Notwithstanding the fact that the share of provincial tax revenue of the Khyber Pukhtunkhwa is stuck around a dismal low 0.46 per cent of GDP, Finance Minister Engineer Humayun Khan announced a tax-free budget for 2012-13.

No serious effort was made in the past four years to expand the tax net to sectors with huge incomes but paying no or very little tax. Powerful interests have thwarted all feeble moves.

This is happening despite the provincial government’s commitment made under the NFC Award. The latest budget white paper also carries the commitment: “The provinces shall improve their tax base” (by effectively taxing the agriculture and real estate sectors) and “collection system” to help the country achieve the 15 per cent tax-to-GDP ratio by 2014-15”. No mention was made in the document as to how the tax revenue be raised from the current low levels.

Tapping revenues from agriculture, real estate and other under-taxed sector is no go area in the province because of strong resistance from the provincial ruling elite.

The dismal performance is attributed to weak tax administration, low taxable capacity, huge informal sector, limited revenue base and political unwillingness to exploit the potential because of pressures of interest groups. The ‘holy cows’ are virtually tax exempt.

In 2009-10, the province collected Rs2.289 billion as both direct and indirect taxes. For the year 2012-13, the projected target has been set at Rs3.976 billion. In the post- NFC award, the province has added only Rs1.687 billion over the past three years.

Not only the overall tax collection has not been increased significantly but taxation is highly concentrated on the indirect taxes. Tax receipts from direct taxes is targeted at 36 per cent in 2012-13, just a nominal increase from about 35 per cent in 2009-10. While the share of indirect taxes has been pitched slightly lower at 63.2 per cent in 2012-13 from 64.8 per cent in 2009-10.

The rich are taxed lightly because of resistance by the landed gentry. The tax on farm incomes is meagre when compared to its revenue potential.

The sectors under direct taxes are agriculture, property, land revenue, trade, professionals etc. The direct tax, estimated at Rs1.462 billion in 2012-13, is up by a mere 4.1 per cent from revised Rs1.403 billion for last fiscal year. The direct taxes include a major chunk of Rs920 million from land revenue which is a rent payable to the state. This includes irrigation water charges (abiana).

In 2009-10, Rs15.740 million was collected from tax on farm incomes. The tax was projected to reach Rs21 million in 2011-12.

The agriculture sector includes two levies: land tax and agriculture income tax (AIT). There is a wide gap between the expected and the actual tax collection in both these categories. The bulk of revenue was generated through the fixed slabs on land while less than Rs1 million was collected from AIT. Less than 100 farmers are registered as AIT payers in the whole province.

The urban immovable property tax has a narrow tax base. From Rs92 million in 2011-12, the revenue is projected at Rs98 million for 2012-13, up 6.5 per cent despite massive increase in rental value of buildings and lands. This calls for revaluation of property values for tax assessment, followed by expansion of tax base.

Indirect taxes comprise provincial excise duty, motor vehicle tax, stamp duties, entertainment tax, electricity duty etc. The collection of indirect taxes is projected at Rs2.514 billion in 2012-13 as against Rs2.245 billion in 2011-12, a marginal rise of 11.9 per cent.