Decentralisation of financial powers fosters revenue collection

Revenue decentralisation in Myanmar should allow states and regions to have their own, self-raised sources of revenues and the Union government should not be a last resort funder of sub-national policies, according to a report on fiscal decentralisation.

Yangon Region Chief Minister U Phyo Min Thein (right). According to the report, commodity taxes are often decentralised to the state or regional government. Aung Htay Hlaing / The Myanmar Times

The International Growth Centre (IGC) published a policy note, Local resource mobilisation, on May 2, outlining the principles and recommendations for Myanmar’s fiscal and revenue decentralisation, with a focus on sub-national revenue collection.

The IGC is a research centre based at the London School of Economics and Political Science in partnership with the University of Oxford, and funded by the UK Department for International Development (DFID). It is headquartered in London but has an office in Yangon.

The note argued that a clear allocation of both responsibilities and corresponding incentives, together with transparency on the work of all layers of government, should be the key basis of the country’s fiscal decentralisation.

Myanmar is in the process of re-defining the responsibilities of different levels of government – from Union, state and regional level to local township level, the publication said. These include both the provision of public goods and services and in raising revenues. Clarity of allocation implies “defining in a precise and transparent way” the role of each level of government in different areas, such as in providing education.

“Knowing which level of government should be held accountable will improve public participation in the decision-making process and foster government’s effectiveness.

“There are currently overlapping responsibilities at the local [township] level across several decentralised government departments as well as the DAOs, making it difficult for citizens to understand which department is in charge of what,” the policy note explained.

The second key principle which complements this is for each level of government to have the incentives to allocate resources to carry out the particular public policy it is responsible for.

“When local bureaucrats are in charge of the allocation of resources at the local level their incentives are often to comply with directions coming from the Union, which are not necessarily in line with the needs of each specific local community.

“If we think that the local population is well informed about their need for public goods and services, the most straightforward way to align incentives is to decentralise decision-making power to elected officials, who are accountable to the local population and have to respond to their demands,” the publication stated.

According to the note, this alignment of incentives to responsibilities should also apply to revenue-raising responsibilities. The current system in Myanmar prevents local governments from keeping any surplus revenues.

“This mechanism [current system] gives sub-national agencies the responsibility to collect taxes, but it does not provide them with the incentives to raise extra revenues beyond their set quota, for example by modifying tax rates or by increasing collection efforts,” it said.

The note also added that centralisation allows for experimentation and comparison. For this advantage to materialise, Myanmar needs to systematically collect information on spending, revenues and policy choices at all layers of government. This transparency and information are essential for citizens to hold their elected officials accountable.

Revenue decentralisation

The allocation of revenue-raising powers refers to both taxation and exploitation of natural resources by different levels of government. Local resource mobilisation argued that sub-national governments need their own sources of revenues and take charge of their budgets and that fiscal transfers should preserve incentives.

“Decentralising only expenditure responsibilities whilst financing the expenditure from tax revenues collected at the Union level is unlikely to reap all the benefits of decentralisation.

“If the Myanmar decentralisation process is to keep its momentum and besuccessful, states and regions will need their own, self-raised sources of revenues as well as a coherent set of incentives to encourage collection,” the publication suggested, adding that property taxes, both the land tax and the building tax are good candidates for decentralisation to local governments, commodity taxes are often decentralised to the state or regional level, with the Union government keeping the income tax, trade taxes and some excise taxes.

“Going forward, the implementation of a modern property tax will be a natural step to increase revenues and increase the equity of the overall revenue system,” it said.

According to one of the recommendations, transfers of revenues from the Union level to sub-national levels need to be based on transparent and objective criteria, such as a state or region’s GDP.

“Importantly, the formula must be ‘set in stone’ – detached from the political process – to make transfers predictable and allow sub-national governments to plan their budget a couple of years ahead.

“One way to ensure the formula is detached from the political process is to enshrine it in the constitution,” the note argued.

Local resource mobilisation also emphasised the need for sub-national governments to be able to plan their expenditures beforehand, and must be responsible for the budgetary consequences of their decisions. It cautioned against using the Union government as a last resort funder of sub-national policies.

“If the extra revenue is appropriated by the state or regional government, or by the Union, township-level policymakers and bureaucrats have no incentive to implement new policies to increase revenue yields.

“If actions are not taken to amend this mechanism, the status quo will prevail and the agencies tasked with collecting revenues will stick to their currently very low revenue quotas.

“If sub-national governments believe that any budget deficit will be financed by the Union, they will likely overspend without thinking of the fiscal consequences of their decisions,” it said.

The publication also touched upon taxation and tax policy incentives, advocating the provision of incentives for taxpayers and tax collectors as well as digitising tax collection records.

Decentralisation, fiscal, administrative and political, is one of the pillars of Myanmar’s transition.

Earlier, economist Tim Dobermann told The Myanmar Times that municipalities need to have more say over raising revenues and become more decentralised in order to have to ability to reform and manage the area efficiently.

“The real value of municipal governments is the ability to have a high level of decision-making when it comes to their area.

“It’s important because you shouldn’t have to go to the central government for the city to make decisions on how on how it rolls out its services – water, sanitation and garbage collection are being done.

“Some of these decisions really need the local context and it makes sense for a local institution to make the decisions.

“At the same time, municipalities are great places to have more ownership and autonomy over raising revenues, such as taxation, license fees and so on. Only at the local level can you be able to make the right choices given the context,” he said.

Khin Maung Win, head of Myan Shwe Pyi Group, also told The Myanmar Times that decentralisation is part of the solution to tackle the infrastructure gap: allow the regional government and private sector to take the lead in implementing small-scale, “mini and micro” infrastructure. Doing so, he argued, would close the gap and provide the rural population access to larger domestic and regional markets.

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