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Investor Presentaiton

FINANCING SUSTAINABLE TOURISM IN KHYBER PAKHTUNKHWA WELCOME TO SWAT MOTORWAY C خوش آمدید سوات موٹروے This section reviews selected literature on tourism taxation and finance to outline experiences of other countries and prevalent best practices and workable models in tourism tax collection and spending. This will inform the preliminary recommendations put forward in the note. Tourism Taxation is an example of hypo- thecation or ring-fencing of tax revenue for a specific purpose i.e., tourism management and development. Hypothecation, ring fencing or ear marking taxes for use in specific sectors, projects or programmes is generally cate- gorised into two broad types - strong/hard and weak/soft. Strong or hard hypothecation is when a particular government service, project or program is completely financed by the earmarked tax, user fees or levy with no other sources of finance. While weak hypothecation is when the tax, fees or levy partially finances the service, project, or programme. Most of the tax revenue hypothecation examples around the world, including for tourism development, fall in the weak or soft category and are supplemented by resources from the central budgetary pool. This is because of the pro- 3Seely (2011). Hypothecated Taxation. cyclical nature of tax revenues and the potential of revenue shortfalls in times of economic downturns. There is also a further categorisation of hypothecation - broad and narrow. Broad hypothecation is when tax revenues are earmarked for a sector such as education, health, or tourism. On the other hand, narrow hypothecation refers to tax revenues being used for a very specific and observable service, project, or programme. e.g., toll taxes for road maintenance, waste disposal charges, entry fees to a museum or a park etc³. The main benefit of earmarking tax revenue for use in a particular sector or for a specific service is that it increases transparency and accountability of a government with the taxpayers enhancing willingness to pay taxes. This is in some sense analogous to consumers purchasing a private good or service from the market. Earmarking tax revenues is particularly effective in countries with low tax compliance and a general lack of public trust in governments and their effectiveness in providing public goods and services. Evidence shows that earmarking is most effective and efficient when it is for the provision of a specific "Mitha (2018). Hypothecation, health taxation and hysterisis 5ibid good or service in accordance with the preferences of the consumers. However, hypothecation of taxes has some serious issues and limitations. Firstly, by tying resources to a particular sector or programme, it limits a government's autonomy to allocate resources according to its preferences (social welfare functions) and strategic plans and is therefore often opposed by bureaucrats and policy makers. Also, as tax revenues are pro- cyclical, complete reliance of a public good or service on one source of revenue (strong hypothecation) can potentially lead to resource constraints in times of low economic activity jeopardising the provision of that good or service. Finally, as tax revenues are dependent on the extent of economic activity of a region, ear-marking these for use in that region can create enclaves of prosperity exacerbating geographical income disparities. While discussing the possibility of ear marking tourism taxes for sustainable tourism development in the context of KP, these issues need to be kept in mind5. 14
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