AMONG the many important budgetary targets missed by the Punjab government during the present financial year is the hefty 39pc shortfall in its tax collection target of Rs164.5bn.

Some blame this shortfall on the ‘unrealistic’ projections for the provincial tax revenues in the budget, which were made without effectively taxing property and income from agriculture.

Others argue that the rapid improvement in the provincial tax collection isn’t possible without reforming the corrupt tax collection machinery and overhauling the tax administration, even if the tax net is broadened, the rates raised and new taxes implemented.

The provincial budget for the next fiscal year seems to have made an attempt to create a balance between these two points of view. It has kept the projections for tax revenues lower and broadened the net, and has set in motion a process to gradually reform the administration.

“The government will continue the shift from direct taxes to indirect taxes because these are less harmful to growth,” note the Punjab budget documents

“We want to first improve collection and bring equity into the existing base instead of adding to the burden of taxpayers,” contended Dr Ayesha Ghous-Pasha, the new provincial finance minister who presented her first budget last Friday.

It is in line with this thinking that the projected provincial target of Rs160bn for 2015-16 is 2.5pc lower than this year’s original estimate of Rs164.7bn, but 40pc higher than the actual collection of Rs114bn.

The Punjab Finance Act 2015 not only brings 10 new services into the GST on services net, but also removes certain distortions in the tax regime, making it a little more equitable. It promises to reward tax compliance, punish evasion, remove inequities, rationalise rates and abolish exemptions as part of the tax reforms exercise.

Furthermore, it proposes levying an infrastructure development cess. The cess, however, is likely to be challenged in courts even if the provincial assembly passes the bill.

“The government’s attempt to tax large farm houses or luxury houses during the last couple of years has produced negligible revenue because the affected people had obtained court orders against these taxes,” noted a Punjab finance department official on the condition of anonymity.

The government had collected Rs14m from luxury houses against the original target of Rs500m, and Rs288,000 from farm houses against the projected Rs15m during the present fiscal year.

The budget documents show that the government has set up a tax reforms unit to strengthen the provincial capacity for tax policy analysis. “Currently, the Punjab government has an incomplete picture of its tax system… while the main hindrance is a lack of capacity, there is also a lack of reliable data — economic and sectoral data as well as taxpayer data, which is used as the basis for assessing different taxes that need to be updated,” say the documents.

The tax reform unit is expected to be the key contributor to the tax policymaking process and analysis.

Another major shift in the Punjab government’s tax policy appears to be its tilt towards indirect taxes.

“The importance of indirect taxes will continue to grow because it is the most important source of instant revenue generation and the more sustainable way to balance budgets and stimulate growth. The government will continue the shift from direct taxes to indirect taxes because these are less harmful to growth,” note the budget documents.

The need for spiking the province’s own tax revenues cannot be overstated to reduce Punjab’s reliance on federal transfers to boost public investments. Next year, for example, federal transfers will contribute almost 78pc to the province’s revenue income, compared to a mere 14pc by provincial taxes.

The combination of lower-than-promised federal transfers (Rs58bn) owing to the Federal Board of Revenue’s failure to meet its projected target for this year and the shortfall in provincial tax collection (Rs50bn) is showing on provincial development spending.

The lower-than-targeted federal and provincial tax collections are largely responsible for the 30-32pc cut in the promised public investment spending of Rs345bn at the expense of job creation and development.

If Punjab has to move forward and grow at a faster rate, it has got put its house in order. Provincial tax reforms could be the most important step in this direction.

Published in Dawn, Economic & Business, June 15th, 2015

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