Increasing revenue receipts in KP

tax
Short on cash
Khyber Pakhtunkhwa has to look for ways to increase its revenue receipts
By Tahir Ali

http://jang.com.pk/thenews/aug2012-weekly/nos-19-08-2012/pol1.htm#4

Khyber Pakhtunkhwa’s receipts from federal and foreign sources have increased in recent years but the province’s own revenue receipts have failed to register any significant growth.

The PORs stood at Rs18.91bn against the target of Rs19.49bn in 2011-12. These comprised direct taxes — taxes on agriculture, property, land revenue, trade and callings — of just Rs1.4bn, indirect taxes — GST on services, provincial excise, motor vehicle tax, stamp duties, cess of all types, electricity duty etc — of Rs11.1bn and non tax receipts — income from property and enterprises, civil administration, economic services, community services, social services and miscellaneous receipts — of Rs6.3bn.

For this fiscal a target of Rs20.10bn has been fixed for the PORs. Rs13.8bn of these are tax receipts, including Rs9.89bn GST on services to be collected by the FBR on behalf of KP government, and Rs6.2bn are non tax receipts.

Though GST has been included in the provincial tax receipts which has made the figures look attractive, the decision is not reasonable as the provincial tax machinery takes credit for an amount which has been collected by the FBR.

If we exclude the GST of Rs8.92bn from the provincial taxes, provincial tax receipts register a nominal growth as percentage to the total PORs. Tax receipts were Rs3.64bn or 36 per cent of the PORs of Rs9.98 last year. This year tax receipts will be Rs3.98 or 39 per cent of the PORs of Rs10.18bn.

The share of PORs as percentage to the overall revenue receipts of the province from all sources is on the decline. For example, the total PORs of Rs18.9bn were 7.4 per cent of the revised total revenue receipts of Rs255bn last year but this year’s PORs target of Rs20.1bn is 6.6 per cent of the total expected receipts of Rs303bn. And if the GST is excluded from the tax receipts, last year’s PORs come to just 3.9 per cent and that of this year’s further to 3.3 per cent of the total revenue receipts from all sources.

From the financial year 2005-06 to 2009-10, actual collection of the PORs has been way short of the targets. The targets/actual collection were Rs4.47bn /Rs4.34bn, Rs5.20/Rs4.77bn, Rs6.22bn/Rs5.32bn, Rs7.44bn/Rs5.43bn and Rs7.53bn/Rs6.41bn in the above five years respectively.

Some ascribe this gap to unrealistic target by finance department and the dilapidated law and order situation but others say complicated tax system and lack of incentives to entrepreneurs are also to blame.

The share of direct taxes has been on the decline and while that of the indirect taxes is on the rise in PORs. While direct taxes constituted 30 per cent of the tax receipts in 2011, their share has come down to just 11 per cent this year. And the share of the indirect taxes has jumped to over 89 per cent from 64 per cent, according to the budget white paper 2011-12.

On the other hand, non tax receipts have been on the rise and always met the targets. These receipts rose from Rs4.7bn in 2009 to Rs5.4bn and Rs6.3bn in the next two years.

The outlook for the future is not bright either. Under the Medium term fiscal framework, fiscal outlook paper prepared by the KP finance department that shows fiscal targets and prospects for all the departments in KP, PORs are projected at Rs10.21bn for the ongoing year, Rs11.3bn for 2013 and Rs12.58bn for the FY 2014. On the contrary, KP has projected income from federal transfers at Rs183bn this year which will go up to Rs213bn and Rs249bn in the next two years. 

The targets for the PORs are frequently missed for constraints like terrorism that has grievously impacted businesses in KP and, therefore, resulted in low taxes, the lack of enthusiasm on part of the taxpayers, the capacity constraints of the tax collection machinery and the elements of corruption therein, huge informal sector and most of all the lack of commitment to exploit the potential on part of authorities.

As per the Seventh NFC Award, provinces were required to streamline their tax collection systems, reduce leakages and increase their revenues by effectively taxing agriculture and real estate sectors and develop and enforce mechanism for maintaining fiscal discipline but this didn’t happen. In an election year, there could hardly be any worthwhile attempt to increase taxes now.

That KP has a limited capacity to collect taxes was also revealed when it assigned the task of collecting the GST to the federal board of revenue unlike Sindh which established and utilised the Sindh Revenue Board for the purpose.

Khyber Pakhtunkhwa needs to focus, especially on stamp duties, motor vehicle tax, land revenue, electricity duty and agriculture income tax to improve resource mobilization. These four taxes earned Rs550mn, Rs900mn, Rs915mn, Rs470 and Rs21mn last year respectively.

The share of agriculture sector has also been minimum though there is a great potential while only Rs21mn were collected in agriculture income tax last year, with around 4.5mn acres cultivated land in KP, income from the agriculture sector could have been dozens of billions even if we consider the average annual income from one acre of land at average of Rs0.1mn.

Given the massive increase in financial resources and additional responsibilities placed on the provinces in the post-18th amendment scenario, it is important to revisit the traditional development policies and practices to revamp the inefficiencies and harness the full productive potential of the economy.

The government should focus on the growth sectors of the economy and concentrate on the natural resource endowments of KP in hydel power, mining and minerals, oil and gas and agriculture value addition and agro-processing industries.

Under the Provincial Reforms Programme, KP intends to increase its own revenues and bring them to 0.9 percent of provincial GDP. Another point of emphasis is to bring down the current expenditure from 8.1 percent to 7.7 percent of provincial GDP. During the medium term, the provincial government will keep the establishment charges at 4 percent of its GDP.

But the targets for revenue growth can hardly be achieved with the existing half-hearted efforts to increase provincial revenue amid rising security expenditure and pay and pension budget.

KP relies for over 93 per cent of its revenue needs on federal transfers and local and foreign loans. It must increase its revenue generation potential to ensure sustained growth of its economy, to offset the negative fallouts of frequent delays in federal transfers amid growing current expenditure.

The province should bring down its current expenditure by unifying several overlapping departments, restructuring of Public Sector Enterprises, rationalisation of government size, budgetary measures, substantial curtailment of foreign visits and of expenses on public offices, security and energy efficiency and conservation.

The informal economy of the province, estimated much higher than formal economy, would have to be brought into the tax-net. The limited private sector presence is further shrinking as entrepreneurs are shifting to other provinces. This trend has to be reversed through investors’ friendly environment.

The Excise and Taxation Department collects all provincial taxes except the land revenue or Abiana. It is the major contributor of revenue to the provincial tax receipts. The biggest handicap of the department, according to the whitepaper, is the lack of capacity to collect all these taxes effectively, both in terms of physical infrastructure and human resources.

As per the recommendations of a special committee of the provincial cabinet, the Board of Revenue has been given more authority and the post of patwari has been increased and upgraded. Computerisation of the system is underway.

The provincial government had in 2008-09 prepared a strategy for increasing the PORs known as Out of Box strategy of Revenue Expansion (OBSRE).

“The province has tremendous water and hydel power resources, lush green forests, great reserves of gas resources and minerals and human capital. The federal government is earning from resources of this province but is giving little to the province. Consequently, KP has to depend on federal transfers. Also, the out of fashion and traditional strategies for revenue generation from own resources have resulted in very nominal growth.

Every year, when the provincial government negotiates any loan with donors, it has to defend relatively weak position of revenue generation as these agencies insist on much needed reforms in this sector,” states the OBSRE paper.

Under the OBSRE, PORs had increased by over 18 percent in 2009-10 to Rs6414mn as compared to Rs5430mn in 2008-09, out of which almost 19 percent (Rs183mn) increase was recorded in the Urban Immovable Property Taxes, land revenue (Abiana) and Traffic fines (which were also the key focused areas in the OBSRE).

Further due to reforms in the over-all revenue department both from the revenue/tax structure perspective and human and physical capital improvements, the recovery against the budget estimates also improved. For example the UIPT shown an astonishing 130 percent achievement, Abiana 97 percent, traffic fines 106 percent and over all combined it had shown 113 percent achievement of its targets against 67 percent, 51 percent and 35 percent performance in 2008.-9.

Detailing on the causes of low revenue base of the province, the paper points out that rich/revenue generating sectors are federally owned. Further, due to the lack of tax administration capacity and political commitment deficiency revenue reforms at sub-national governments do not take place. Again, this seems less than before mainly due to exemptions in flood and war on terror stricken areas, had they been included then the performance had been much better.

Similarly, to increase its own revenue receipts and decrease the burden on provincial exchequer, KP has established several investment funds that have earned dozens of billions by investing the funds in treasury bills, investment bonds and other investment opportunities.

The general provident investment funds, where the money deducted from the monthly pay of the provincial employees is kept and on which the government gives a profit of 11 per cent every year, opened with just Rs200mn has now over Rs18bn in its account despite the fact that Rs6.75bn have been released to employees from the fund thus far.

Similarly, the size of the pension fund which was Rs4bn in 2006 is Rs12.4bn by June30 this year though Rs6.85bn were released from it. Again, the Hydel development fund opened with Rs50mn has now increased to over Rs24bn despite the fact that over Rs16bn released from it for financing different hydro power projects in the province. The CPF opened with Rs50mn has now around Rs3bn while Rs2.4bn have already been utilised out of it.

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Neglected agriculture engineering

technology
No to agri-engineering?
Investment in latest technologies used in the 
agriculture sector can substantially increase the produce in KP
By Tahir Ali

http://jang.com.pk/thenews/sep2012-weekly/nos-02-09-2012/pol1.htm#4

The engineering sub-sector of agriculture in Khyber Pakhtunkhwa is faced with various snags which are hindering farm mechanisation in the province.

A senior official of the Agriculture Engineering Department (AED) said that meagre funds allocations, fragmentation of land holding by division, higher rates of agricultural machinery in the market, lack of awareness in farmers, policy blues and poor control on inflation and machinery prices have checked farmers from adopting farm mechanisation.

Farmers, however, also say that government’s indifference, low annual funds utilisation ratio, lack of coordination between the public and private sector and illiteracy and poverty of farmers and shortage of machinery pools, staff and offices at the grassroot level are rendering farm mechanisation a distant dream.

Though AED’s share in the budget has been increased to 0.38 percent of total provincial ADP this year from 0.19 percent in last year with its allocation jumping to Rs0.37bn this year from Rs0.16bn in last fiscal, it’s still way short of the requirements of the sector.

With present meagre allocations, agriculture mechanisation is impossible. While the government is either disinclined or incapable to give the required resources to the department, the private sector too has neglected the vital sector in its investment priorities.

Low priorities of investment in agriculture sector both on part of the government and farmers have led to a perpetual state of subsistence farming.

The AED needs plenty of bulldozers to prepare more soil for cultivation as the already scarce under cultivation land in KP is fast decreasing for urbanisation and soil erosion.

For this sufficient funds are required. But the provincial government continues to allocate meagre funds to the vital sector. Donor agencies, therefore, should come forward and help provide the machinery.

The AED was disbanded in the province in the Musharraf regime and its bulldozers, etc, were handed over to the department of Agriculture Extension. “The AED was reinstated a few years ago. It got back its bulldozers but in pathetic condition”, said an official who didn’t want to be named.

“The department is utilising over 22 years’ old outlived machinery that needs immediate replacement. We have only 30 bulldozers in workable condition while another 15 are non-functional, though repairable. There are 7 machinery stores in KP, one each at divisional level and most districts of the province have no such facility.

And the machinery there is outdated, not replaced since 1992. The federal government had in 2009 promised to provide 100 bulldozers to the province under a project but the promise wasn’t met,” he added. 

Even today, only 9 off the 25 districts in KP have seeds grading plants and the rest still remain deprived of these facilities.

According to the official, the government will procure 25 bulldozers this year for reclamation of land in KP. “Its tender was floated last year but no responsive parties turned up. Tenders are now being issued again and bulldozers will be in our hands at the end of this fiscal year hopefully. These will help reclaim 10000 hectares of land annually.”

Only about 20 per cent farmers use modern agriculture technology. This is because either most have no money to buy and, if they have, no knowledge or inclination to use the modern farming techniques and services.

But the official said the current year ADP has several good schemes for the sector. “The government will also install 3 power winches which will be utilised for installation of tube wells. Besides, the construction of agriculture engineering workshop in Mardan will also be completed. Work on the installation of 500 dug wells (2009-12) in water scarce areas of KP will hopefully complete by the end of this fiscal year. Another project for small farmers land development worth Rs100mn also continues,” he added.

According to the ADP document, only Rs15mn could be spent by June last on the land development scheme and the throw forward amount will be Rs69mn beyond this fiscal year.

Low funds utilisation and delay in completion of the projects is another problem. In all, Rs1.19bn of total agriculture ADP of Rs1.35bn could be utilized last fiscal. Most of the schemes of the AED from last fiscal were throw-forwarded to this year.

For example the installation of dug wells began in 2009 but still continues. Similarly, the land development scheme was launched in 2010 but is far from completion as yet. The delay increases the cost of the projects besides depriving the farmers of the benefits of the projects.

Insufficient staff is yet another problem. The number of officials of the department, according to the official, was 1500 a decade ago which has decreased since then as different offices and posts were given up in downsising initiative.

AED has great significance as it provides machinery to farmers for reclamation of cultivable wasteland and addition of cultivable land that enhances agricultural produce. It also helps exploit the surface and sub-surface water resources for irrigation by use of machinery. It also provides free of cost counselling services on the farm mechanisation related problems. And it intermittently helps the government in calamities like earth-quake and floods, etc, by offering the heavy machinery lying in its machinery pool.

According to an estimate, each year 0.1mh of irrigated and 0.28mh sof rain-fed lands is feared lost to soil erosion in KP, FATA and PATA. Another 3.9mh of non-arable land is also threatened by it.

Lands in rain-fed areas in southern parts of the province, Charsadda, Mardan and most of those in the hilly areas of Dir, Swat and Chitral are threatened by erosion, especially where there are little vegetations, forests or crop cover.

Agriculture worldwide has undergone great changes and various technologies are used for ploughing the fields and sowing, harvesting and packing crops but farmers in many parts of KP are still seen ploughing their fields with bullocks and hand-harvesting is widespread, resulting in delays and losses.

Mechanised farming can increase per acre yield but small landholding in the province is the hurdle. The government could solve this problem by importing or evolving miniature and using laser technology for the purpose.

Zahir Khan, a farmer from Peshawar, said that the provincial government should procure agricultural machinery and provide it to the farming community on subsidised rates across the province. It must purchase bulldozers in large numbers and open machinery pools in the district and tehsil level with a transparent monitoring mechanism in place to ensure merit-based provision to the needy farmers.”

“These machinery pools could be opened on the basis of public private partnership and could be extended to the grassroot levels. These machinery pools have long been promised in several agriculture policies promulgated by the government. The government also should streamline the laser technology for land levelling in the province,” he added.

Patwari a shield for big farmers

Patwari a shield for big farmers
By Tahir Ali
Dawn 27th August, 2012

KHYBER Pakhtunkhwa has achieved aggregate target for farm income tax and land revenue set at Rs21 million last fiscal year which is, however, much lower than the sector’s potential.

If one goes by the slabs in the Ordinance 2001, the tax collection turns out to be a paltry sum because of so much non-compliance by the landed gentry.

The share of agriculture income tax (AIT) was just 0.11 per cent in the total provincial own receipts (PORs) of Rs18.91 billion and only 1.5 per cent in the direct taxes of Rs1.4 billion. Tax from AIT is targeted at Rs22mn for the current fiscal.

An official said the income from land tax/AIT dropped because the government, after second thoughts, exempted five acres or less land from land tax and the number of tax payers decreased.

But, the AIT should have gone up in the wake of rising farm incomes owing to increased support prices of wheat and sugarcane and rising cereal and fruit/vegetable prices.

Under the 2001 Ordinance, the AIT is levied on income from ‘cultivated land’ —- the net area sown and the harvest during a tax year, regardless of the number of crops raised, including area under fruit-bearing orchards. It is collected from the owner, mortgagee or lessee or tenant.

Land tax is collected at a fixed rate of Rs72 per acre while exempting 12/5 acres under crops and Rs300/acre for orchards.

Initially there was also no exemption for LT but later five acres or less of agriculture land under crops or orchards were exempted. Of late, this limit has been increased to 12.5 acres.

There are around 28,000 landlords holding over five acres, but only 100 are registered tax payers.

The taxes are collected by the revenue and estate department through patwaris. Small farmers say they have no political clout and have to oblige patwaris while remaining major contributors to the AIT.

“In the absence of any reliable computerised system for the assessment and determination of expected agriculture income each year and the lack of a sound computerised database of all landowners in the province, the AIT collection is left to the discretion
of the dreaded patwari.

He can claim any amount from a small landowner/farmer to extract bribe from him. “The Patwari can damage property record and lodge false complaint against you in revenue court,” said a farmer.

According to growers, there is rampant evasion of taxes and corruption in the system.

“Patwaris lack the power to make the powerful landlords pay the taxes. Once an officer asked a patwari in my presence to visit a landlord and collect the taxes from him. The patwari said he would not go because he may not be able to return as the landlord
had threatened him with detention if he visited him for tax collection.

The fact is big landlords hardly contribute any taxes while small farmers are subjected to unjust taxation,” he said.

“The problem will be there unless land record is computerised with an unquestionable database of landholders, their normal incomes, and a list of persons liable to pay taxes while the discretionary role of the patwari is minimised” he argued.

But a patrwari said, “many farmers are defaulters and our repeated visits and requests to them to clear their dues fall on deaf ears,” he said.

According to a farmer, there is no formula to assess the difference in quality of land, seeds, water and the weather effects.

“The provincial board of revenue needs to provide basic training to revenue officials on computing farm incomes on the basis of returns filed by growers,” he said.

Land revenue receipt, recorded at Rs604 million in 2007, rose to Rs915 million in 2011. It has been targeted at Rs920 million for FY2012-13.

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