May 21, 2006	Sunday	Rabi-us-Sani 22, 1427

LAHORE: Within the given rigid framework of an exceedingly centralised tax administration in Pakistan, the effort in Punjab over the past decades to enhance its own tax base has always resulted in the mushrooming of inefficient, low revenue generating levies without producing the desired results.

Interestingly, the province’s own tax resources have historically formed on an average less than 10 per cent of its total revenue receipts. In the fiscal year 2001-02, the provincial tax revenue of Rs11.770 billion formed just 9.78 per cent of its total revenue receipts. The share of provincial taxes as percentage of Punjab’s total revenues has since grown, but it is still estimated to form only 11.48 per cent (Rs25.771 billion) of the provincial revenue receipts for the outgoing fiscal year.

The extremely low share of the provincial own tax resources means that Punjab has to heavily depend upon federal transfers under the National Finance Commission (NFC) arrangement to meet its revenue and development needs.

As against the provincial own tax resource share of 9.78 per cent, the federal funds of Rs99.977 billion formed over 83 per cent of the total revenues of the province in 2001-02. Though the share of federal transfers as percentage of the province’s revenue receipts for the outgoing year is estimated to have gone down to 73.75 per cent (Rs165.513 billion), it is more because of a quantum jump in the generation of non-tax revenue of Rs33.124 billion. It means that provincial non-tax revenues have grown as percentage of the total revenue receipts of the province to 14.76 per cent during the outgoing year from 7.12 per cent in 2001-02.

Indeed, the centre is more to blame for this situation than the successive provincial governments, which have had little or no legal space to manoeuvre for levying efficient, revenue generating taxes in the country’s existing federal tax structure. In fact, the situation has led to the mushrooming of provincial taxes, especially indirect levies in the province.

The share of indirect taxes in the provincial tax resource has usually remained almost double the share of direct taxes. In 2001-02, indirect taxes contributed Rs7.671 billion to the provincial tax revenue as compared to direct taxes of Rs4.099 billion. The budget for the outgoing fiscal year estimates collection of Rs16.767 billion from indirect taxes as against Rs9.003 billion from direct taxes.

Not many years ago, the number of provincial taxes in Punjab stood at 36. Most of them were highly inefficient and a big cause of problems for taxpayers, especially the private businesses. In view of the negative impact of the multiplicity and inefficiency of provincial levies, it was decided to slash the number to nine in 2001-02. The decision paid off in the shape of increased tax revenues over the years.

Yet the provincial finance managers are once again finding it difficult, if not impossible, to substantially boost the provincial own tax revenue to reduce dependence on federal transfers, and develop at a faster pace.

“If the federal government allows us to levy sales tax on services, we can bring down the number of existing provincial levies to 2-3, as well as raise our tax revenues substantially,” Punjab chief secretary Salman Siddique said during his presentation at the third Punjab Development Forum (PDF) early this month. His statement reflected the wish of the provincial government to have fewer but efficient and high revenue generating taxes instead of several inefficient levies.

“If Punjab has to increase its own tax resource substantially, it will have to impose sales tax on services. It is going to be the most robust tax, which is critical expanding our own resources. But the problem is that the federal government is not letting us tax the services sector, and wants to keep it with itself. It is because Islamabad knows that the duck that lays golden eggs is the services sector,” a finance department official tells Dawn.

Why does Punjab want the federal government to allow it to levy sales tax on services? “The services sector, which already contributes 53 per cent to the provincial GDP of $60 billion, is going to be the main driving force for future economic growth. So you can well imagine the immense potential for revenue generation from this sector. Secondly, the imposition of sales tax on services will simplify tax collection and help eliminate inefficient levies that usually obstruct economic growth and block development of private businesses,” reply officials.

Two provinces, Punjab and Sindh, where the services sector has become the main driving force of economic growth have approached the central government to allow them to levy sales tax on services. However, the federal government has so far not responded positively to their request.

“Under the constitution, sales tax on services is a provincial tax. Legally speaking, Punjab, and for that matter any other province, can impose sales tax on services. But the problem is that the federal government has already central excise duty (CED) on most services, and under the law where there is an excise no taxation can be made. Hence, the provinces cannot tax the services unless the centre removes CED on them,” the officials say.

In 2001-02, the finance division had allowed Punjab to levy tax on 14 or so services. Later, the number was cut down to just six because the remaining services were already under the CED and the federal government did not withdraw it.

The areas where Punjab is allowed to levy provincial tax include extremely low revenue generating services like laundries, marriage halls, etc. “The services that really lay golden eggs like telecommunication, banking, carriage of goods by rail or air are still kept by the federal government to itself and remain under the CED. Unless the centre withdraws excise on buoyant services and give us some legal space for legislation in this respect, the province cannot tax them,” the officials add.

The federal government is holding on to the “right” to tax services on the pretext that permitting the provinces to tax this sector will cause inter-provincial issues to arise and lead to acrimony between them. As services like telecommunication, banking, etc., are spread across the provinces, thanks to the common market that has emerged in the country owing to free movement of goods and services across the provincial boundaries, Islamabad holds that it will be difficult, rather impossible, to determine the share of each province from the revenue generated from them.

However, the Punjab finance department officials do not buy this argument. “This is a flimsy argument in this age of computers. Everything relating to their businesses is recorded on the computers by the service providers. The entire data pertaining to the size and place of a business transaction can be collected from computers and respective shares of the provinces determined,” retort the provincial officials.

Tax incidence

KARACHI: The following are six income backets and the level of tax incidences on them:

Monthly Total Tax As % of

Income (Income Tax + incidence

Indirect taxes) total income

Amount in rupees

15,000 746 4.97

30,000 1,938 6.46

50,000 5,370 10.74

75,000 11,488 15.37

100,000 27,012 27.01

400,000 155,036 38.75

The table above is based on Dawn survey. It covers average family of five members. The tax incidence can vary to quite an extent for a number of factors. — Moinuddin Ahmed