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Reluctant tax collector

June 24, 2013

SINDH, which has a high growth potential, could have presented a deficit-free budget for the next fiscal year, if revenue initiatives had been taken to effectively tax all categories of income, including earnings from agriculture.

This would have made a difference because it would have at least minimised the deficit, which has been placed at Rs21.637 billion for the budget 2013-14.

Financial experts are of the view that the provincial budget should have been based on an assumption of 10 per cent inflation and 3.5 per cent economic growth. The collection of taxes in the budget 2013-14 should have been projected at 13.5 per cent over the last fiscal’s actual revenue.

Consequently, this would have resulted in higher tax revenue, even if the provincial government, as is obvious from budget documents, did not make serious attempts to expand the tax base, weed out corruption, and plug revenue leakages.

Though a major chunk of the provincial budget would be financed through federal transfers of Rs409 billion, with Rs333 billion coming from the divisible pool, Rs67 billion through straight transfers (royalty on oil and gas etc.) and Rs9 billion on account of grants, the provincial government would be left with a deficit of Rs21.637 billion on total expenditure of Rs617 billion, against total receipts of Rs595.575 billion.

However, if the provincial government had based its revenue growth at 13.5 per cent as had been suggested by experts, it would have at least narrowed down the budget gap to Rs4.559 billion, only on collection of total provincial tax receipts at Rs132.262 billion, against the 2013-14 budget estimate of Rs120.182 billion.

The increase in provincial tax receipts to Rs132.262 billion, along with federal transfers of Rs409.012 billion, would have helped the total provincial tax receipts to go up to Rs541.274 billion, against the 2013-14 budget estimate of Rs529.195 billion.

As a result of this, the total provincial receipts would have gone up to Rs612.653 billion on adding up budget estimates coming from current capital receipts at Rs18.442 billion, other receipts of Rs44.937 billion and public accounts of Rs8 billion.

This would have provided Sindh fiscal space, because with an estimated 2013-14 total expenditure of Rs617.212 billion against total receipts of Rs612.653 billion, there would have been a small deficit of Rs4.559 billion, which could have been easily managed on minor fiscal or even normal administrative adjustments.

The agricultural income tax being a provincial subject, experts estimate that it could yield around Rs5.874 billion if it was taxed at five per cent under the presumptive tax regime. This could have turned a deficit budget into a surplus budget.

But, unfortunately, all the provinces have failed to effectively collect agriculture income tax, with Sindh’s collection at around Rs200 million, and Punjab’s at Rs800 million.

Similarly, these experts say that by licensing all retail and wholesale shops at a flat rate of Rs1,500, Sindh would have collected around Rs1.5 billion per annum from around one million shops located in it. There is large scale consumption of imported liquor, but it is being sold without any taxes or levies. If the provincial government imposes a fixed charge on the sale of imported liquor, it can collect around Rs2.5 billion.

The infrastructure cess during the current fiscal fetched around Rs17 billion, but if serious efforts are made without discrimination, it will yield up to Rs25 billion, say experts. Presently, petroleum and petroleum products entering Sindh do not pay the cess. The Afghan Transit Trade (ATT) and some other types of cargo are also exempted from the infrastructure cess.

It is therefore clear that the Sindh government has failed to introduce tax reforms that would have increased its revenue collection.

Under the constitution of the Islamic Republic of Pakistan, there is a distribution of rights of the federation and provinces for levying and collection of taxes and duties. In principle, four kinds of taxes are collected. These are: income tax, consumption tax (also known general sales tax), tax on transaction for assets, and user charges.

Strangely, the income tax on agriculture falls under the ambit of provincial governments, where all federating units of the country have failed miserably and therefore have to depend on their revenue share from the federal divisible pool.

On the consumption side, a substantial portion of tax on rendering of services falls within the purview of the provincial governments. All transaction taxes on assets, including registration and stamp duties, fall within the ambit of provincial taxes. This sums up the importance of provincial taxes.

All user charges, such as urban immovable property tax, which is a tax of local bodies, are also collected by provincial governments. Similarly, under the Constitution, the right to collect licensing of professions and shops also inter alia lies with provincial governments.

While a feeble attempt has been made by the provincial government in the budget 2013-14 proposals to broaden the tax base, it falls too short of the measures required to make higher contribution to the tax-to-GDP ratio.

Sindh Chief Minister Syed Qaim Ali Shah, who also holds the finance portfolio, argued in his budget speech that with the existing tax base, it was not possible to achieve the desirable tax-to-GDP ratio of 15 per cent fixed under the NFC Award by the year 2014-15.