 LGSP-LIC district) 1.4 Inception workshop at selected 30 LGSP-LIC UP level in every six LGSPLIC districts (01 day) 2.1 Manual Development for systematic tax assessment by simple mass-appraisal system for assessing holding tax containing transparent tax assessment procedure, outlining categories and process for documentation 2.1.1 Training to UP Secretary, Tax Collector, WDC member and UFTs on proper holding tax assessment 2.2 Arrange meeting/discussion to motivate the citizen on mass appraisal/self appraisal system of assessing UP revenue for getting adequate services 2.3 Exposure Visit 3.1 Arrange training/ workshop to motivate the UP elected functionaries, secretary and tax collector on identification of different sources of revenue other than holding tax 3.2 Organize discussion meeting/open budget session for UP functionaries and citizens for promoting understanding of the optional sources for wider range of UP revenue 3.3 Organize orientation/brainstorming session for imposing certain ceiling of fees to establish close linkage between UPs particular service directly rendered to beneficiaries and revenue income 3.4 Introduce the classification of businesses bringing all types of business under tax net Enhancing the effectiveness and/or efficiency of UP revenue administration and collection through 4.1 Manual development on proper documentation and maintenance of registers for transparent and systematic revenue collection. 4.1.1 Training to Chairman, Secretary, Tax collector & UFTs 4.2 Manual Development for better collection performance (i.e., banking transaction, installment basis payment) 4.2.1 Training to Secretary, Tax Collector and UFTs 4.3 Introduce Public discloser mechanism for revenue self sufficiency linked to UPs

UNDP Project UNDP Project DDLG DF

& & &

13000 8000 12000

DDLG, UCO & DF DF & UCO

10000

5000

Consultant

5000

DF & UCO

5000

3. Expanding the revenue base for UPs self sufficiency and better service delivery

DF & UCO DDLG, UCO & DF

5000 3000

DDLG, UCO & DF

4000

DDLG, UCO & DF

3000

DDLG, UCO & DF

4000

4. Better revenue administration and collection arrangements

Consultant, DF, UFT & UP Consultant, DF, UFT & UP Consultant, DF, UFT & UP Consultant, DF, UFT & UP Consultant, DF, UFT &

2000

3000

2000

3000

3000

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capacity building (open budget, bill board, information dissemination etc.) 4.4 Effective follow-up of non-payers, with notices prominently displayed on the houses of defaulters (a three-stage set of notices, black, yellow, red) 5. Motivation and Incentive system for own source revenue collection 5.1 Motivational and awareness building campaign for UPs capacity building with citizens at UP and ward level for paying tax linking better service delivery by organizing brainstorming/discussion/ interacting meeting with chairman, members and secretary 5.2 Introduce awareness campaign to empower and to increase access of information through IEC strategy to motivate tax-payers that revenues collected will be properly used to provide services that benefit them 5.3 Introduce cash/kind award for targeted tax collection achievement to the best tax collector/secretary Introduce cash/kind award for targeted tax collection achievement to the best tax collector/secretary 5.4 Introduce special award/prizes/ rewards/appreciation to the best chairman/member (public representatives) for targeted tax collection achievement in every division 5.5 Introduce a system of appreciation to the best tax payer at UP and ward level during open budget session in various forms 6.1 Introduce a M&E strategy for piloting of UP revenue mobilization through training on M&E Strategy to DF, DDLG and UCOs 6.2 Knowledge sharing on basis of periodic monitoring and evaluation.

UP Consultant, DF, UFT & UP Consultant, DF, UFT & UP 3000

3000

Consultant, DF, UFT & UP

5000

Consultant, DF, UFT & UP

5000

Consultant, DF, UFT & UP

7000

Consultant, DF, UFT & UP Consultant, DF & UFT

5000

6. More robust followup and enforcement process

2000

6.3 Gradual introduction of simple computerised spreadsheets for managing and monitoring local revenue collection.
7. Policy Advocacy

Consultant, DF & UFT Consultant, DF & UFT

3000 3000

7.1 Advocacy program for national and ministry level in order to influence policy makers (e.g., LGRD&C. LG Division etc.) updating the Model Tax Schedule, 2003 to at least reflect inflation since 2003. 7.2 Advocacy, Networking, Liaison with local administration for returning the right of leasing (Hatbazar, Jalmohal etc) -a return of Jalmohal and Hatbazar for leasing by UP up to the certain level of ceiling (with UNO monitoring the tendering process) 7.2.1 Advocacy program for - Increasing the IPTT tax to 2 percent from existing one percent - Increasing the UPs share of the Land

UNDP Project

&

UNDP Project

&

30

Transfer Tax from 1% to 2%: - Introduce 3% (or higher) share of the Land Development Tax for UPs in return to their assistance with mobilising the tax 7.2.2 Advocacy to - Appoint each UP a finance officer, with at least basic training in accounting and financial management . - take measures that Upazila Parishads new revenue sources should not be at the expenses of UPs revenue sources *Note: Budget, Timeline and Responsible Party would be finalized after discussion with the UNDP, LGD and Project Authority.

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

Occupation / Income

Numbe r of Rooms 4

Construction Type

Basic Assessment

+10% if water on plot by UP

Total Assessment

Reasons for Any Reduction 9

7 = 6 x 0.25

8=6+7

Amount of Reduction (%) 10

Adjusted Assessment

11 = 7-10

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

Buildin g Size (sq ft) 4

Construction Type 5

Construction Rate (PWD rate per sq ft) 6

Rental Value

7 = 4 x 6 x 7.5%

Or Actual Annual Rent x 10/12 8

Total Assessment

9 = 7 (or 8) x tax rate

All buildings should be included, either under residential or non-residential. Mobile phone masts can also be included. Reductions may be given for residential assessments for reasons of poverty, under the following conditions: all reductions should be agreed by the Ward Committee and approved by the UP the published assessment register for residential properties should indicate the reasons for the reduction (column 9) reductions should normally be limited to 50% of the assessment not more than 25% of the households in the ward should be given reductions

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

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

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