ISLAMABAD: Khyber Pakhtunkhwa is set to face a significant fall in its financial resources owing to failure of the government to substantially increase its revenue base over the past five years.

Currently, the KP government is receiving arrears from the federal government on net hydel profits (NHP) and entering a new agreement on the share of hydel profits. Once arrears are settled and a new agreement is made, revenues are likely to fall.

The total revenue from hydel profits currently makes up 5 per cent of the total provincial revenues.

The flow of the federal transfers has been erratic though still constitute almost 90pc of total revenue of the provincial government.

An official source in the KP finance department told Dawn that the budgetary pressures are already showing their impact as the provincial cabinet had reduced expenditures by 20pc or Rs29 billion in FY 2016-17.

One of the reasons, according to the official, is the demand for funds for three tiers of the local government was growing as the provincial government has to ensure availability and transfer of 30pc of its funds to local governments.

The additional cushion was made available to the KP government in terms of 1pc of the divisible pool as compensation for war on terror and releases of past NHP arrears are being used as funds transfer to the local governments.

Since the establishment of local governments in KP, more than Rs48bn have been released to these administrative units, which were historic.

Official data shows that in the past three years, the provincial tax and non-tax receipts fell short of their respective targets.

In the year 2014-15, the provincial revenue receipts fell short of target by Rs8.5bn as it reached Rs11.28bn, against the target of Rs19.83bn for the same year.

The revenue collection stood at Rs12.84bn in 2015-16 as against the target of Rs22.6bn, reflecting a shortfall of Rs9.76bn.

However, the revenue remained on target of Rs10.19bn for the year 2013-14.

The provincial government has not finalised the revenue figures for the outgoing FY2016-17 so far.

According to the source, the growth in revenue increase was the direct outcome of increase in allocations from the NFC and the devolution of general sales tax.

Several reasons were listed for low provincial revenue resources in the past three years. One of them was that revenue forecasting was not based on a clear fiscal policy and analysis of revenue type. The revenue targets are set incrementally and didn’t disaggregate between arrears collection and new collections.

Other weaknesses identified in the provincial revenue system are revenue collection are not clearly monitored, no regular tax audits and investigations are carried out and no tangible measures are being taken to promote tax compliance or manage the risk of low compliance.

The provincial finance department has evolved several measures for revenue enhancement.

According to the draft proposals, it was suggested to adjust tax- and fee-based rates against inflation in the upcoming budget.

It was proposed to develop a system of periodic revaluation and indexing the tax rate to the rate of inflation.

Rates for specific tax lines, particularly for non-tax lines have not been updated for a long time, in some cases since 2005. The rates of abiana were not increased since 2014.

Fee rates charged by the department of mines and mineral have remained the same since 2009. As the rates was not adjusted since 2009, in real terms the government is charging 57pc of the rate that it was charging in 2009.

According to the proposed recommendations if implemented, the adjustment in royalty rates would generate 43pc additional revenue under the royalties. The additional revenue projected from the adjustment of inflation was estimated at Rs3.4bn.

According to the official, a similar growth was projected to realise from a number of tax and non-tax revenue lines, whose rates have not been revised for more than five years after adjustment of inflation.

To improve tax and non-tax planning, forecasting and policy-making, it was also suggested to establish a tax policy unit in finance department which could advise on the best course of action on these points.

Currently, provincial tax revenue and non-tax revenue are being collected by several departments.

Published in Dawn, December 10th, 2017