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Sindh’s quest for tax reforms

Updated June 19, 2017

Having achieved outstanding success in a sustained pioneering effort — collection of sales tax on services — the Sindh government is exploring new ways to boost provincial tax revenues.

Not only that, part of the current exercise is to revamp public institutions in order to improve governance and service delivery. The existing provincial planning and development department is being turned into a semi-autonomous Planning and Development Board to assist the government in policymaking and speedy execution of development projects.

To cut delays in project execution and to capture real time progress on major schemes, a Monitoring Dashboard is being set up. Institutional capacity is a major issue in service delivery which results in cost-over runs, waste and leakages of huge funds. The cost benefit ratio is distorted.

Implicit in the autonomy of the federating units is economic self-reliance and realising the potential tax revenue will help Sindh achieve that goal

But the most radical proposal now under the provincial government’s consideration is devolving collection of urban immovable property tax to local bodies.

“In our own experience, the devolution of tax collection at an appropriate level increases efficiency and transparency”, observed Chief Minister Murad Ali Shah in his budget speech earlier this month. He supported the move with his remark:”Societies can only progress if they are provided with a robust local government.”

And this new responsibility, when devolved, will ‘increase the resources’ of the local councils. He noted that over Rs2 billion collected as urban immovable property tax was dismally low as compared to its huge potential. The property tax is now collected by the provincial government which shares revenue thus raised with local councils on a 50-50 basis.

Currently, local bodies have no taxation authority and are funded by the provincial governments for running expenses as well as development spending. Annual allocations for them are made by the Provincial Finance Commission.

While deviating from many of its founding principles, successive PPP governments have been the country’s most effective vehicle for promoting fiscal federalism.

Yet the party’s weak commitment to the development of autonomous local governments has provoked severe criticism. The chief minister’s latest move is likely to face opposition from MPAs who seek to centralise power at the provincial level.

Under the present arrangement local bodies are essentially accountable to the provincial administration and not so much to the voters. If grass root organisations are allowed to raise local taxes, they would be answerable to local taxpayers/voters.

And going by the present dispensation, district governments are accountable to the provincial government but not vice versa. This has been a cause of social tensions with political divide turning into a hurdle in the rapid integration of ancient rural and modern urban segments of the provincial economy, social progress and prosperity.

Press reports also suggest the provincial government is toying with the idea of merging two revenue authorities — the Sindh Revenue Board (SRB) and the Sindh of Board of Revenue (SBR). While no final decision is yet in sight, some ideas or options are being floated at the policy level. Loose ideas include transfer of agricultural income tax (AIT) from the SBR to the SRB.

The SBR has successfully digitalised record of farmlands but it has not succeeded in realising the full potential of agricultural income tax. A mere Rs.393 million is estimated to have been raised this fiscal year while the target of Rs1bn, set for 2017-18, appears to be too ambitious going by the past collection record.

But in the case of a merger of the two revenue authorities, some argue that the clash of different work and management cultures of the two organisations would pose a serious problem. Mergers and acquisitions have not been an unqualified success, even in case of multinationals which are governed by best international practices.

In case of transfer of AIT to the newly created tax authority, the land revenue will have to be insulated from AIT.

But some tax experts suggest that it would be easier for the SRB to take over some of the functions of the provincial excise department like professional, entrainment tax etc.

While the final decision on revamping the taxation system is unpredictable at the moment, it is clear that the incumbent chief minister is trying to change things for the better.

Implicit in the autonomy of the federating units is economic self-reliance. And realising the potential tax revenue will help Sindh achieve that goal.

The critical problem lies in developing trade skills and expertise, and even commitment to an all-pervasive work culture in the provincial administration; which is linked so deeply with the province’s progress, prosperity and well-being.

There are limits to which ordinary citizens can be alienated from elitist politics and economics.

Published in Dawn, The Business and Finance Weekly, June 19th, 2017