KARACHI, Oct 29: While pointing out the constitutional authority of the provinces in respect of agricultural income tax and the sales tax on services that constitute 75 per cent of the GDP, the State Bank of Pakistan wants the provincial and local governments, particularly the “relatively well-off provinces such as Punjab and Sindh” to step up their revenue mobilization efforts.

In its annual report on review of the economy for the year 2004-05 released on Saturday, the central bank terms the almost total dependence of all tiers of the governments -— local and the provincial —- on the federal taxes a “weakness in the revenue structure”.

“The taxation of agricultural income has already received considerable attention at the policy level but tax yield remains low,” the report observes and expresses surprise that there has been little debate on the poor growth in the services sector taxes.

The SBP report makes it clear that the provinces will have to significantly enhance their tax collecting capacity to meet their financing requirements. Such efforts will greatly improve the tax-to-GDP ratios, and will also meet the objective of fiscal decentralization.

In an analytical and comparative review of the revenue structures of the provinces, the SBP reports deterioration in vertical imbalances in the period when devolution process was set in during 2000-05 as compared to pre-devolution period of 1995 to 2000. On the one hand, the share of provincial revenues in total revenue increased marginally from 6.8 per cent in pre-devolution to 7 per cent in devolution, but on the other hand, the share of current expenditures increased from 23.8 per cent in 1995-2000 to 26.3 per cent in 2000-05 period stretching further the vertical imbalance. As a result, contrary to the objectives of fiscal devolution exercise, the reliance of provinces on receipts from federal government has increased.

Vertical imbalance, the report explains is a degree of reliance of a provincial government on the federal government revenues to support their expenditure.

The SBP report singles out Punjab which showed the most impressive performance in 2004-05 when it registered a revenue surplus of Rs44.9 billion that indicated 82.3 per cent growth on a year to year basis. Punjab’s revenue growth in 2004-05 was 16.5 per cent with a slower 4.2 per cent growth in current expenditure. Development expenditure increased by 59.3 per cent in 05. It includes with Rs20.8 billion going to the local governments, Rs14.5 billion to roads, Rs6 billion to water and power and Rs4.6 billion to rural development.

Sindh’s budgetary performance during 2004-05 showed an improvement as revenue deficit declined by 58.4 per cent reaching Rs3.1 billion. The revenue receipts increased by 20 per cent and current expenditure increased by 13.6 per cent. Despite this deficit, the Sindh government increased its developmental expenditure by 86.4 per cent to Rs29.8 billion leading to a financial gap of Rs32.9 billion. The Sindh plans to finance this gap to the extent of Rs18.3 billion from outside ADP resources, Rs9 billion grants and Rs5.4 billion net public accounts receipt.

The SBP warns that Sindh’s financial position will remain poor so long as it does not improve its revenue receipts.

Balochistan, the report says had been engaged in financing of its development budgets through the years. Its total resources amounted to Rs29 billion against current expenditure of Rs26.2 billion and development budget of Rs14.9 billion. Worsening of the financial situation has forced the Balochistan government to enter into an agreement with the SBP for creating a block loan of Rs9.3 billion. In June 2004 this loan amounted to Rs8.7 billion indicating that it is being serviced.

The NWFP’s revenue receipts amounted to Rs45.3 billion, the current expenditure Rs42.7 billion and development budget of Rs15.9 billion. Since 2001, the NWFP government has embarked upon a programme of retiring federal government loans. In 2003 it retired Rs5.7 billion, Rs2 billion in 2004 and Rs2.5 billion in 2005. It plans to retire Rs3.2 billion in the current fiscal year and then Rs12.8 billion by the year 2011. By 2005 end it carried a debt burden of Rs61.1 billion including Rs23.6 billion of the federal government.

What is cause of concern for the State Bank is weak buoyancy in tax receipts and the seemingly inability to widen the tax base substantially. A Rs900 billion revenue mobilization during the year 2005 looks impressive but is a cause of concern when weighed in context of 8.4 per cent economic growth and fall in tax-to-GDP ratio.