Revenue pattern analysis of Khulna City Corporation

Abstract

City corporations in Bangladesh are responsible for providing various municipal services such as water supply, gas, electricity, health services, education etc. to the city dwellers. To maintain all responsibilities in a City Corporation every year a budget is sanctioned. Revenue income pattern of Khulna City Corporation has been showed in this research to explore the income generation process. The income of City Corporation depends on government grant and internal revenues. The income is not well enough to maintain all the functions of City Corporation. Internal income sources are various taxes, rates, fees, tender, license etc. Govt. grants provide for various project executions which is too much higher than internal income. Finally some recommendations have been given in this research for developing a better revenue income process for Khulna City Corporation.

Key words:  City Corporation, Budget, Revenue, Tax, Rates, Grants, Municipality, Finance, Administration.

1.1 Introduction

As cities growth and decentralization becomes more common, local governments are assuming greater responsibility for providing and financing effective public services. In East Asia (excluding Japan), conservative estimates indicate that $1.2 trillion in infrastructure investments related to urbanization will be needed over the next decade (Internet). However, local fiscal and financial capacity rarely keeps pace with these increasing responsibilities. In Bangladesh presently the total urban population is more than 28% of total national population (BBS, 1991). The urbanization in Bangladesh has grown very rapidly. The main problems of our urban life is mass poverty, gross inequality, high unemployment or misemployment, overcrowded housing and proliferation of slums and squatters, deterioration in the environmental conditions, highly inadequate supply of clean drinking water and sanitation, high incidence of diseases, over crowding in schools and hospitals, overloading in public transport and increase in traffic jams, road accidents, violence, crimes and social tensions. It is true that rapid urbanization, through rural-urban migration, may aggravate some of the existing urban problems, and even create new ones. It is basically contentious in the urban development policy of the government and the low quality of urban management.                                                                                                                      

City Corporations are one of the tiers of urban local government in Bangladesh. There is both cooperation as well as separation of activities between the City Corporation and the central government in regards to financial management and administration, maintenance of law and order, preservation of law and order, preservation of environment, maintenance of health, education and recreation facilities, development of infrastructure etc. Now the City Corporations are not able to maintain a satisfactory standard of civic facilities and can not mobilize resources at the required level.  

The City Corporation of Bangladesh plays a vital role in the development of its urban areas. They provide the basic urban services and facilities by spending the revenue earned from various sources. The City Corporation receives the responsibilities and powers related to municipal finance (revenue collection and obligation of providing urban public services) through the Paurashava ordinance 1977. The municipal finance of the City Corporation may be described with respect to their revenue earning, revenue expenditure and financial management. The financial activities of a City Corporation may be classified as accounting, budgeting and auditing. Budget means the anticipated income and expenditure of a year.

1.2 Rationale of the study

The city corporations of Bangladesh can generate internal resources through taxes, rates, fees and rents from own property. These are collected to defray mainly the expenses of establishment and maintenance of roads, water supply system, conservancy and electricity for street lighting. Government grants constitute a significant portion of city corporation income. This study focuses on financial and administrative management which have implications in revenue earning system. Every city corporation has a huge number of responsibilities and to conduct all these responsibilities properly they have to depend on its income and its administration of proper management. Obviously City Corporation has an administrative and financial mechanism, but it is not working in rational way. So finding out the existing phenomenon it should develop a strategy for the financial management and administration. For this reason this study will be conducted for Khulna City Corporation as Khulna city is one of the larger city of Bangladesh.        

1.3 Scope and limitation of the study

The present study mostly centered on the problems and prospects of municipal income of Khulna City Corporation. More specifically the study discusses about the revenue sources and administrative management of the city corporation.

In the present study, the following are the limitations:

·         Detailed data are not available in a systematic manner

·         Limited time

2 Municipal budgeting and financial management

2.1 Introduction

Budgeting is a key component of a decentralized system of sub national finances. Without adequate budgetary autonomy and accountability, there is no real possibility of attaining the efficiency gains associated with fiscal decentralization. Budgetary autonomy means that sub national governments have discretion regarding the level of services they deliver, their mix , as well as the ability to decide how to  produce public services, in particular what inputs to hire and how much to pay for them. Budget institutions and processes are important for decentralized system of intergovernmental finances because they provide the mechanism to translate taxpayer preferences into spending decisions and because they help maintain sub national government officials accountability to tax payers.

2.2 Budget process and issues 

In Bangladesh, the recurrent operating budget is referred to as the “Revenue Budget” and the capital budget is called the ‘Development Budget’. In City Corporation level the issues and problems related to developing modern and responsive financial management systems are complex and long term. Because Bangladesh uses a unitary system of government, many of the issues are budgeting and financial management reforms are generic to all levels of government. Also due to the profound influence of central government practices on the budgeting, accounting and auditing processes and the fiscal reporting requirements of the City Corporations, any efforts to reform and enhance practice in these areas are inextricably linked to the success of reform efforts at the national level. 

2.3 Budget preparation

Budget preparation typically takes anywhere between two to six weeks when international practice shows that adequate budget preparation should take at least several months. The budget proposal is formulated   through the expenditure request of the various budget units, following the budget calendar, which usually begins early to mid-April and is concluded by late May. Absent from this process are the budget preparation guidelines and understanding that accompany good budgeting practices, policy service objectives, and accurate and achievable estimates of revenues and expenditures. Thus the revenue and expenditure estimates are not conducive to good budgeting practices and the budgeting process itself appears to be merely an academic exercise. In fact budget preparation appears to represent little more than an incremental adjustment to the previous year’s budget in very general line-item descriptions and with disregard of the deference between what has been budgeted and what has been executed. Unlike modern budget practices, the proposed municipal budgets are not based on an analysis of service level needs or planned policy objectives.

  

The scope of the budget preparation process at the municipal level must be expanded to allow greater technical and public comment on the content on the proposed expenditure plans. The fact that the budget preparation process requires only 2-6 weeks dooms the process to be little more than a perfunctory and essentially meaningless effort. A structured and formal effort should begin immediately to draft new budget forms which require more detailed information on the services, activities, and projects for which expenditures are being recommended. To prepare such budget forms in a manner that accurately reflect the proposed expenditure plan, the municipal political and civic leaders must also embark on the strategic planning activity that results in identifiable and measurable objectives with specific target dates. The budget plans should be explained to tax payers in open council meetings and publicized in the press. 

2.4 Budget approval process

The budget approval process starts with reviews and modifications of the draft budget by the City Corporation authority to submission to LGD for more modifications and adjustments in specific line items (if it appears that expenditure plans are unrealistic relative to likely revenue receipts) prior to final approval. This process of review at the Ministry level appears to be particularly meaningless, since evidence year after year shows that expenditure and revenue projections are grossly unrealistic, and GOB has not done anything to address this issue. At this point in the budget process, LGD also indicates to the municipality the amount of local government grants to be received and development projects to be funded. Typically the approved budget is returned to the City Corporation by mid-August even though the fiscal year begins July 1. An important issue is the disjunction between the municipal budget approval process and the governments own budgeting process. The fact that the municipal budgets are approved after the government’s own budgeting process is completed, raises questions as to whether municipal needs are considered as input into the grant resource allocation by GOB.

The budgeting and funding practices of the national government bear a substantial responsibility for the generally substandard budgeting and fiscal management policies and practices at the municipal level. To expect municipal officials to prepare budgets without any prior indication of the level of block grant funding from the GOB is irrational so long as the block grants remain such a significant proportion of the City Corporation.

The timing of the budgeting process therefore needs to be synchronized with the central government budgeting process to allow need assessment, prioritization of investments and enable final municipal proposed budgets to be used as input in the central budget resource allocation exercise. The municipal budgeting exercise should therefore start earlier. In addition, the fiscal timing of the block grant process should be structured to provide fiscal incentives to improve fiscal management at the municipal level. To achieve reform objectives, the GOB should establish budget targets for the block grant category and provide appropriate fiscal guidelines to the City Corporation by April 1 each year for the succeeding fiscal year. Simultaneously, the criteria to be used in the allocation of these funds should be published and implemented as announced.

2.5 Budget execution and management

The successful execution and management of the budget requires the establishment of policies, procedures, and efforts to assure the prompt and timely collection of revenues and for each management purposes, the expeditious investment of those revenues. Similarly the rate expenditures should not only be monitored in terms of actual levels, but should be evaluated relative to previously approved and a need upon budget expenditure plan. In this phase of the budgeting process the policies and practice of Bangladesh’s municipalities are quite rudimentary. There is no basis for continuous monitoring of budget revenues and expenditures, and in most cases, there is no control over expected revenue and expenditures, while monthly reports and third-quarter budget revisions are reviewed by the council, actions to balance the budget appear to be taken only in the final quarter of the year, when it becomes obvious that budgeted levels of expenditure and revenue are not going to be met. At this time several options are considered to assure that the budget is balanced at the end of the fiscal year. (a) Reduce the rate of expenditures in identified line times; (b) transfer funds from those line-times with surplus balances to those with likely year end deficits and (c) instruct the tax collection officials to increase revenue collection efforts with an emphasis on taxes in arrears. This option is particularly important if the threat of a year –end imbalance is due to logging revenues rather than overspending.

Under normal circumstances, the third quarter budget review could provide an excellent basis for developing a more continuous and meaningful expenditure management process. A quarterly formal review of revenue receipts and expenditures could provide the transition to the adoption of monthly monitoring of expenditures and revenues and a more effective budget execution process. Another important issue in budget execution is the lack of decision powers of officials in charge of implementing municipal functions. Officials in charge of different spending units should be granted flexibility on management decisions within their assigned budgets. To guarantee compliance with the budget mandates, spending units should be required to seek permission from the chief executive officer before funds are re-allocated across budget categories.

2.6 Strengthening municipal financial management

The budget and financial management process should seek to achieve two principal public policy goals.

(a)    Reflect in discrete and observable ways the purposes for which public sources will expended, by being more open(and more responsive to its citizens), and more descriptive of the services to be offered, by whom they will be provided, and to whom they will be provided.

(b)   Provide a means of measuring both political and fiscal administrative accountability. The most important role of sub-national governments is to decide what expenditures best satisfy the needs and service requirements of its citizens. The successful achievement of this roll is both politically desirable and economically efficient as well.

3 Municipal incomes

3.1 Introduction

Municipal income is very much depending upon local tax and central Government allocation in Bangladesh. Financing municipal involves raising an adequate income in order to meet its expenditure on community services. According to a broad formulation of the function of local Government all the amenities and services which make living better physically, economically, socially and culturally constitute the responsibility of local Government. To manage and extend municipal services City Corporation collect local taxes, fees and rates and receive Government grants, both recurrent and capital.

3.2 Municipal income

The main revenue source of City Corporation is holding tax (land, conservancy, lighting, and water supply). Now tax revenue, Government grants etc. The main source of City Corporation revenue can be divided into three groups:

      Internally raised revenue

      The Government grants and

      Loans and Advances

The Third source is very low is proportion to the total revenue of the City Corporation. Government grant includes all types of supportive assistant from the own source revenue includes taxes, rates, fines, tolls and profits from own property. Own revenue has always constituted the major portion of income in the City Corporation.

3.2.1        Internally raised revenue

Internal revenue can be broadly classified in three categories. They are:

• Land or Property Based Revenue
• Activity based or Benefit Based Revenue
• Income from City Corporation own property

3.2.1.1 Land or property based revenue

This includes tax on house, rates of electricity, water and conservancy and urban immovable property transfer tax. While the first three are purely local lives, the fourth one is a tax shard with the government.

3.2.1.2 Activity based or benefit based revenue

These include taxes on profession, trades and callings tax on application of erection and re-erection of buildings, taxes on advertisement, amusement vehicles fees for markets and licenses and tolls on ferries, bus stand and sand deposits.

3.2.1.3 Income from City Corporation own property

This includes Paurashava own property income for shops, land, building, markets, auditorium, community centre, ponds and boarding houses.

3.2.2        Government Grant

Government grants are all types of supportive assistance from the center. The grants are wanted mainly for paying a portion of the salaries and compensations of local employees, honorarium of elected representatives’, maintenance of infrastructures and development of roads, culverts, drains and canals. The Government grants are of the following:

• Urban normal grant
• Octroi compensation grant
• Urban works program grant
• Special development grant

3.2.2.1 Urban normal grant

These include special salary grants compensatory grants for special purposes like mosquito eradication, education programs, medicine and injections. The basis for normal or recurrent grant is the need for additional resources for salaries of staff in the City Corporation and the traditional quantum of aid that had been following.

3.2.2.2 Octroi compensation grant

Octroi compensation grant was started from the fiscal year 1981-1982 as a replacement to the City Corporation lost income from octroi tax, which was suspended by a central decision at the recommendation of the taxation inquiry commission.

3.2.2.3 Urban works program grant

Urban works program (UWP) grants have been the primary development grant for the urban local bodies in Bangladesh. The purpose of the grant has been development and maintenance of infrastructures, helping the pour groups with employment opportunities and training the local bodies to conduct small project with local participation.

     3.2.2.4 Special development grant

In Bangladesh government grants are distributed in the City Corporation are not proportionately. Related to population since different types of grants are distributed to different criteria and all City Corporation are not in quality for all grants in the same ratio.

3.2.3 Loans and advances

Loans and advances is the third source which is very small in proportion in context of total revenue of the City Corporations in Bangladesh.

Revenue from different sources of City Corporation is followings:

Table01: Revenue from different sources in City Corporation

Internal sources	Government grants	Loans and advances
Holding tax, property tax, tax on erection of buildings, profession tax, tax on establishment, tax on vehicles, fees for markets, other taxes and tolls, own property income, other income	Normal grant, Octroi compensation, Works program, Development assistance	Government loan, Foreign loan

Source: Municipal finance in Bangladesh, 1989.

Revenue collection process diagram of KCC is shown in the next page in figure no. 01.

4.0 Revenue Collection Process

                                                                                  

Figure01: Revenue Collection Process diagram of KCC.

5.0 General Information about KCC

Table02: General information about KCC

Worker	1287
Ward	31
Population	15,000,00
Area	45.65 sqkm
Holding number	40640
Property	163.94 acre
Slam	55
Super market	16
Community centre	26
Cemetery	7
Park	9
Child park	2
Bazar	26
Public toilet	10
Shasan	4
Slaughters house	3
Health centre	3
Urban primary health care centre	27
Maternity centre	2

Source: KCC, 2003.

6.0 Municipal income of Khulna City Corporation

The income of KCC is basically two types as well as other city corporations. The contribution in yearly expenditure the income from external sources is several times higher than income from internal sources. The contribution of internal and external sources of income of KCC is shown in the table below.

Table03: Revenue from different sources in KCC.

Year	Internal source	Percent	External source(Govt.)	Percent
2000-01	32,10,74,829.00	12.38	227,71,33,892.00	87.62
2001-02	35,11,42,128.00	13.01	234,72,39,000.00	86.99
2002-03	42,97,35,805.00	15.02	243,10,54,000.00	84.98
2003-04	36,17,17,325.00	13.61	229,51,20,000.00	86.39
2004-05	39,19,90,000.00	13.80	245,17,00,000.00	86.20

   Source: Annual Budget, KCC.

From the above table we can find that in total income of KCC in year 2000-2001 the contribution of internal source is 12.38% where contribution of external source is 87.62%. In year 2001-2002 the income from internal source is 13.01% and income from external source is 86.99%. Income from internal and external source is 15.02% and 84.98% in year 2002-2003. Contribution to total income from internal and external source is 13.61% and 86.39% in fiscal year 2003-2004 and contribution of internal and external source is 13.80% and 86.20% in year 2004-2005.

Table04: Total income and expenditure of KCC.

Year	Total income (tk)	Total Expenditure(tk)
2000-01	259,82,08,721.00	257,98,06,743.00
2001-02	269,83,81,128.00	269,83,81,128.00
2002-03	286,07,89,805.00	281,08,76,450.00
2003-04	265,68,37,325.00	255,68,37,289.00
2004-05	284,36,90,000.00	284,55,16,200.00

Source: Annual Budget, KCC.

The table above shows the total income and expenditure of five years of KCC.   More or less the income and expenditure of every year is near to same. The total income of fiscal year 2002-2003 is 286, 0789,805.00 which is the highest income within five years and total expenditure of year 2004-2005 is 284,55,16,200.00 which is the highest expenditure within five years.

6.1 Organogram of revenue collection system of KCC

 

Figure02: Organogram of revenue collection system of KCC

Working process diagram of Tax assessment of KCC is shown on next page in figure no.03.

6.2 Working process diagram of Tax assessment of KCC

 Figure03: Working process diagram of Tax assessment of KCC.

Table05: Revenue from internal sources of Khulna City Corporation.

Internal Sources	Amount of income (in tk)
Tax	10,73,45,000.00
Rates	10,80,00,000.00
Fees	2,79,70,000.00
Penalty fee	1,65,000.00
Others	72,10,000.00
Govt grant	70,00,000.00
Profit from bank	60,00,000.00
Tender form	2,00,00,000.00
Asphalt plant	1,25,00,000.00
Roller fare	20,00,000.00
Bus/truck terminal	10,00,000.00
Miscellaneous	20,00,000.00
Salary & advance back	15,00000.00
Water supply	8,93,00,000.00
Total	39,19,90,000.00

Source: Annual Budget 2004-2005, KCC.

The above table shows that total income from internal source is 39, 19, 90,000 in fiscal year 2004-2005. the highest income is gain from rates sector which is 10,80,00,000, next greater income is generated from tax sector which is 10,73,45,000 and next from water supply and the amount is 8,93,00,000. The lowest income is generated from penalty charge and the amount is 1, 65,000.

Table06: income from external sources of Khulna City Corporation.

Sources	Amount of income (in tk)
Govt. special grant	10,00,00,000.00
Govt. grant in ADP	104,37,00,000.00
Govt. grant in projects	109,20,00,000.00
Total	223,57,00,000.00

Source: Annual Budget 2004-2005, KCC.

From the above table we find that total income from external source in fiscal year 2004-2005 is 223,57,00,000 in which the largest contribution is from govt. grant in projects and the amount is 109,20,00,000 next contribution from govt. grant in ADP and the amount is 104,37,00,000 and next contribution is 10,00,00,000 which is contributed from govt. special grant.

Table07: Revenue from tax sector of KCC.

sources	Amount of income (in tk)
Holding tax	8,40,00,000.00
property transfer tax	80,00,000.00
Registration of premises tax	2,00,000.00
Profession tax	97,30,000.00
Advertisement tax	6,50,000.00
Cinema tax	17,50,000.00
Transport tax	2,00,000.00
Rickshaw, van tax	28,00,000.00
Animal tax	15,000.00
Total	10,73,45,000.00

Source: Annual Budget 2004-2005, KCC.

The table above shows that total revenue earned from tax sector in fiscal year 2004-2005

is 10, 73, 45, 000.  The maximum contribution is earned from holding tax and the amount

is 8, 40, 00, 000 and the lowest income is generated from animal tax which is 10,73,45,000.

 Table08: Revenue from fees sector of KCC.

Sources	Amount of income (in tk)
Toll from Bazar	50,00,000.00
Super market fare	1,10,00,000.00
slaughters	7,00,000.00
Warrant fees	20,000.00
A.R.V sell	50,000.00
License for rickshaw	2,00,000.00
Fare from Hall and park	1,00,000.00
Road cut & Damerage	50,00,000.00
Fare from zia hall	7,00,000.00
License fees from  contractor	27,00,000.00
Surcharge	25,00,000.00
Total	2,79,70,000.00

Source: Annual budget 2004-2005, KCC.

From the above table we can see that total income of fees sector in fiscal year 2004-2005 is

2, 79, 70, 000. The income generated from market fare is 1, 10, 00, 000 and others contribution from various sources of fees. The lowest amount of income is only 20,000 which are generated from warrant fees.

Table09: Revenue from water Department of KCC.

Sources	Amount of income (in tk)
Water tax
previous	2,88,00,000.00
current	2,92,00,000.00
Pipe line connection	5,00,000.00
Monthly charge
previous	2,00,00,000.00
current	1,00,00,000.00
Special water supply	8,00,000.00
Total	8,93,00,000.00

Source: Annual budget 2004-2005, KCC.

The above table shows that total income from water department as tax from water supply is 8, 93, 00, 000 in fiscal year 2004-2005.

Table10: Tax collection performance of KCC.

Year	Types	Amounts (in tk)	Percentage
2000-2001	Collected	8,11,24,283.00	25.27
	Not collected	23,99,50,546.00	74.73
2001-2002	Collected	12,38,04,521.00	35.26
	Not collected	22,73,37,607.00	64.74
2002-2003	Collected	12,24,80,982.00	28.50
	Not collected	30,72,54,823.00	71.50
2003-2004	Collected	13,31,76,530.00	36.82
	Not collected	22,85,40,795.00	63.18
2004-2005	Collected	18,29,90,014.00	46.68
	Not collected	20,89,99,986.00	53.32

Source: KCC record, 2005.

Thus we can realize the tax collection performance of KCC is in bad condition. Every year very few percent of revenue can be collected. Within five years highest revenue is collected in fiscal year 2004-05 which is 46.68%. In fiscal year 2000-2001, 2001-2002, 2002-2003 and 2003-2004 the revenue collection is 25.27%, 35.26%, 28.50% and 36.82% respectively. The main defaulters of tax payment are politicians and government itself.

7.0 Problems of revenue earning process

The paurashava ordinance states that “City Corporation may with the previous sanction of the government levy is the prescribed manner, all or any of the taxes, rates, tolls and fees mentioned in the first schedule.” So by legislation the City Corporation authority is liable to fix up tax and collect them. Tax collection depends on the execution of this rule properly. The main problems of tax collection in Khulna City Corporation are as following.

¨  Tax assessment and collection procedure is backdated and corrupted.

¨  Lack of consciousness of the people

¨  Administrative problems

¨  Influence of local politicians and pressure groups

¨  Lack of strong database

¨  Lack of personnel

¨  Corruption and irregularities

¨  Other problems

8.1 Conclusion

Municipal finance is very much important. In context of Khulna City Corporation the municipality is very much dependent on central government allocation. For self sufficiency of municipality the reformation of municipality is very much needed. The expert manpower should be employed in City Corporation. In Division level there are other government agencies those are responsible for some activities. There exists parallelism of activities and lack of coordination among them. As a result municipality can not play the desired role in urban management. So an intergovernmental coordination is very necessary.   

The legal framework of municipalities should therefore be reviewed right away with the objectives of consolidating and simplifying the numerous legal provisions affecting City Corporation. The best strategy for reform is to update and expand the paurashava ordinance, municipal law, consolidate all the different legal provisions in regulations and standing orders and apply equally for paurashava and city corporations with specialized provision where necessary. The objectives of this law would be to provide a legal framework for municipalities more self government and operational independence and imposes more accountability in their performance, including flexibility in alternative ways to provide municipal services.

8.2 Recommendations

                                       

      Initiate legal/ policy steps to prevent/ discourage the inclusion of are as a source of revenue initiate fiscal incentives or sanctions for failure to pay taxes.

      It is necessary to modernize accounting system: introduce double entry cash accounting system, computerizing budgeting, financial management and auditing.

      It should find out the alternative sources of income and develop capital improvement plans.

      Increase revenues from holding taxes by increasing the tax base immediately and adjust for inflation, and increase penalties for delinquency.

      Increase revenue from other taxes by adjusting the tax rates in the model tax schedules immediately: provide incentives to tax personnel to improve tax efforts.

      Develop Taxation Mapping and strong Database system.

References

Khulna City Corporation (KCC), Annual Budget 2000-2005, Khulna, Bangladesh.

Hossain, M., 1989, Municipal finance in Bangladesh, University press limited, Dhaka.

Hasan, k., 1997, Bangladesh municipal finance sector study, Jagadish press ltd, Dhaka.

Bangladesh Bureau of Statistics (1992), Bangladesh Population Census, 1991, Community Series, Zila Khulna. Dhaka: Bangladesh Bureau of Statistics.

Ferdous, S., (1999), Expenditure pattern of a paurashava: a case study on Kushtia paurashava, BURP thesis, Urban and rural planning Diacipline, Khulna University, Khulna, Bangladesh.

 

Roy, K.T., (1998), Utilization of municipal immovable properties: A Study on Bagerhat Paurashava, BURP thesis, Urban and rural planning Diacipline, Khulna University, Khulna, Bangladesh.

 

World Bank, (1997), Bangladesh municipal finance sector study, Bangladesh govt. press, Dhaka, Bangladesh.

Ahmed, N., (1992), Barisal Paurashava finance, A journal of local Government, Vol.21, No.2, National Institute of Local Government publication, Dhaka, Bangladesh.