Tax revenue: Inadequate for both local and central governments

Dhiman Chowdhury   | Published: July 16, 2018 21:26:02 | Updated: July 16, 2018 21:54:17

Local governments find local solutions to local problems. Local residents know  their own problems better. National government is too involved in its own problems to devote its time to local needs. A healthy division of labour and close cooperation between the national and local government result in an orderly management of both national and local affairs. Self-reliance is the ability to cope with one's problems by the use of one's own resources and skills. Decentralisation strengthens this capability of local governments by giving them greater opportunity to govern themselves.

However, there are limited financial resources at local level and there is need to develop a mechanism to generate alternative means to supplement them. It is important to assess the relative importance of local government tax compared to central government tax and overall tax position of the country. Proper tax jurisdiction should be designed. There is the need for shared revenue. Last but not least, there is need for cooperation between the central and local government on taxation issues.

LOCAL GOVERNMENT REVENUE: City corporations in the urban level and municipalities in the rural level are major local government bodies. Their revenue includes assigned tax revenue and shared taxes, grants, loans, fees and fines. Local governments are dependent on the centre for financial aid. Assigned taxes are property-based revenue like holding tax. There are activity-based revenue like taxes on advertisement, amusements, vehicles, fees on shops and licenses, tolls on ferries and bus stands. In addition, there is donor finance from the World Bank, Asian Development Bank (ADB), Japan International Cooperation Agency (JICA), Danida, USAID, United Nations Development Programme (UNDP), European Union (EU) and the UK Department for International Development (DFID).

Local government received 1.52 per cent to 3.1 per cent of total central budget during 2010-14. In terms of gross domestic product (GDP) the figures are 0.42 per cent to 0.62 per cent. In UK, local governments received around 4.0 to 5.0 per cent of GDP. In India, grants and subsidies are 2.0 per cent of GDP and 15 per cent of total revenue. In Vietnam, own source of revenue is 13 per cent of GDP and 70 per cent of total revenue; grants from government are 7.0 per cent of GDP and 33 per cent of total revenue. The figures are 2.6 per cent and 63 per cent in Thailand, 9.6 per cent and 65 per cent in Philippines, 5.0 per cent and 75 per cent in Indonesia (OECD 2016).

CITY CORPORATION ACT 2009: Currently 7.0 per cent holding tax on rental value and another 2.0 per cent for waste management and 3.0 per cent for lighting is in place. There is 2.0 per cent property transfer tax on deed value. There are annual tax on businesses and professions from TK500 to TK15000 depending on size and nature of business and institutions. There are also fees on registration, trade license, courts, hawkers, police clearance, terminals, market and slaughter house, parking space, etc. 

SOME STATISTICS FROM ANNUAL REPORTS OF LOCAL GOVERNMENTS, 2015-17: Dhaka City Corporation budget shows - own revenue TK9880m, grants from the central government TK700m, total revenue excluding foreign aid TK10580. Of this, holding tax was TK4800m, from market TK1600m, property transfer TK1350m. Thus, holding tax was 48.6 per cent, market 16.2 per cent and property transfer tax 13.7 per cent of own source of revenue. Development expenditure was TK6980m or 66 per cent from own. Per capita own revenue was TK2196 or BPS18.9 (1BPS=TK116 and population 4.5m). The figure was TK442 (TK221m/0.5m) or BPS3.81 in Cumilla City Corporation during 2015-16. Per capita government grants was TK 155 in Dhaka and TK1484 (TK742m/0.5m) in Cumilla. Thus smaller city corporations are funded mainly by government grants.  Per capita development expenditure from own source is TK1551 or BPS13.4 in Dhaka and TK1722 (TK861m/0.5m) or BPS14.8 in Cumilla. In Bhairab Paurashva, revenue from own source TK63m, government grants TK60, development expenditureTK92, population 0.118m;  thus revenue own per capita TK534 or BPS4.6 and TK1043 or BPS9 including government grants. Development expenditure per capita was TK780 or BPS6.7.

INTERNATIONAL EXPERIENCE: Average per capita own tax revenue is TK11 in high performing Upazila Parishad during 2003-7 which is less than a BPS (Ullah and Pongquany, 2011).  Mott (2011) found average per capita revenue of TK1930 of which own revenue is TK580 (BPS4.8) during 2007-8 in 30 municipalities. In UK it is BPS1900, including grants, during 2008-9. Own local government revenue per capita was $15 in Africa, $245 in Asia, $2763 in industrialised countries during 1993.   

A COMPARISON WITH THE KOLKATTA MUNICIPAL CORPORATION: Own revenue during 2016-17 was INR16843m, government grants INR11774m, total expenditure INR30217, population 4.5m in Kolkata Municipal Corporation. Thus per capita own revenue is INR3743 (TK4678) which is more than double of Dhaka's TK2196.

LOCAL GOVERNMENT REVENUE AND EXPENDITURE IN MANY COUNTRIES IS HIGHER THAN THE CENTRAL GOVERNMENT'S OF BANGLADESH: The average local government revenue as a percentage of GDP was 6.99 per cent and median was 6.04 per cent during 2010. The lowest was 2.77 per cent in Luxembourg, 9.6 per cent in Philippines, and the highest was 19.62 per cent in Sweden. In USA, of the total tax, 20 per cent of GDP was collected by the federal, 10 per cent by the state and another 10 per cent by the local government.  Central tax-GDP ratio in Bangladesh is around 10 per cent which is close to only local government tax revenue in many countries.

LOCAL GOVERNMENT AND LOCAL GOVERNMENT TAX: Both remained neglected for ages as reflected in the very low level of local government tax and dependence on central government-shared revenue. Except three or four city corporations most of the municipalities are mostly dependent on the central government. Strengthening local governance, more autonomy and accountability are preconditions for increase in local taxes and expenditures.  

COMPETITIVENESS AND CORRUPTION PERCEPTION INDEX: Most competitive and least corrupt countries like Switzerland, USA, Netherlands, Germany, Sweden, UK, Japan, Finland, and Norway have central government tax-GDP ratio more than 30 per cent.  Least competitive and most corrupt countries like Mozambique, Chad, Liberia, Mauritania, Sierra Leon, Haiti, Nigeria, and Ethiopia have this ratio less than 15 per cent.  Local government expenditure as a percentage of GDP is more than 12 per cent in Japan Sweden, Denmark, UK, France and USA. It is  0.1 per cent of GDP in Chad, 1.7 per cent in Senegal, 2.4 per cent in Zimbabwe, 2.1 per cent in Nigeria and 1.8 per cent of central government expenditure in Mozambique and Sierra Leone. No data is available with the Organisation for Economic Cooperation and Development (OECD) for Ethiopia, Liberia, Mauritania and Haiti, meaning it is insignificant.

INFORMAL SECTOR: According to International Labour Organisation (ILO), 2013, the highest informal sector is in South Asia with 82 per cent of the non-agricultural employment; the closest being 66 per cent in Sub-Saharan Africa. One important reason for high informality is weak governance. The informal sector is unregistered and escapes tax. Studies show evidence of negative correlation between informality and tax receipts. The governments have failed to enforce tax rules or provide incentives and institutional support to firms to join the formal sector.

Dr. Dhiman Chowdhury is Professor of Accounting at the University of Dhaka.




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