An Exercise: Revenue-sharing arrangements in Bangladesh

By Md. Zahurul Islam

Email:zahir.ucep@yahoo.com
1. In order to local government to exercise a degree of fiscal autonomy consistent with
a fiscally decentralized government structure, local government must control some
own sources of revenue. In this regard, the key policy questions are: which tax
should be local governments levy and how? Revenue sharing is an arrangement in
which the revenue from given tax base accrues to both the central government and
local governments. It ensures local government specified sources of revenue to
carry out their functions.
2. The assignment of tax in a decentralized system of finance must decide three types
of issues. First, what level of government will be granted legal powers to introduce
new tax or change the definition of tax bases and the determination of tax rates?
Second, how revenue from different tax will be shared? Third, what level of
government will be responsible for the administration and enforcement of the
different taxes?

3. The governance system in Bangladesh is one of the most centralized in the world.
Sub-national expenditures as a percentage of total consolidated government
expenditures are estimated to be in the range of 3-4 percent. The comparable
figures for Indonesia or South Africa, two unitary countries that decentralized in the
last 15 years or less, are 34 percent and 52 percent respectively. On the revenue
side, most major tax bases remain under the control of the central government and
while own source revenue potential varies vertically across the different levels as
well as horizontally across different entities at each level, at the aggregate less than
2 percent of total government revenue is collected at sub-national levels, placing
Bangladesh at the lowest end internationally. Central government is collecting most
of revenues like, custom duties, value added tax, personal & corporate income tax.

4. The efficient financing of local government bodies of which Municipality is an

important part ,has become a major challenge for Bangladesh. The density of
municipal population is rising due in- migration and higher population growth rate.
The municipalities are expected to provide a certain minimum level of civic cervices
to citizen in accordance with their obligatory functions and mandate.

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5. Municipal Revenue Items as per Local Government (Municipality) Act, 2009:

Own-source revenues:
Taxes:
Property tax and Shared property tax;
Property tax on annual value of buildings and lands;
Tax on transfer of property ownership;
Share (2%) of Land Development tax collection (Sub-tax on taxes imposed by
central government);
Rates on lighting, fire, waste disposal, water, social welfare and etc;
Other taxes:
Tax on profession, business and etc;
Tax on advertisement, cinema, drama and other entertainment;
Tax on non-motorized vehicle (Rikshaw, van etc).
Rates:
Lighting;
Conservancy;
Fire;
Waste disposal;
Water;
Social welfare.
Non-tax revenues/fees:
Fees on building construction and reconstruction;
Fees on export from and import to municipal jurisdiction;
Fees on birth, marriage etc;
School fees;
Fees on agricultural fair and display, sports competition and etc;
Fees on license, approvals etc;
Fees on water bodies and ferry terminal;
Toll fees.
Own propertys rentals, leases and profits:
Bus terminal;
Community centers;
Market rental;
Others.
Intergovernmental transfers:
Annual Development Allocation;
Special development grants;
Salary compensation grants

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6. There are few sources that local governments are entitled to receive share of
revenue from some local sources which are subject to the control of rates, bases
and administration by central government. Local governments are allowed only the
specified percentage as its own revenue.
Share from land registration fees: Land registration fee is an important revenue
source of LGs and in the absence of alternative tax bases at the local level, this
source is likely to remain of major importance. This revenue is collected and
controlled by controlled by the Ministry of Law of the central Government.
Share from Market and Water body auction fees: The operation of markets
(daily and periodic) within LG area is contracted out on annual lease basis, as is the
use of water bodies for fishing. The income is distributed 5% to the Ministry of Land,
20% for the salary of the LG staff, 15% for the maintenance and development of
market, 10% for the Sub-district (Upazila) development fund, 5% to the LG where
the market is located and the rest 45% to be deposited in the sub-district (Upazila)
development fund for distribution among UPs in the Upazila.
Share from land development tax: In local government (Union Parishad) act,
2009 includes provision for UPs share which is yet to be decided by the central
authority. It is observed that UP land office is responsible for collection of and
development Tax (LDT) which is administered and controlled by the Ministry of
Land.
7. As the share revenue means central government collects revenue and shares it with
the local governments. Automatic revenue sharing is still not used extensively in
Bangladesh. Revenue sharing system in Bangladesh is conventional top down
allocation in the name of block grants, are far too limited. Even the potential of
existing sources have not been explored or exploited.
8. There is often a revenue deficiency arising from a mismatch between revenue
means and expenditure needs, typically of lower tiers of government including
municipality. This situation is referred to as a vertical fiscal imbalance. Some
municipalities in Bangladesh are unable to provide an adequate level of services
compared to other municipalities because of their fiscal capacity variations which is
revered to as horizontal fiscal imbalance. This indicates that spending on civic
services of municipality which is lower i.e. under spending.

9. As the local governments in Bangladesh have severe fiscal gap in terms of vertical
and horizontal. So revenue sharing basis should be on a per capita basis has an
implicate equalization component which will include all residents regardless of
income or place or class of residence.
-End-

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