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Urban Development through Local Efforts Programme A joint programme of the Ministry of Local Development (MLD)
Urban Development through Local Efforts Programme A joint programme of the Ministry of Local Development (MLD)
Urban Development through Local Efforts Programme A joint programme of the Ministry of Local Development (MLD)

Urban Development through Local Efforts Programme

A joint programme of the Ministry of Local Development (MLD) and the German Technical Cooperation (GTZ)

Local Property Tax Improvement

Case studies on the assessment of IPT/HALT in the municipalities of Dharan, Pokhara, and Madhyapur-Thimi

April 2009

Table of Contents

  • 0. Executive Summary

4

  • 1. The struggle for Own Source Revenues

5

  • 2.1 Dharan Municipality

7

  • 2.2 SWOT-Analysis Dharan Municipality

7

  • 2.3 Major Findings ............................................................................................................

7

  • 3.1 Pokhara Municipality .................................................................................................

8

  • 3.2 SWOT-Analysis Pokhara

9

  • 3.3 Major Findings ............................................................................................................

9

  • 4.1 Madhyapur-Thimi

10

  • 4.2 SWOT-Analysis

10

  • 4.3 Major Findings

11

5.

Conclusion and

11

  • 5.1 Recommendations

12

  • 5.2 Guidelines and manuals

12

  • 5.3 Computerization and Software

13

  • 5.4 Capacity Development

13

  • 5.5 Political Awareness

14

6.

Conclusion

15

List of abbreviations

CAS – Corporate Accounting System DM – Dharan Municipality FNCCI – Federation of Nepalese Chambers of Commerce and Industry FY – Fiscal Year GTZ – German Technical Cooperation IPT – Integrated Property Tax HALT – House and Land Tax KMC – Kathmandu Metropolitan City LDF – Local Development Fee LSGA – Local Self-Governance Act LSGR – Local Self-Governance Regulations MC/PM – Minimum Conditions & Performance Measures MLD – Ministry of Local Development MTM – Madhyapur-Thimi Municipality MuAN – Municipal Association of Nepal OSR – Own Source Revenues PM – Pokhara Sub-Metropolitan Municipality RLC – Regional Learning Center UDLE – Urban Development through Local Efforts Programme UDTC – Urban Development Training Center WTO – World Trade Organization

0. Executive Summary

Nepal’s municipalities are facing major challenges with the abolishment of the Local Development Fee (LDF) and are required to improve their own source revenues (OSR) in order to cope at least partly with the expected gap of financial resources. This report deals with the past and present experiences municipalities have made with the Integrated Property Tax (IPT) or House and Land Tax (HALT) in their revenue composition. It also analyses the reasons why the high yield potentials are not being realised and why there is such a high discrepancy between different municipalities regarding their performance in tax coverage and tax collection.

The report is based on case studies on the municipalities of Dharan, Pokhara, and Madhyapur-Thimi. Interviews were conducted with the heads and employees of the tax revenue sections. The objective of this report is to establish a linkage between the theory of local property taxation and the reality of Nepalese municipal finance

The results show that there are various reasons for the underperformance in IPT/HALT assessment.

  • There is a lack of political commitment on central and local level regarding IPT/HALT. The municipalities complain about missing recognition for the effort made by the administrative staff. This also holds true for financial and technical support.

  • Partly the legal framework provides unclear definitions. For example certain policies of the LSGA need to be reviewed such as the list of tax exemptions. Government buildings and schools which are exempted by the act also require public services. Facilities that are serving the public welfare should rather be rewarded by receiving grants instead of being exempted from the list of taxpayers.

  • The computerization is essential to run a full-fledged and comprehensive database which is supposed to process information fast and accurately. The software is a current source of complaints. Therefore, a demand to develop unitary and updated software for IPT/HALT exists.

  • In most cases only the chief revenue officers have received training in local property tax. The remaining employees have not benefited of any training and suffer from low qualification.

  • There is a need for practical guidelines which help municipalities during the implementation process, but also when problems arise during the actual assessment. Guidelines and support need also to be provided in cases when a switch from HALT to IPT is underway.

  • In general the tax culture among the Nepalese population is underdeveloped. The willingness to pay liabilities is not existent and the often criticized missing transparency in handling of taxpayer money holds as excuse for it. Hence, there is no tax equality as long as only a few are burdened to pay the debts of the whole population. The tax awareness needs to be improved in order to raise compliance.

1. The struggle for Own Source Revenues

The 58 municipalities of Nepal are going to face major challenges over the next years trying to fill the upcoming gap in financial resources bound to arise due to the abolishment of LDF, a type of unconditional grant. Since Nepal joined the World Trade Organization (WTO) in April 2004 it is required to abolish all the import taxes by 2011 which have been restricting trade over the past decades. Unfortunately for Nepalese municipalities their main income source, the LDF, accounting to 74% of OSR, is financed by import taxes 1 . The phasing out of LDF will force both the central government as well as municipalities to review and restructure the current urban finance system and to explore alternative finance mechanisms for local government .

In this regard the property taxation has been a very useful tool in the contingent of finance instruments of local governments in most countries. An average of 40% of the sub-national taxes in developing countries is based on local property tax. Nepalese local governments, however, have been reluctant in the implementation and development of a properly functioning local property tax system since the introduction of

1 Collected from customs at a rate of 1,5 % on imported goods.

the LSGA in 1999. HALT and IPT are the two options of local land based taxes provided by the LSGA and implemented in most of the municipalities. 2 Due to various flaws in tax design and administration, the revenue has not even reached up to 30% of the potential revenue which could be generated through a scientific and comprehensive assessment. There are even 12 out of 58 municipalities which do not collect any land and property tax. This becomes even more evident when looking at t he total tax revenue composition of the fiscal year (FY) 2005/2006. It consisted of 75% LDF, 17% IPT/Halt, and 5% professional tax. Out off the total revenue composition only 8% derive from IPT/HALT. In most development countries local property tax amounts to an average of 18% of total revenue composition. This leads to the assumption that in Nepal a huge revenues potential remains currently untapped.

There are major differences between Nepalese municipalities concerning their IPT/HALT performance. Some municipalities like Dharan have a tax coverage of 70%, while others like Madhyapur-Thimi are having only a 10-15% tax coverage. This report analyses the reasons for the high discrepancy between municipalities such as the ones mentioned above and to state recommendations on how to improve performance regarding IPT/HALT. The report will also give implications for other municipalities, which might learn from best-practice fields and furthermore from mistakes.

It is obvious that revenues, levied through a comprehensive and full-fledged local property tax assessment will not be able to fill the expected financial gap, emerging after the abolishment of LDF. Still it is a necessary instrument to at least reduce the impact of missing financial resources on the municipalities and to enhance fiscal decentralization through OSRs such as IPT/HALT while decreasing financial dependencies from central government.

2 Currently 34 municipalities are working with IPT, 12 municipalities with HALT.

2.1

Dharan Municipality

With a tax coverage of 70% Dharan municipality (DM) is a outstanding municipalit y in regards of local property tax collection. DM implemented IPT in 2005 with support from UDLE and is ever since looking at continuously improving tax coverage. The DM is located in Sunsari District in the Eastern Development Region and has a population of

110,244.

  • 2.2 SWOT-Analysis Dharan Municipality

Strengths

Weaknesses

  • - Valuation method

  • - Not updated Software

  • - Accuracy of a comprehensive

  • - No monitoring of IPT process

database

  • - No evaluation of IPT process

  • - Qualified Staff assi gned with IPT

  • - No network between computerized

  • - Experience and Know-How

information

  • - Tax campaigning

  • - No linkage of expenditures to

  • - Incentives for compliance

revenues

Opportunities

Threats

  • - New software developer

  • - No elected municipal body

  • - Meetings for information sharing

  • - Outdated LSGA regulations e.g.

  • - Institutionalized knowledge

exemptions

exchange platforms

  • - Accumulated knowledge in single

  • - Tax culture

persons

  • - Migration to Dharan

  • - Lack of support and recognition by central and local government

  • 2.3 Major Findings

Dharan has proved that their mixed method for valuation, through the involvement of primary and secondary sources such as valuation committees on municipal and ward level, and the utilization of existing taxpayer information have been a success in the establishment of a properly running and full-fledged taxpayer database. Even though the software seems to be running well, there is still potential for improvement in this particular area. In regard to the software the hope is being put in the contracting of a new software developer who offers regular updates and a more user- friendly and even more accurate system. One of the biggest threats to future success is the lack of interest from the local and central government. Without their support, improvements in the current taxation system are very difficult to make. It is strongly recommended to involve DM’s highly experienced and qualified staff in future workshops on information sharing.

3.1 Pokhara Municipality

The sub-metropolitan municipality of Pokhara has implemented HALT as local property tax. The municipality is located in Kaski District in the Western Development Region and has a population of 190,723. Of the 14.000 registered taxpayers, 10,000 are paying their taxes. Even though the responsible persons of the municipality consider a switch to IPT favorable for many reasons, there are various obstacles which the municipality is facing in this respect.

3.2

SWOT-Analysis Pokhara

Strengths

Weaknesses

  • - Established computer and software network and knowledge sharing

  • - Decreased amount of taxpayers due to HALT

  • - Full-fledged house numbering

  • - Database

system

  • - Not updated Software

  • - Incentives for compliance

  • - No monitoring

  • - No evaluation

Opportunities

Threats

  • - CAS

  • - No elected municipal body

  • - New software developer

  • - High taxpayer resistance against

  • - Information sharing platforms and

switch to IPT

knowledge exchange on HALT

  • - Outdated LSGA regulations e.g. exemptions

  • - No effective provision for sanctions 3

  • - Lack of commitment by central and local government

  • 3.3 Major Findings

Pokhara has established a very sophisticated computer network among the different sections of the municipality’s office. Information is being processed in real time and the revenues are directly linked to the expenditures. The database for HALT, however, is in a

very poor condition, hindering the municipality to increase their amount of HALT revenue and the introduction of a billing system. This can be lead back to the unsuccessful valuation attempt 10 years ago and the fact that ever since there has not been an update due to a lack of qualified manpower and financial resources.

3 The possibility to seize property leads to 5 year processes which are impossible to deal with for municipalities.

CAS will be introduced in the next year leading to more transparency and in turn hopefully to more taxpayer compliance. Together with the CAS software, aligned new HALT software shall supposedly bring more user friendliness and accuracy along in the coming years. As it looks PM has dismissed the idea of implementing IPT in the next future due to taxpayer resistance and a lack of political commitment. In addition to the installation of a comprehensive database and software the attempt to improve HALT through scientific research and knowledge exchange seems to be a promising perspective for PM to improve their performance.

  • 4.1 Madhyapur-Thimi

The municipality of Madhyapur-Thimi (MTM) is assessing HALT as local property tax. It has a population of 56,077 and is located in the Bhaktapur District in the Katmandu

valley. The tax coverage amounts only to 10-15%. MTM attempted to switch from HALT to IPT but so far without any success.

  • 4.2 SWOT-Analysis Madhyapur-Thimi

Strengths

Weaknesses

-

House numbering

  • - No clear assignments in Tax Revenue office

 
  • - Under qualified staff

  • - No HALT computerization/ no software

  • - Poor database

  • - No monitoring

  • - No evaluation

  • - No incentives or sanctions

  • - No campaigning

Opportunities

Threats

  • - New tax payers moving in

  • - Lack of political interest on local

  • - Setting up of workshops with

and central level (specially local)

taxpayers

  • - Lack of external support

  • - Introduction of new software and computerization of HALT

  • - Lacking Tax culture

  • - Using incentives and campaigning system from professional tax also for HALT

4.3 Major Findings

MTM has achieved quite a big success through house numbering. So far about 80% have been completed. The more surprising it is that the condition of the database is of such low standard. Only about 50% of the taxpayers are registered in it. The information is not even computerized and still handled manually leading to high efficiency losses. In addition it seems almost impossible to process such a vast amount of information by only three employees which are responsible for all the taxes, not just HALT. The favourable switch to IPT is not possible as long as there is a lack political decision making. All the attempts made by the employees to improve the situation have so far not been acknowledged by the municipal council, leading to disillusion and frustration among the employees. The status of local property taxation seems not to be appreciated by the political side. The introduction of a computer and a new HALT software are the first key-steps necessary to improve the situation in MTM. Incentive systems and campaigning already have been introduced in the case of professional tax even though it has the smaller scope of tax payers than HALT. It is questionable why it has not been practiced in the case of HALT yet.

5. Conclusion and recommendations

The results that have previously been presented are being compared and discussed in this section and recommendations on how to deal with specific fields relating to local property taxation are provided.

  • 5.1 Recommendations

Area of Recommendations

Specific Recommendation

Responsible Institutions

  • 5.2 Guidelines/Manuals

  • - Assistance to

UDLE, MuAN

MuAN

  • - Tax campaigning

UDLE, MuAN

  • - HALT to IPT Manual

UDLE

  • 5.3 Computerization and

  • - Supply computers

UDLE, Cost sharing

Software

approach

  • - Tendering of

MLD, GTZ

software

  • 5.4 Capacity Development

  • - Computer Training packages

MLD, GTZ, Software company

  • - IPT/HALT training for subordinates

UDLE, Kathmandu University

  • - Certification for

UDLE, Kathmandu

Training

University

  • - Workshops for Information sharing

UDLE, UDTC, RLCs, best- practice municipalities, e.g. Dharan

  • 5.5 Political Awareness

  • - Review of LSGA

MLD, Muan

  • - Awareness raising

UDLE

measures

  • - Creation of UDLE newsletter

UDLE

  • 5.2 Guidelines and manuals

The preparation of a simple and clearly structured guideline for municipalities that are intending to implement IPT/HALT is one of the prerequisites for their future success. It will be necessary that it considers particular needs of the municipalities related to their geography, size, population, financial resources, tax coverage, and qualification of human

resources. MuAN is currently finalizing such a manual. UDLE can provide assistance in reviewing it and by supplying input.

The tax campaigning section of the MuAN manual for example needs to be extended and strategies for communication between the municipalities and the taxpayers included. There is a lot of potential in tax campaigning which should be exploited by the municipalities. UDLE in cooperation with MuAN could provide the necessary know- how.

There are plenty of municipalities which are striving for a switch from HALT to IPT. A HALT to IPT guideline could be helpful by explaining how to perform a successful switch from HALT to IPT step by step. It could be compiled by UDLE and distributed to the particular municipalities e.g. Pokhara and Madhyapur-Thimi which already stated interest in performing a switch. At the same time HALT can also be improved by making it more scientific, maybe also by involving scholars from academic institutions.

  • 5.3 Computerization and Software

The computerization and utilization of proper software is essential for a comprehensive database. UDLE therefore should supply computers to municipalities. The financing of the computers might possibly be solved by taking a cost sharing approach. Municipalities might just refund the rest from future revenues generated through IPT/HALT.

All the municipalities should be using the same software while a single institution, such as the MLD holds the property rights. UDLE in cooperation with the MLD could define the requirements and then tender software for IPT/HALT. It could be centrally distributed to the municipalities. Cost-sharing might also be a solution in order to finance the development of such software. The prerequisite would be that the future software is affordable for all the municipalities. As CAS is supposed to be implemented in most municipalities it should be a requirement that the software is compatible.

  • 5.4 Capacity Development

In order to improve the handling of the computerized database and IPT/HALT software all the employees of the tax section should receive computer training packages. The course line could be developed by UDLE while universities are assigned with conducting the training. This concept has successfully been practised in the past already.

General IPT/HALT training for subordinates should be organized and conducted. The attendance to workshops should be offered to all municipal staff. They are the ones facilitating IPT/HALT and by directly addressing them transaction costs are being reduced in the revenue sections as the supervisor does not need to instruct his personnel himself and knowledge is directly provided.

To provide an incentive for the participants to broaden their knowledge and to develop personally a certification for IPT/HALT training should be created. This also assures the quality and standards of the training provided. A test at the end of the training will then make it possible for the trainees to attain a certification. The certification could be devised by UDLE in cooperation with Kathmandu University or other accredited institutions providing training to public servants.

The practical and successful experiences made by municipalities, e.g. Dharan, in fields like the establishment of a full-fledged database can be of a merit for others who are facing problems in handling IPT. Workshops and information sharing with best practice municipalities like Dharan should be organized by UDLE involving the urban development training centers (UDTC) and regional learning centers (RLC). The institutionalization of knowledge-exchange platforms will be of great benefit for the participating municipalities.

5.5 Political Awareness

The exemption regulations manifested in the LSGA are antiquated. Therefore, a Review of the LSGA by the MLD is necessary. It is clear that schools and government buildings

also need electricity and should not be exempted for example. If the buildings are serving a public good they should be rewarded in terms of grants which could be distributed.

UDLE needs to assure that local and central government support is established by taking Awareness raising measures. Central and local government officials need to be convinced of the potential and importance of IPT/HALT in the own source revenue composition of the municipalities. Field trips organized by UDLE to best practice municipalities such as Dharan could be conducted for government officials to prove how a scientific and comprehensive assessment will lead to success.

To keep partners in ministries and stakeholders up to date on newest developments concerning municipal finance the Creation of an UDLE newsletter by UDLE would be promising. It can be used to raise awareness on the importance and feasibility of local property taxation.

6. Conclusion

Even though the three target municipalities are performing quite differently it comes clear that they share common problems. There are huge discrepancies between better and worse performing municipalities. Reasons for this can be found when taking a look at the staff in the municipalities which often are poorly trained or not trained at all in the Field of IPT and HALT. Another reason is the often half-hearted attempt to set up a database which is not full-fledged and afterwards not properly maintained or updated. Doing it manually usually leads to poor results while those municipalities which have computerized IPT/HALT are doing comparably well. Without a comprehensive database and software to maintain and update it the chances for success seem to be very low. Another problem is the very high taxpayer resistance. People are mistrusting the public servants and criticizing the lack of transparency. The visibility of the output generated by public money needs to be improved by a lot in order to raise taxpayer compliance and to build a tax culture. This process obviously will take some time.

Another crucial question is how the central government is going to decide upon the future of local property tax. The practice shows that there are municipalities like Dharan or Pokhara which are willing and able to share their knowledge with other municipalities. With the government’s acknowledgement of the importance of IPT/HALT, its commitment in financial and technical support, the chances for an improvement of local property tax revenues in Nepalese municipalities are quite optimistic Local property tax is highly dependent on external influences. A lot of municipalities were completely dependent on external consultants and finance packages during the IPT/HALT implementation process. When support from UDLE to municipalities was considerably reduced in 2005 only a few kept developing IPT/HALT further. It is necessary to create capacities inside the municipalities, offer information sharing platforms, institutionalize knowledge exchange and to provide guidelines for independent implementation or maintenance. A certain amount of financial support is unavoidable when it comes to computerization and software as for most municipalities the purchase is unaffordable. Still experience shows that without these basic prerequisites the chances for a successful assessment are marginally low.