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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About Tahir Ali Khan
I am an academic, freelance columnist, writer and a social worker.

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