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
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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 Madhyapur-Thimi........................................................................ 10
4.3 Major Findings .......................................................................................................... 11
5. Conclusion and recommendations............................................................................. 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
2
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
3
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.
4

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.
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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 the 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.
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2.1 Dharan Municipality
With a tax coverage of 70% Dharan municipality (DM) is a outstanding municipality 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 assigned with IPT
-
No network between computerized
-
Experience and Know-How
-
Tax campaigning
-
Incentives for compliance
Opportunities
information
-
No linkage of expenditures to
revenues
Threats
-
New software developer
-
No elected municipal body
-
Meetings for information sharing
-
Outdated LSGA regulations e.g.
-
Institutionalized knowledge
exchange platforms
-
Tax culture
-
Migration to Dharan
exemptions
-
Accumulated knowledge in single
persons
-
Lack of support and recognition by
central and local government
2.3 Major Findings
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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 userfriendly 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.
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3.2 SWOT-Analysis Pokhara
Strengths
-
Established computer and software
Weaknesses
-
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
knowledge exchange on HALT
switch to IPT
-
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.
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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
-
House numbering
Weaknesses
-
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
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Opportunities
-
New tax payers moving in
-
Setting up of workshops with
-
Threats
-
Lack of political interest on local
and central level (specially local)
taxpayers
-
Lack of external support
Introduction of new software and
-
Lacking Tax culture
computerization of HALT
-
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
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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
5.2 Guidelines/Manuals
Specific Recommendation
-
5.3 Computerization and
Software
-
5.4 Capacity Development
-
5.5 Political Awareness
-
Responsible Institutions
Assistance to
MuAN
Tax campaigning
UDLE, MuAN
HALT to IPT
Manual
Supply computers
UDLE
Tendering of
software
Computer Training
packages
IPT/HALT training
for subordinates
Certification for
Training
Workshops for
Information sharing
Review of LSGA
Awareness raising
measures
Creation of UDLE
newsletter
UDLE, MuAN
UDLE, Cost sharing
approach
MLD, GTZ
MLD, GTZ, Software
company
UDLE, Kathmandu
University
UDLE, Kathmandu
University
UDLE, UDTC, RLCs, bestpractice municipalities, e.g.
Dharan
MLD, Muan
UDLE
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
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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 knowhow.
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
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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
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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.
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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.
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