Investor Presentaiton

FINANCING SUSTAINABLE TOURISM IN KHYBER PAKHTUNKHWA 4.2 Constraints in imposing Tourism Cess As discussed in the previous section, constitutional provisions make direct ring- fencing of taxes for tourism development difficult. Alternatively, it was suggested by KPRA officials that ring-fencing tax revenues for tourism development could be possible through the introduction of a cess. According to the financial rules of the province, a cess must be used for a specific and defined purpose. The tobacco cess and infrastructure development cess in KP are examples. The KPRA stakeholders were of the view that given existing low tax compliance levels, despite reduced sales tax of 5% on hospitality and tourism related services in KP, an additional cess would cause dissatisfaction amongst businesses and might impact future investment in tourism and hospitality. Thus, the introduction of a tourism cess has to be accompanied by lowering of other tax liabilities, so that the overall tax burden on tourism and hospitality service providers does not increase. Another possible option could be to apportion a percentage of the existing sales tax rate or the excise tax on hotels (bed tax) into a tourism cess, without increasing the overall sales tax rate or excise rate. In fact, some representatives of the hospitality sector, viewed the current excise tax on hotels to be a simpler and easier instrument to implement compared to the sales tax. However, representatives of the KP Tourism department indicated that it would be difficult to justify such apportioning to the finance department, especially given the rise in funding on tourism development in recent years. They were also of the view that as cess must be levied for a specific purpose, it would be challenging to establish a direct relationship between cess revenue and tourism related expenditures under the current centralized structure of the finance department. For example, if the excise tax on hotels is converted to a tourism cess, the Excise, Taxation and Narcotics Control Department of KP would be the relevant tax collection authority. The cess revenue collected from a particular tourist area would have to be allocated to the development authority of that specific area i.e., hotel tax or cess collected from Naran would be given to KDA as part of the annual budgetary transfer. Alternatively, the cess revenue could go into KPCTA tourism fund or to local governments for community development projects. The above is an example of broad hypo- thecation, where the cess revenue generated from a specific tourist area is spent on tourism related development but not on a specific project or scheme in that area. Also, the hypothecated cess revenue is soft, i.e., supplemented by other sources of revenue such as annual transfers by the provincial government to KPCTA and development authorities. Existing sales taxes or excise taxes on hotels could be apportioned as tourism cess and proceeds spent on sustainable tourism development in areas where the revenue is generated. Alternatively, a distribution formula could be devised by the finance department by which a certain percentage of tax revenue collected from a tourist area would be spent on tourism related infrastructure development in that area via transfers to KPCTA, development authorities or local governments. All the options listed above would require legislative approval and would need to have an administrative mechanism to ensure investment and spending on tourist areas where the tax revenue is being generated. Currently the only institutional mechanism available for local revenue generation for tourism related spending is KPCTA and the Development Authorities in KP. These authorities have their own mandated instruments of revenue collection which can be spent directly on tourism related projects. 26 26

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