Owing to weak fiscal governance, tax collection in Khyber Pakhtunkhwa stands at a mere Rs15 billion, with the largest share coming from the general sales tax on services.

Though the share of the provincial tax revenue is stuck at a dismal low of 0.47pc of GDP, KP does not have any effective programme to maximise revenue generation

The past four years have recorded shortfalls in the projected budgetary targets. But once again a revenue target of Rs22.306bn has been set for 2017-18, against provisional collection of Rs15bn this year.

An official of the KP finance department said that the World Bank would provide $200 million budgetary support to help the provincial government in raising revenue from its own sources. “We are expecting to enhance the narrow tax-base of the province”, the official claimed.

Over 82pc of the provincial tax revenue is contributed by indirect taxes. The rich landed gentry are taxed lightly, when compared to their revenue potential.

The commitment made by the provinces in the last NFC Award, to increase their share in tax revenue, has not been honoured.

Though the share of provincial tax revenue is stuck at a dismal low, KP does not have any effective programme to maximise revenue generation

Tax experts attribute the poor collection to weak administration, low taxable capacity, a huge informal sector, limited revenue base, and political resistance to exploit potential.

The KP finance department data shows that the collection from direct tax was a mere Rs2.497bn in 2013-14, which was projected to reach Rs3.8bn in the outgoing fiscal year because of better collection of tax on agriculture, and urban immovable property.

When the PTI-led government came to power, the collection from agriculture income tax (AIT) was Rs22m but in the next three years it reached Rs68.8m in 2015-16. The AIT will be Rs88m in 2017-18.

On official record there are 27,794 landlords who own in excess of five acres, but only a few hundred are registered as AIT payers. Over the past four years, the AIT has contributed a meagre 0.02pc, 0.1pc, 0.02pc and 0.3pc to provincial tax receipts, respectively.

Similarly, the collection from urban immovable property tax was Rs447m in 2012-13, expected to reach Rs1bn in the outgoing fiscal year. However, for the next year a target of Rs1.2bn has been projected.

The urban immovable property tax revenue, with a narrow base, stagnates between Rs440m to Rs670m despite a huge increase in the rental value of buildings and lands. This calls for revaluation of property for tax assessment, and expansion of the tax base.

The land revenue, which includes water charges, was estimated to fetch Rs2bn in the next fiscal year.

Indirect taxes — GST on services, excise duty, motor vehicle tax, stamp duties, entertainment tax, electricity duty etc — are projected at Rs19.23bn for fiscal year 2017-18. The share of indirect taxes in the overall provincial revenue stood at 82pc or Rs7.98bn in 2013-14 while it reached Rs9.89bn in 2015-16.

The biggest share in indirect tax came from GST on services: Rs7.26bn in 2015-16 which is targeted at Rs13.65bn in 2017-18 as against the projected revenue of Rs10bn for the current fiscal year.

In the budget 2017-18, few more services were brought under the tax net.

Up to FY2011-12, the Federal Board of Revenue was collecting sales tax on 11 categories of services on behalf of the province. KP received Rs8.9bn, after deduction of the FBR’s service charges. The coverage has now been extended five times, but not with proportionate collection.

Service providers with an annual turnover of over Rs5m fall in the taxable category. Currently, service providers registered with KPRA stand at over 1,500 taxpayers while only 580 sales tax returns were filed in 2016.

There are also policy issues. The province is losing Rs4bn per year due to lack of legal cover for input adjustment. Though a MoU was signed with the FBR in July 2016, is yet to be implemented.

The issues are: jurisdiction over services and the apportionment of revenue among the FBR and the revenue agencies of Sindh and Punjab.

The tax revenue from motor vehicles, road permits and fitness was projected at Rs2bn for the fiscal year 2017-18, up from a stagnated figure of Rs1.8bn over the past few years. The entertainment tax shows a negative growth.

More than 120 items are subject to varying stamp duty rates, but the bulk of the revenue is collected from stamps on property transfers. The stamp duty includes virtually all kinds of transfers and legal documents.

The revenue collection from this head is projected at Rs900m for 2017-18 against Rs800m in 2016-17; and has remained less than Rs900m for the past three years.

Published in Dawn, The Business and Finance Weekly, June 26th, 2017