The property tax yield in Punjab forms a very small fraction of the total provincial tax collection in spite of a phenomenal increase in investment in urban property, residential and commercial both, over last several years.

Budget documents show that property tax collection remains around six per cent of provincial tax revenues, far below its true potential despite reforms implemented in the last few years and massive increase in urban housing and commercial property across the cities in the province.

“You are absolutely right. We are not even close to its potential … urban property remains one of the most under-taxed areas in Punjab,” concedes Provincial Finance Minister Ayesha Ghaus-Pasha. She helped bring down property tax from a high of 25pc to 5pc and revised rental rates upward by 50pc to bring them closer to reflect the market rents in 2014/2015, as part of her tax reform agenda.

The idea was to enhance rental rates by 10pc each year from 2015/2016 to bring them almost equal to the market rate. But the government has not been able to enhance rental rates since because of fear of political fallout and public resistance. Even the Shahbaz Sharif government’s plans to tax large farmhouses and luxury houses failed to pay off because of court stay orders.

“Our valuation tables still don’t reflect the actual market value of the urban property,” she said, adding the Urban Immovable Property Tax (UIPT) yield could be raised manifold by eliminating the gap between real market rates and DC rates, increasing taxpayer base, and plugging leakages and corruption.

Budget documents show that property tax collection remains far below its true potential despite reforms implemented in the last few years

UIPT is a tax devolved to municipal committees, municipal corporations and metropolitan corporations but it is being collected by the provincial government for administrative purposes and passed on to the local governments.

Property tax collection has historically remained low in Punjab since the government started collecting it in 1958.

Various studies have blamed a wide variety of factors including a narrow tax base, gap between the real market value of a property and the value assessed by the government, generous exemptions, widespread tax evasion and corruption, and weak tax administration for the lower-than-potential collection of UIPT.

Urban property tax is considered to be the most growth-friendly levy across countries. Governments collect property tax to deliver basic public services like roads, streetlights, sanitation, security (to their citizens), says an International Growth Centre (IGC) study — Reforming the Urban Property Tax in Punjab.

“The government of Punjab faces a serious fiscal challenge in paying for the delivery of basic public services. The urban property tax collected in Punjab is about a fifth of that collected by comparable countries.

The costs of urban service provision also far exceed the tax revenues collected. However, Punjab can increase its collection to more than Rs25bn with comprehensive reforms,” Hina Shaikh and Sohaib Athar wrote in the IGC study.

A senior official from the Punjab excise and taxation department that collects property tax claimed while talking to this correspondent that the UIPT collection had significantly increased over the years.

The department, he said, had collected Rs10.7bn during the last fiscal year, up by over a fifth from Rs8.7bn scraped together the previous year.

However, budget documents show that the increase remains measly when compared with Rs4.1bn collected as urban property tax in 2009/2010. The government is targeting UIPT collection of above Rs13bn during this year. But officials expect the actual collection to fall significantly short of the target.

The official defended the performance of his department, saying it was implementing several procedures to improve tax collection including property tax. “In order to increase the UIPT yield, we are computerising property tax record to provide the facility of self-assessment to the taxpayers,” he said.

In the first phase, the property Tax record of 18 districts was computerised, which covered 85pc revenue of the province. “The computerisation of the remaining 18 districts is under process. A specific pin code has been issued to each taxpayer so they know the description and assessment of their property unit,” he added.

A consultant, who refused to give his name because has worked with the provincial government in the recent past, argued that the provincial authorities were too focused on revenue collection rather than using taxes as a tool for pushing economic growth.

“We need a comprehensive provincial tax policy that promotes economic growth rather than constrains it. Only then will we be able to focus on enhancing collection of levies like property tax that are required for building urban infrastructure and delivering public services to the citizens to encourage growth.”

Published in Dawn, The Business and Finance Weekly, March 26th, 2018

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