Provincial taxation has a huge potential in two — yet to be fully realised — areas: the sales tax on services sector which shares nearly 60pc of the country’s gross domestic product; and tax on farm incomes with agriculture that accounts for close to 20pc of the GDP.

The provinces have outperformed the Federal Board of Revenue in collecting sales tax on services, showing how some taxes can be better collected at the sub-national level; though the collection pales into insignificance when seen in the context of the size of the services sector in the economy.

Much of this business activity is in the informal sector while taxation responsibility has only recently been acquired by the provinces. The bulk of this revenue is contributed by major developed cities where business is far better organised and is part of the documented economy. For example, the Sindh Revenue Board collects 78pc of its sales tax on services from a few sectors including the Karachi seaport, airport and terminal operators, telecommunications, banks, insurance, franchise, stock brokers, etc.

As opposed to their performance in urban areas, the provinces have a dismal record in collecting tax from farm incomes and land revenue. These low revenue yields demonstrate the inability of the tax authorities to deliver effectively and the ruling parties’ lack of political will to raise provincial revenues from the landed aristocracy.

According to official procedure, agricultural income tax (AIT) or land revenue, whichever is higher, is collected by tax authorities. The main barrier is the domination of big farmers in the provincial assemblies and their captive rural electoral constituencies. With the general elections early next year, none of the ruling political parties are likely to risk annoying the rural gentry.

As opposed to their performance in urban areas, the provinces have a dismal record in collecting tax from farm incomes and land revenue

With the digitalisation of farmland records in Punjab and Sindh, it was hoped that AIT would go up significantly because of clear land tiles and the reduced discretionary role of revenue officials, particularly of patwaris and tapedars. So far the nominal IAT collection has fluctuated from year to year within a narrow band.

However, a significantly improved AIT revenue is direly needed to step up investment for the uplift of an essentially backward agriculture run by an outdated mode of farming and marketing. A World Bank report just released highlights that the government spending on agriculture as a ratio of overall budgeted outlays and agricultural GDP is far lower than other countries in the region. Since agriculture is a provincial subject, the failure lies squarely on provincial governments.

For want of modernisation, the share of agriculture to GDP is declining gradually, outpaced by growth in the services sector and industry. Upgrading irrigation facilities, building farm-to-market roads, setting up storage facilities, etc, requires enormous investment; which in turn shall raise productivity and income of small farmers and landless peasants.

But things are moving in the opposite direction. The Sindh government has also stopped distribution of state lands among landless peasants.

The provinces need to put agriculture at the centre of their development strategy for both domestic food security and exports to food deficit neighbouring countries.

The latest figures show well over 40pc of the population engaged in agriculture shares less than 20pc of the GDP (national income). Here it must be conceded that there is a huge transfer of resources from rural areas to urban centres because of the existing market manipulation, both in case of prices of farm inputs and crops. And because small farmers suffer the most, this trend needs to be curbed.

Big farmers have the wherewithal and know how to get the best deal. They are major beneficiaries of support prices, subsidies on farm inputs, subsidised tractors schemes, low irrigation water charges, etc. But they pay very little income tax or land revenue.

Of the total provincial revenue collected by Punjab in fiscal year 2016 only 1pc came from AIT and 7.5pc from land revenue. In case of KP, AIT’s share was 0.6pc and that of land revenue 12.6pc. AIT contributed 0.1pc and land revenue 5.8pc of Balochistan’s total revenue. The worst performer was Sindh with 0.3pc collected as AIT and 0.2pc as land revenue. Sindh has the biggest farm economy after Punjab.

The percentages have also to be seen in the backdrop of impressive provincial tax revenue growth of 37.6pc with Sindh taking the lead in collection of sales tax on services, especially from the port city of Karachi. It only shows the AIT and land revenue are not keeping pace with the rise in the overall tax revenue.

Coupled with capacity building of tax authorities, the State Bank of Pakistan has suggested that ‘introduction of incentives, such as reinvestment of tax receipts for improvement of infrastructural development, may help raise substantial revenue from the sector’.

Published in Dawn, The Business and Finance Weekly, May 29th, 2017