Property tax is substantially under-utilized instrument in Pakistan and Punjab is no exception. The contribution of property taxation to overall provincial tax receipts in Punjab is just 6% or just under PKR 14 billion, which is nowhere close to the potential of a province that house 110 million people residing in close to 15 million properties. The importance of property taxation gets amplified as it can be linked to service provision at local level – a lower property tax base means that the government has to continuously finance local services by foregoing other priorities. Property tax reforms in Punjab has been under discussion for a several years now, and a lot of suggestions on improving the property tax-formula to increase property taxation, governance and digitalization reforms and, changing the value base from rental to capital value has been discussed..
The Excise, Taxation & Narcotics Control Department (ET&NCD) in Punjab worked in partnership with Urban Unit to create a GIS data base of over a million addresses including creating electronic versions of field data collection form. However, the returns to these investments have been low to date and the existing data of over 5 million properties has not been integrated with the GIS data. Earlier this year the ET&NCD has embarked on major initiative in collaboration with Sub-National Governance (SNG) Programme a UKAid sponsored initiative with technical and implementation support provided by Center for Economic Research in Pakistan (CERP) and Red Buffer a local IT firm based out of Islamabad. This new initiative is taking a problem driven iterative approach to address some key efficiency and transparency inadequacies in the current system.
Primarily, the new system being introduced will integrate the GIS based data with regular data of excise to create a clean uniform base line. This data will then be linked with a field surveyor application through an intelligent machine learning and artificial intelligence tool. This will help the system to support the field data collection more efficiently by not auto-allocating zones that need to be covered but by pushing data already in records soon as the surveyor reaches the property. This will help in identifying and registering new properties, updating details on existing and creating digital identity plates. In the next stage, the integrated data set will be matched against satellite imaginary data and the system will pick up uncovered areas, altered areas and growing areas. The system to a certain degree of accuracy will be able to predict number, approximate size and type of properties. As the tool gets more utilised it is expected to become more accurate through its internal learning algorithm.
Finally, at the taxpayer end the system will provide an easy-to-use interface where the property owner can rectify details, generate tax demand and pay and raise queries. Additionally, this interface will provide compliance information and experiment with ‘nudging’ to impact behaviors of tax-payers for better compliance. Overall, the system is aiming to result in a more efficient, transparent and tax-payer friendly and engaging property tax regime in Punjab. Dr. Astrid Hass, who leads the International Center for Tax and Development (ICTD), UK Local Government Revenue Initiative, in her research shows that similar initiatives in Malawi, Uganda and Sierra Lone have been extremely successful and the revenue collection as well as the tax base has increased many folds. These results demonstrate a substantial promise and potential for Punjab under its existing initiative.
However, property tax as compared to most other federal and provincial taxation is unique, as state to tax-payer engagement is highest. Any citizen that owns/resides in a property even though it may be an exempt property needs to engage with the field tax machinery. Therefore, this tax is not just about revenue for provision of goods and services, this fits in a bigger paradigm of accountability and service delivery by the government. The predicament of the tax payer about why should the tax be paid if the government fails to deliver usable services is strongest for property tax, as the very purpose of this to empower local authorities to raise revenue and deliver services. Therefore, international evidence and specific research done on Punjab, for example that by Dr. Adnan Qadir Khan, Professor at School of Public Policy, London School of Economics, show that taxpayer-state trust deficit is a major reason for low compliance and that property tax collections will only increase if the governments become more accountable and transparent on how they spend resources and the impact on quality of services delivered is visible. Another important aspect of property taxation is the equity impact. Evidence shows that women generally pay more in property taxes than men, the reason for difference is not yet established. Taking this in to account might also help in greater compliance.
Moreover, Dr. Mujtaba Piracha, Pakistan’s Ambassador to World Trade Organisation, in his upcoming book on dynamics of property taxation makes a strong point about the politics of property taxation. His field research shows that governance inefficiencies in the field system of excise exist, but these inefficiencies ar more selective, while the politics of the whole system is a more central issue. For example, in the present system the provincial government is responsible for collecting taxes and the revenues flow to local governments, this reduces the incentives for provincial level operators to increase compliance and efficiency as they do not reap the gains. An innovative approach, though not popular politically, may allow provincial governments to be the end recipients of property taxes for next 10-years and let them enhance the coverage and collection. Similarly, the other extreme could be where collection functions are passed on to the local governments and based on their development plans and service delivery plans they can start collecting property taxes, however, the minimum baseline could be set to current collection levels.
Another important reform area that has been under discussion for a while is base value criteria. At present rental value of property is used, however, there are strong proponents of using capital value as the basis. Capital value at the start resolves the issue of putting a value on vacant land and start collecting property tax. Given the frequent boom and bust economic growth pattern in Pakistan, property is seen as not only a safe but a wealth creation heaven for investors – therefore, substantial resources exit productive sectors and sit in ‘cash rich’ but productively dead investments. Taxing such investments will not increase revenues substantially, but will also help in pulling back capital in productive sectors. However, the debate as seen over the years is more political than that based on merit logic.
In short, property taxes remain an interesting area of debate given a strong link with citizens perception about quality of services, accountability and transparency that all contributes towards strengthening democracy and it’s the strengthened faith in democracy that will reduce the trust deficit and increase tax compliance. The efficiency enhancing innovations such as the one being implemented by SNG are all efforts that contribute towards creating better systems for delivering better services and also help in generating more evidence and support to overturn politics of taxation to some degree.
Usman Khan, CFA IMC
Lead Action Research and Innovation SNG & a researcher in policy, politics & strategy.