<!-- Start of picture text --> _N Policy Research *<br>Transport<br>WPS 986<br><!-- End of picture text --> This paper- a product of the Transport Division, Infrastructure and Urban Development Departmentis part of a larger departmental projeet on pricing, cost recovery, and efficient resource use in the road subsector. The report is based on a series of case studies carried out in Argentina, Bolivia, Ghana, India, and - Yugoslavia drawing also on studies carried out in Indonesia, Nepal, and Tanzania. Copies of this paper are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Jemifer Francis-O'Conmor, room S10-063, extension 35205 (46 pages).

After studying the problems of administering road user taxes in 19 developing countries, Bahl reports the following, among other things:

* There is no single, correct structure for road user taxation since the various charges may play different roles in different national revenue systems.

* All effective tax administration requires a solid, uncomplicated tax structure.

* The substantial revenue potential of road user taxation rests on a growing tax base. Despite this, road user taxation remains an underused source of public finance in developing countries.

* Tax evasion and avoidance narrow the tax base, cost governments revenue, and compromise the efficiency and redistribution objectives of a tax system. Evasion may occur by nonfiling, underreporting, or smuggling. It generally increases with the tax rates (particulady the marginal tax rates) and decreases with a greater probability of detection and with a more severe penalty. Avoidance is the result of loopholes in a tax system that enable a taxpayer to reduce liability by adjusting the consumption or composition of received income, or by making different investment or production choices.

* The problems of evasion and avoidance must be approached simultanteously. If a tax

adminritration narrows the possibility for successful evasion, the result may be an increase in avoidance.

* The four main types of road user charges are (1) fuel tax, (2) sales tax, excise tax, and import duty, (3) annual license and vehicle registration charges, and (4) tolls.

* Action should be taken under all four main reform options (1) to keep rate levels as low as possible, (2) to broaden the tax base, limit exemptions, and move toward a single uniform tax rate, (3) to simplify taxes to minimize ambiguity, ease administration, reduce administrative cost, and lower the compliance cost, and (4) to improve tax enforcement by improving tax collection, record-keeping, liability assessment, and identification of those liable to pay the tax.

* Transport fuel pricing needs to be better - coordinated, and rate structures especially for sales tax, excise tax, and import duty - could be lowered and made more uniform. In some countries there is scope for raising fuel tax and the annual license tax, provided it is accompanied by better enforcement. Evidence found in the case studies for this paper have not supported an incentives argument: that taxpayers will be more inclined to pay if they see a direct benefit between tax and spending.

The Policy Research Working Paper Series disseminates the findings of work under way in theBank. Anobjectiveof the series is to get these findings out qicklcy, even if presentations are less than fully polished. The fmdings, interpretations, and conclusions in these papers do not necessarily represent official Bank policy.

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