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MOBILIZING LOCAL REVENUE FROM THE BUSINESS SECTOR

Roy Kelly Duke University

<roykelly@duke.edu>

Innovations in Local Revenue MobilizationWorld Bank Workshop Sponsored by the

Tax Policy and Administration and Decentralization Thematic Groups, World Bank Institute and Lincoln Institute of Land Policy

23-24 June 2003

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Business Taxation or Regulation?

Legal issues

Standard evaluation criteria – Revenue Adequacy– Efficiency– Equity– Administrative Feasibility – Political Acceptability

If taxation: Maximize revenues fairly and efficiently within administrative and political constraints

If regulation: Fees should be limited to costs of administration/enforcement (except to offset negative externalities)

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Rationale for Local Business Taxation

Benefit Principle: local businesses should pay for the general benefits they receive—not captured by direct user charges. Benefit taxes can be both efficient and equitable.

Entitlement Principle: local communities are entitled to a share of the proceeds from economic activities.

Caution from the economists: Firms can pass on the tax burden to suppliers and consumers, and possibly ‘export’ a portion of the tax. This affects the ultimate incidence of a tax on businesses and resulting efficiency and equity positions.

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Rationale for Local Business Licensing

Market Failures provide justification for government intervention—often exercised through regulatory controls such as licensing.

Public health: licensing of food & alcohol trade, slaughter slabs, meat processing, etc.

Public safety: entertainment & casinos, street trading, industries liable to cause pollution, etc.

Public welfare: zoning—licensing for location, limiting excessive competition and quality control (e.g., taxis, certain traders, …)

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Business Taxation/Revenue Experience

Wide Variety– Ad Valorem on income, turnover/sales, property value– Unit Rates on type, size, location (presumptive)

Local Examples (see Bird, 2003, Devas/Kelly, 2001):

– North America (corporate income, VAT, property)– Europe (business capital/profits in Germany, business

capital/payroll in France)– Latin America and Asia (turnover w/ flat fee for small

businesses in Brazil, Venezuela and the Philippines, Octroi in South Asia)

– Francophone Africa (business capital/payroll/turnover)– Anglophone Africa (licensing)

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FIRST PRIORITY: Business Permits NOT Property Rates

WHY?  Businesses have a “culture of paying” thus

compliance should be quite high. Businesses have “ability to pay” Businesses are spread throughout all LA(s) All LA(s) have access to some economic

base of businesses. Businesses license revenue administration is

quite simple and can serve as catalyst for improving all local revenue administration

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The Critical Obstacle Although policy can be fine tuned, the primary obstacle

to successful local revenue mobilization is:

Weak Administration

Problems:

Lack of citizen credibility Lack of political will Revenue base information: lacking, incomplete, or dated Misclassification Low collections Enforcement: virtually non-existent

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Analytical Model for Revenue Mobilization

= * * * *

Rev Base: Unknown Revenue BaseTR: Tax Rate / Fee Structure

Revenues$$$

RevBase

TR CR

CR: Coverage Ratio

VR

VR: Valuation / Classification Ratio

CLR

CLR: Collection / Enforcement Ratio

Policy Variables Administrative Variables

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Reform Environment In Kenya

Kenya Local Government Reform Programme

• Improve Service Delivery• Participatory Governance• Poverty Alleviation

Primary Focus and Accomplishments:• Intergovernmental Fiscal Transfers

- Local Authorities Transfer Fund (LATF)

• Revenue Mobilization and Financial Management - Single Business Permit, local authority integrated financial operations management system (LAIFOMS)

• Participatory Service Delivery Planning - Local Authority Service Delivery Action Plan (LASDAP)

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Decentralization Policy, Constitution Review, Local Government Act Review, public sector management and sectoral reforms, capacity development, econ recovery plan

  Local Authority Transfer Fund (LATF) • Participatory Local Authority Service Delivery Action Plan (LASDAP)• Single Business Permit• Pilot IFMS

(PRSP, 9th Development Plan)

Devolution of functions to

local governments

Capacity of local

governments

Conceptualization Phase

Consolidation Phase

Take-Off Phase

Early 1990s Late 1990s 2002 onwards 2004 onwards?

Series of GOK studies, Omamo Commission,KLGRP secretariat, …

Local Government Reform Programme (KLGRP)Phasing and Future Scenario

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Comprehensive and Integrated Reform

1998: Central Government abolished central level trade licensing Local Government Act changed to allow Single Business Permit Ministry of Local Government SBP Circular Issued containing

the 2-year phase-in strategy, classification/tariff schedules and administrative procedures

Local Authorities Transfer Fund (LATF) Act enacted

1999 36 LA(s) adopted the SBP in 1999 Local Authority Services Charge (LASC) phased out 1999-2000 LATF monies (Ksh 1 billion) released to all local authorities Integrated Financial Operations Management System (IFOMS)

initiated in 2 pilot sites.

2000 138 LA(s) adopted the SBP in 2000 LASC phased out by 1/2000 LATF’s SBP requirement LATF monies increased to Ksh 2.3 billion for FY 2000-2001

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Licensing Environment In Kenya

• Established System (Pre-Independence)

• Evolved into a Complex System: • Multiple level of licenses (central and local)• Multiple licensing agencies• Multiple licenses for one business (based on activities)• Illogical & inconsistent tariff structures and categories across

LA(s) and business activity• Poor Administration (incomplete registers, misclassifications, no

billing, poor collection, ineffective enforcement, lack of taxpayer service)

• Ineffective regulatory requirements • Low level of local revenues, with little scope for increase

High Economic, Administrative and Compliance Costs with low revenue yield and regulatory impact

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Business Profile in Kenya (2000)

Over 300,000 reported businesses by LA(s)

Activity Type Nation Counties (as % of Nation)

Traders 56% 50%

Informal sector 15% 42%

Lodging/catering 12% 56% Agricultural 5% 63% Industry/workshop 5% 33%

Education 2% 40%

Others 5% 20% TOTAL 100% 48%

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License Reform In Kenya: Objective

Rationalize the policy and administrative procedures in order to:

• Deregulate business sector to encourage greater economic growth and employment

• Provide more buoyant revenues for local authorities

• Improve horizontal and vertical equity

• Reduce administrative and compliance costs

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What is the Single Business Permit?

A Single Business Permit is “a permit that allows the conduct of a business or trade, including a profession or occupation, within the area of a local authority.” (LGA, Cap 265,

Section 2)

A comprehensive definition: Improves the revenue base, equity, efficiency and

administration. Provides the necessary information for local

planning, regulation, finance and service delivery.

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SBP decoupled from Regulatory Functions

There are no prerequisites for granting or renewing a license--such as a pre-approval or inspection by such offices as the health department or planning department.

All businesses must comply with current regulations on health and safety, with inspections to be conducted on an ongoing basis, coupled with own enforcement provisions (e.g., closure)

LA may cancel an existing business permit where “upon receipt of a written report from an inspector appointed under this Act or any other written law, it finds that the business or trade to which it relates endangers the health and safety of the persons residing in the neighborhood.” (Cap 265, Section 163 A (5)).

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How does the Single Business Permit work?

Each LA has discretion to choose one column (1-16) from the SBP Fee Schedule issued by the MoLG. Councils are responsible and accountable for the choice of fee schedule. Fee Schedules are “pre-approved” by the Minister.

Fee schedules are progressive, based on presumptive turnover/income, differentiated by business type and size.

Each business only pays one SBP fee.

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SBP Requirements

Each tariff schedule (ie, each column) must be used in its entirety.

Council must Gazette its fee schedule. Each business should be registered, classified

and recorded in a business register. Each business is to pay for only one permit in

accordance with its SBP classification.

Note: Although other licenses should not be charged, businesses can be required to pay other fees and charges such as user charges for garbage collection, advertising, etc.

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BRIMS CODE CATEGORIES OF BUSINESS

Sched

No 6 7 8 9 10 11 12 13

Base Value

250 300 350 400 500 600 700 850

103Mega Store, Hypermarket Large Multi-Department Sore, Hypermarket Over 100 employees or Premises over 3,000 m

60 15,000 18,000 21,000 24,000 30,000 36,000 42,000 51,000

105Large Trader, Shop, Retail Store or Personal Service From 21 to 100 Employees &/or Premises from 300 to 3000 m2. Fair Location

20 5,000 6,000 7,000 8,000 10,000 12,000 14,000 17,000

110Medium Trader, Shop or Retail Service From 5 to 20 employees &/or premises from 50 to 300 m2. Fair Location

10 2,500 3,000 3,500 4,000 5,000 6,000 7,000 8,500

115Small Trader, Shop or Retail Service Up to 4 employees &/or Premises less than 50 m2. Far away Location.

5 1,250 1,500 1,750 2,000 2,500 3,000 3,500 4,250

120Kiosk Light or Temporary construction less than 5 m2 4 1,000 1,200 1,400 1,600 2,000 2,400 2,800 3,400

195 Other Wholesale-Retail Traders, Stores, Shops and Services 4 1,000 1,200 1,400 1,600 2,000 2,400 2,800 3,400

Single Business Permit Fee Schedule (Kenya, 1999)

100

GENERAL TRADE, WHOLESALE, RETAIL, STORES, SHOPS, PERSONAL SERVICES Such as : Distributors, Traders, Wholesalers, Hypermarkets, Department Stores, Supermarkets, Show Rooms, Boutique

CODE CATEGORIES OF BUSINESS

Sched

No 5 6 7 8 9

Base Value 100 130 150 180 200

103Mega Store, Hypermarket Large Multi-Department Sore, Hypermarket Over 100 employees or Premises over 3,000 m

60 6,000 7,800 9,000 10,800 12,000

105Large Trader, Shop, Retail Store or Personal Service From 21 to 100 Employees &/or Premises from 300 to 3000 m2. Fair Location

25 2,500 3,250 3,750 4,500 5,000

110Medium Trader, Shop or Retail Service From 5 to 20 employees &/or premises from 50 to 300 m2. Fair Location

15 1,500 1,950 2,250 2,700 3,000

115Small Trader, Shop or Retail Service Up to 4 employees &/or Premises less than 50 m2. Far away Location.

6 600 780 900 1,080 1,200

120Kiosk Light or Temporary detached construction less than 5 m2 5 500 650 750 900 1,000

125 Standard Market Stall 5 500 650 750 900 1,000

130 Small Market Stall 4 400 520 600 720 800

195 Other Wholesale-Retail Traders, Stores, Shops and Services 4 400 520 600 720 800

Single Business Permit Fee Schedule (Malawi Proposal)

100

GENERAL TRADE, WHOLESALE, RETAIL, STORES, SHOPS, PERSONAL SERVICES Such as : Distributors, Traders, Wholesalers, Hypermarkets, Department Stores, Supermarkets, Show Rooms, Boutique

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Buoyant Revenues for LA(s)

A simplified fee structure and administration strengthens ability to register, assess, collect and enforce against non-compliance

A progressive fee structure allows for buoyant revenue enhancement

A comprehensive business register creates a broad revenue base

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Improve Horizontal & Vertical Equity

Fee structure simplified to assist proper classification

Fee structure differentiated by business type and size

Larger businesses pay more than smaller businesses

Relative fee structure consistent across LA(s), although absolute fee levels are determined by LA

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Reduce Administrative & Compliance Costs

Fee Structure and Administrative Procedures were simplified to

– Make it easier (cheaper) for Businesses and Professions to be Registered, Classified, Assessed and Pay a Single Business Permit

– Make it easier (cheaper) for Local Authorities to Register, Classify, Assess and Collect a Single Business Permit

through a “One Stop Shop” (OSS)SBP Data Form

Kenya SBP Form

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SBP Experience in Kenya

Widely appreciated by the business sector and LA(s)—higher revenues, lower compliance costs. (Abuodha and Bowles, 2000)

Initial revenues went up 30-40 percent. SBP accounts for 15 percent of total own source revenues. Largest source of revenues in counties (27%) and small towns (22%).

National level consultative forum (KAM, KNCCI): only 13 LA(s) identified as problematic.

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Revenue Source Nairobi MC TC CC TotalCILOR 0 2 2 2 1

Property Rates 28 20 5 2 19

SBP 11 16 27 22 15

Vehicle Parking 4 8 11 1 5

Market Fees 2 9 20 12 7

Plot Rents 0 1 5 4 1

Water & Sewerage Fees 39 19 1 0 23

LASC on employees 0 0 0 1 0

Total Cess Receipts 0 1 11 15 4

Game Park Fees 0 0 0 27 5

Poll Rate 0 0 0 0 0

House Rents 7 6 2 2 6

Others 9 17 14 12 12

TOTAL Revenues 100 100 100 100 100

FY 2001-2002 (percentages)Relative Contribution of Own Source Revenues by LA Type

Source: LATF Database 2002

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SBP Implementation Issues

Slight policy adjustments made for (new categories—mega traders & communications, reduction for large industry)

Traveling wholesaler issue (e.g., bread) Professionals Level of fee schedule (court cases) Multiple licensing or intentional misclassification Need for more effective dialogue between LA and

business community Need for improved collection/enforcement Continual need for improved administration

(registries, classification, collection—LAIFOMS)

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General Lessons from Kenya

Keep policy and administration simple. Make LA(s) accountable for rate

discretion but with central guidance and oversight.

Delink regulatory controls from licensing revenues

Involve business community stakeholders Refine policy but focus must be on

improved administration

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Way Forward

Improve Consultation: Organize consultative forums with councilors, staff and business community (linked to participatory governance activities)

Improve Implementation: Local authorities and business community partnership – Create a comprehensive business registry ensuring complete

coverage and accurate classification– Consult on selection of the business fee schedule– Improve collection and enforcement

Improve Monitoring: Regularly monitor progress on the implementation of Single Business Permit and take corrective measures on noted irregularities.