Property Taxes and State Incapacity in Pakistan
By Muhammad Mujtaba Piracha
Oxford University Press, Karachi
ISBN: 978-0190702557
227pp.

Although Muhammad Mujtaba Piracha’s Property Taxes and State Incapacity in Pakistan gives a feel of promising research work by a senior civil servant of the country, it doesn’t quite live up to expectations.

For starters, the title is a bit misleading, since Piracha only discusses property taxes in the province of Punjab and not the country as a whole. The book’s seven chapters address issues such as the reasons behind the low property tax in Punjab, the bureaucratic set-up and inter-governmental politics, income and liquidity of subnational governments, low spending on public services, the informality of formal tax collection, the lack of change despite enforcement drives and, lastly, recommendations and the way forward.

According to the book, the amount of tax evaded overall is the equivalent of four percent of Pakistan’s annual gross domestic product (GDP).

Of the roughly 4.6 million registered taxable properties in Punjab, only 2.5 million are taxed. Similarly, estimates for the collection of urban immovable property tax per annum were Rs 35 billion — and that was as far back as 2010. As recently as 2020, only about one third of this 10-year-old estimate of potential tax was being collected.

Despite some limitations of its data and analysis, a book offers some interesting insights into the low level of tax collections in Pakistan

The author provides quite a bit of information on property taxes, but the book is essentially a senior civil servant’s take on governance structure and functioning in Pakistan. Not just strictly analysing property taxes, Piracha looks critically at local government structures, inter-governmental transfers, the role of politicians and the role of junior tax officials from the viewpoint of a senior civil servant.

The author discusses his own self as a senior civil servant in more than a few places, but a self-ethnographic, methodological note would have helped. The book is based on Piracha’s PhD thesis and so there ought to have been a proper chapter on methodology, instead of the patches of information scattered about.

The data used is relevant, certainly, but dated. For a book that has been published in 2022, it relies on data collected mainly in the early 2000s, until 2012. This is a major limitation.

The author is quite critical of the Local Government Ordinance 2001, as it served to undermine the functioning of the bureaucracy in Pakistan and was resisted by both civil servants as well as provincial-level politicians who felt threatened by competition from local-level politicians.

Piracha is equally critical of politicians — particularly at the provincial level — who collude with junior level taxation functionaries to subvert efforts to increase taxation. The politicians often do not pay taxes either.

Looking through his senior civil servant’s lens, the author criticises junior taxation functionaries in the Excise, Taxation and Narcotics Control Department (ET&NCD) who have disproportionate amounts of local knowledge about property taxes due and arrears owed, but often keep this information mostly to themselves in order to collude with the taxpayers to earn bribes. Departmental tax collection suffers because of this information asymmetry.

However, these same functionaries quite cleverly do help out with tax collection — particularly in the last quarter of the financial year — through strategically leveraging partial payments of arrears in order to keep their job secure as they’ve been working in their circles on tax collection for years, if not decades. Senior officers, meanwhile, are only deployed for a few years at most.

The junior functionaries monopolise their local knowledge to their advantage and are often backed by local level politicians, who probably split the spoils of corruption with them. The author brings this aspect out vividly, but he does not throw light on how senior civil servants are themselves often an equal part of these rent-seeking networks. Therefore, the book looks at every cog in Pakistan’s wheels of governance with jaundiced eyes, but it is not objective enough to offer the same treatment to the cadre of senior civil servants.

The main idea of Piracha’s book is that property taxes in Punjab are collected in an orphanised manner, and split between three levels of subnational government. Level one — provincial — collects the property taxes, but is allowed to keep only about 14 percent of this revenue. Level two — district — gets nothing. Level three is the town government and ‘gets’ 81 percent. The rest goes towards collection charges, etc.

Because of this formula that makes property tax a very small part of its income, the provincial government is not pushed to invest in the resources needed to bring the tax structure up to the mark, where the collection can be meaningfully increased.

From its due of 81 percent, the town government actually gets about 57 percent after various legal deductions in the process. As a result, it is not motivated to increase collections either.

The author therefore suggests that property taxes should be either wholly allocated to provincial government revenue, or the share should be substantially increased to incentivise provincial governments to improve collection.

Town governments do not have the infrastructure to collect property taxes on their own and there might be more local collusion if tax collection is left to the town governments only. So the solution, according to the author, lies with providing better incentives to the provincial government, by increasing its share of property taxes substantially.

Another major problem is what is known in institutional economics as the ‘moral hazard problem’. The majority of provincial governments’ income comes through inter-governmental transfers from the federal government. Similarly, the majority of local governments’ income is transferred by the provincial governments to the local governments.

This, in turn, gives subnational governments the perverse incentive to ‘not’ raise their own revenues because of the political cost (it makes them politically unpopular) and also financial cost (in terms of maintaining and updating a reasonable tax collection system).

Since subnational governments can meet their needs anyways through inter-governmental transfers from their higher-level government, they make little effort to raise additional — including property — taxes. But this is a point well-covered in the literature on taxation in Pakistan. The author does need to make this argument for the sake of completeness, but it isn’t an original contribution to existing literature.

Piracha uses the term “informality” to describe the under-the-table practices of ET&NCD staff. Certainly, taking bribes and colluding with taxpayers to defraud the government for private gain is informal, but all informal activities and realms are not always illegal or corrupt. It would have been better had the author directly used the framework of ‘rent-seeking’ instead of couching it as ‘informality’.

Towards the end of the book, the author reviews the efforts to digitise property tax records and tax collection in at least five of Punjab’s major districts. After several false starts, the digitisation has brought some degree of transparency and better accountability in tax collection in Punjab.

However, neither the Punjab government's strict enforcement drive in the year of the fieldwork of the author, nor the digitisation drive itself were any major precursors to change in the tax culture, as the junior level taxation functionaries still wield considerable influence on the way the property tax is assessed, levied and collected.

They can easily declare a dwelling self-occupied even if it is rented, or residential even if it is commercial — property tax is five times more for commercial properties. Removing, or minimising, differentials in the tax rate will cut down the influence of these functionaries.

The author notes that it is much the same story regarding international donors. In the last few decades, donor organisations have funded the Government of Punjab to increase property taxation, but this is done in “weak” and “temporary” ways, as if mostly to check the box. Donors are hardly interested in bringing about real change in the property tax culture in Punjab.

Property Taxes and State Incapacity in Pakistan has some potential despite its many limitations, but it is a particularly worthwhile read in order to learn a senior civil servant’s take on governance issues in Pakistan.

The reviewer is an Islamabad-based social scientist.

She can be reached at fskcolumns@gmail.com

Published in Dawn, Books & Authors, July 17th, 2022