PESHAWAR: The Khyber Pakhtunkhwa’s Medium Term Inclusive Growth Strategy 2015-18 is aimed at making substantial efforts by the provincial government for generating revenue to increase provincial tax from the current 0.47 per cent to about 0.8 per cent.

Titled ‘Reclaiming prosperity in Khyber Pakhtunkhwa’, the strategy, prepared by the planning and development (P&D) department, asks the provincial government to take concrete measures to increase the province’s own revenue.

It says that tax revenue of the province stood at Rs13 billion in 2013-14, about 0.47 per cent of province’s GDP.

The strategy paper identifies federal receipts as main source of the province’s revenue because its share in the divisible pool of tax revenue was 14.62 per cent. In 2013-14, federal tax assignments of Rs184 billion, straight transfers of Rs29 billion, Rs 22 billion in lieu of one per cent of federal divisible on account of war against terrorism and Rs25 billion arrears under the head of hydel profit accounted for major chunk of Rs322 billion revenue of the province.

Provincial govt asked to make substantial efforts for revenue generation

The paper says that the provincial government relies very heavily on revenues, collected by federal government and then transferred to province. It notes that the province has also enjoyed benefits of hydel power profit amounting to Rs25 billion per annum that federal government was expected to pay by 2013-14.

However, there is another set of arrears of Rs50 billion, whose annual payments are still being worked out after adjustment against Pepco receivables. It raises a looming possibility of running short of a very substantial annual flow of funds, once the province has received all its arrears and therefore it would have to make a major effort to increase its own source revenue.

The strategy says that assuming Khyber Pakhtunkhwa sets the same growth and investment targets as the federal government national targets under the Vision 2025, its total expenditure will increase from Rs327 billion in 2013-14 to Rs398 billion in 2015 and Rs826 billion in 2020.

It notes that although the federal transfers and hydel profit would continue to provide cushions vis-à-vis rising expenditure, yet it would not be enough even with optimistic projection of tax-to-GDP ratio, thus necessitating a revenue mobilisation effort to meet high growth targets of the provincial government.

The province’s own main sources of revenue include Rs1,300 million of land revenue, Rs8,000 million of GST on services, Rs1,075 million of motor and vehicle tax, Rs670 million of stamp duty and Rs507 million electricity duty.

The paper suggests each of these sources of revenue should be made more buoyant as it requires far reaching policy and institutional reforms.

It says that service sector in 2010-11 was estimated to be 58.5 per cent of province’s GDP and if a value added tax at the rate of 16 per cent is applied to all services, the potential tax revenue would have been Rs249 billion in 2013-14.

“The current tax collection is effectively targeting only 3.2 per cent of the full potential,” it adds.

The paper says that agricultural land and incomes are taxable under the NWFP Land Tax and Income Tax Ordinance, 2001, however, tax rates on agricultural land are frozen at 2,000 level and income at 2001 level.

It suggests that changing current form of tax collection from land to income tax would require building modern income tax machinery that can take a couple of years but in the interim, land tax rates can be revised in a way that tax collection from land is comparable with income tax collection in other sectors of the economy.

Published in Dawn, September 11th, 2015

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