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EVER since the seventh NFC award, signed in Gwadar in the last days of 2009, a large and growing share of federal tax revenue has been devolved on the provinces, along with large governance responsibilities. When the award was finalised, Shaukat Tarin was finance minister and led the negotiations and championed the downward devolution of power. He laid great emphasis on the responsibilities that now came to the provincial governments, underlining that the award should not be seen by them as a cash cow but as a signal to activate their own revenue lines and become serious about their responsibility to generate their own revenues as well.
The most recent provincial budgets just announced are a good opportunity to assess how far the provinces have come down the road to raising their own revenues, six years after the award became operational, and the last full year of the term of the ruling parties in each respective province.
Sindh had set a goal for itself in 2014, outlined in the Sindh Tax Revenue Mobilisation Plan 2014-2019, to raise its own tax receipts to Rs200bn by 2017. Last year, it raised Rs125bn, and for next year it has budgeted Rs154bn as own taxes. This is just under 20pc of the total receipts of Sindh. In the revised estimates for this fiscal year, this proportion came in at 19pc, so for the next year the target sounds a bit optimistic.
Half of this comes from the sales tax on services, a percentage that stood at 40pc when the revenue mobilisation plan was drawn up in 2014, so even though an improvement is clearly evident, its narrow base is a problem. Adding to the problem is the large and growing role of the informal sector that the sales tax machinery cannot reach. Part of the argument behind devolution was that those authorities closest to the taxpayers were better situated to make a collection. So Sindh’s challenge lies in broadening the base if the increases in own resources are to continue.
The most recent provincial budgets just announced are a good opportunity to assess how far the provinces have come down the road to raising their own revenues.
Punjab has similar issues with own revenues growing a narrow base. Its own revenues are just over 19pc of its general revenue receipts for next year. In the year 2010-11, the first full year of the new NFC award, this proportion was 16.6pc, so here too an improvement can be seen.
If one sees own provincial revenues as a proportion of the federal tax assignment — which measures specifically those tax revenues that are collected by the centre but transferred to the provinces — the performance of Sindh looks markedly better. Sindh’s share of own revenues as a proportion of taxes transferred from the centre is at 31.6pc in the current fiscal year, while Punjab is just above 27pc.
A breakdown of where the provincial tax effort has really paid off reveals something similar between both provinces. Sales tax on services remains the highest earner. In Punjab, this head accounted for 45pc of all provincial tax collections in 2010-11, but in revised estimates for the current fiscal year it has risen to cross 57pc, showing it to be the fastest-moving head in the provincial revenue effort.
Lagging far behind in both provinces are taxes on agriculture incomes. Punjab claims they have a plan in place to build this line. Sindh makes no such claim.
Other than this, the provinces are largely making hay out of a small assortment of miscellaneous revenue heads, some of which have literally dropped into their laps following the NFC award, like stamp duties or land revenue (not the same as agriculture incomes), showing a limited effort to actually venture out and build any new revenue lines of their own. That would involve tackling growing informality in their respective domains, documenting land ownership and titles more effectively and capturing the real value of real-estate transactions, for instance.
KP province has a bigger challenge before it. The economy of the province is smaller, dispersed, and geography poses formidable obstacles, and a new political party took control of the province in 2013, marking a discontinuity in political priorities, something that Sindh and Punjab did not have to reckon with.
Provincial own taxes in the current fiscal year are barely 9pc of general revenue receipts, and as a proportion of the federal tax assignment they are just above 13pc. The province has a lot of work to do in mobilising its own resources, and faced with far higher levels of informality, driven by the massive trading economy around the city of Peshawar, it will be years before they can appreciably change these proportions. The PTI government had a few innovative ideas on mobilising resources using forest resources, but the real meat is in finding ways to tap the large traders of the province, which will prove very taxing indeed, if you’ll pardon the metaphor.
The budget for Balochistan has not been announced yet so it’s not possible to say how well they have fared in building any revenue lines based on current numbers, but if the past is anything to go by, their challenges are even more stark than that of KP.
If the provincial governments restrict their revenue effort to sales tax on services and make no appreciable move to venture into the massive incomes accruing in agriculture and the enormous turnovers in their real-estate economies, their revenue effort will begin to plateau out from this year onward. That must not be allowed to happen because it will be a violation of the spirit of the NFC award as much as the obligatory surpluses that the centre imposes upon the provinces are.
This was the year to announce large new reform measures to tackle growing informality and unveil plans for activating new revenue lines, but the provinces have opted to tread water instead and focus on the forthcoming elections. In the years to come, this short-sightedness will prove to be a mistake.
The writer is a member of staff.
Twitter: @khurramhusain
Published in Dawn, June 16th, 2016
