keeping cities clean and functional is problematic for local government in Pakistan as the property tax collected is inadequate to cover the costs of the services like roads, streetlights, policing and sanitation.
Property tax is in fact a local government tax, but since they lack capacity, it is collected by the provincial governments. The tax collected is passed on to the cities and towns as per tax collection in their jurisdiction.
Tax compliance on property tax is extremely weak. For instance in Karachi, the largest city of the country the number of property units exceed 875,000 but the residents who pay property tax are a little above 100,000.
The situation is not different in other big cities though it is somewhat better in Punjab. Property tax collection in Punjab is a little over Rs5 billion while study by the International Growth Centre estimated that with fair taxation the property tax could be increased fivefold to Rs25 billion.
The property tax base has not grown because valuation tables – the value which the government assigns to various properties – are not updated frequently enough to reflect actual market values.
There is law that mandates that the rent of the property has to be increased by eight percent per annum. The property owners ensure this or a higher rate is applied on rents every year.
If we apply this formula in assessment of property values from the date this law was enforced, the property values would increase by 500 percent. Successive surveys and re-assessments should be done every three years. Till this is done, tax collection projections should be annually indexed to inflation.
Properties occupied by owners are taxed at different rates than those occupied by renters, to the advantage of the former. It is illogical to exempt or lower the rate of property tax on owners that live in their house. They are using all the civic services that have a cost and the entire burden cannot be passed on to the rented houses.
Government should update property values to a realistic level, and reduce the tax rates by half. Even then the government would be able to double the property tax at the current property tax base and could increase it many times if it is collected transparently from all city dwellers.
Since the property values assessed by the deputy commissioners are very low, the tax collection is also very low despite high tax rate. Experts estimate that if the value of the properties was assessed on current market price, and the tax rate was reduced by 50 percent, it would not be an unbearable burden on the taxpayer.
A family living in a 10 marla house in the most expensive area of Lahore would have to pay additional monthly amount equivalent to three burgers of any international fast food chain.
Studies have revealed that the property tax collection in Pakistan is 5-7 times lower than in countries with similar income levels. This is the reason that the cost of urban service provision also far exceeds the tax revenues collected.
Some critics claim property transfer taxes will deter investment. However, many jurisdictions in North America, including the British Columbia government, have a property transfer tax, and there is little empirical evidence to support claims that such a tax inhibits investment in real property.
A property transfer tax would allow local government to capture some of the increase in land value each time a property is sold. It is an efficient way of capturing a small percentage of the increase in land value.
Property taxes are the predominant taxing mechanism the municipal government can use to raise money, and they amount to 40 percent of the annual operating budget in most dynamic cities.
In Pakistan it is much less than 10 percent. A senior government official admitted that market value, assessed by government-hired valuators last year, was at least three to 15 times higher than the district commissioner-determined (DC) rates.