Municipalities grew poorer after federal government scrapped Octroi
Octroi is a tax on commodities or things to sell that are brought into a town or city. You could call it “municipal customs”. Crudely visualised, it’s like a tax collected when the truck carrying Larkana watermelons enters Karachi at the toll plaza on the Super Highway right outside the city limits. The word emerged in the late 16th century from the French octroyer ‘to grant’, based on medieval Latin auctorizare.
This way of earning money was working out well for Karachi, which is after all, a big business center with lots of products entering its jurisdiction and a population of millions to buy them. In 1999, however, the federal government scrapped the Octroi tax and to make up for this loss of revenue, told KMC that the city government would receive 2.5% of what the Sindh government collected in general sales tax. The GST was at 12.5% and was bumped up to 15%.
The proceeds of 2.5% additional GST were given to Sindh as compensation for the loss of Octroi revenue to be distributed among local governments.
Perhaps Islamabad’s big government idea was to change the mechanism and stop the collection of tax from the point where the goods were enteringthe city and start collecting it where the product was sold. So the watermelons were not taxed when they came off the Super Highway from Larkana but instead when you bought one at a fruit shop in Clifton.
Changing the mechanism was most likely motivated by the desire to take financial power away from one level of government and hand it to another. The idea was that the city government would be then given its share. And as we all know, that didn’t turn out so well.
“The problem is huge,” says Khalid sahib. “The municipal governments had Octroi as a good source of revenue. It was taken away and they were not empowered with other resources which could manage the shortfall.”
After this decision, municipalities grew poorer. The federal government said no one else would collect this Octroi. “They gave this money to the Sindh government, not to the entity which lost the source of revenue,” explained Khalid sahib. That entity was KMC.
The Provincial Finance Commission can make decisions about the Octroi but it last met in 1999. (It met in 2007 but nothing was decided). So ‘Octroi’ or their replacement funding levels are stuck. (Just a note, to avert confusion. The Octroi doesn’t exist any more but bureaucrats still use this word when referring to its replacement.)
That was the past, and indeed, a struggle that very much continues into the future. But in addition to the ‘Octroi’ money, Karachi’s city managers have also been getting money from the level above them: the Sindh government. If it is feeling generous and goes by the book, KMC gets its share.
The Sindh government gives all of the province’s 23 districts money to pay for their ‘development’. In Karachi, it has to give money to the KMC and the city’s smaller six district municipal corporations: Central, South, West, East, Korangi, Malir.
The money is divided by a fixed or “historical” formula: 65% of the yearly development money goes to the rest of Sindh and 35% goes to Karachi’s local government (to be split between the KMC and DMCs).
“This is a fixed formula and it has been followed for the last decade,” said a senior bureaucrat. So no surprises there.
Of course, the Sindh government itself has to find the money to give its local governments and dole it out from its budget. This year, 2019, it said it would give everyone Rs30b for development and 16% or Rs2.5b of that would go to KMC. The DMCs would get their own separate shares.
The cash doesn’t always flow interrupted, however. And if the Sindh government itself doesn’t have that money, then the tier below it won’t get the funds either. “Like this year, in 2018-19, the Sindh government didn’t give Karachi Rs2.5b- the last quarterly instalment in share of annual development program (ADP) to KMC,” said the bureaucrat.
That happens because at some level, Sindh doesn’t get its cash from the federal government. KMC’s bureaucrats admit that blockages at the federal government level affect the Sindh government.
“Provincial governments had to rely on federal receipts because the system of revenue is highly centralised,” explains Khalid sahib. “If you look at the total number of receipts of Pakistan, you will see 90% collected by the federal government.”
This is why, in a Sindh budget of Rs1,200b, he thinks about Rs800b is what Sindh expects to take from Islamabad. The province is hardly able to manage on that which is why it is hard-pressed to give money to the municipalities.
When the Sindh government doesn’t give Karachi its development funding, the KMC budget shrinks.
Sindh’s development money was Rs30b last year but this amount dropped to Rs20b this year. What it can give Karachi thus also shrank in proportion from Rs4.8b to Rs3.2b. This is why you see KMC’s budget also go down roughly one billion rupees from Rs27b to Rs26b.
“Instead of Rs5b we got Rs2.5b,” the mayor said. “All our ongoing schemes were not completed.”
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