The Panel of Economists has proposed the federal government to transfer collection powers of Capital Value Tax (CVT) on immovable property to the provinces. The "Panel of Economists" report issued on Tuesday recommended to strengthen the own source revenue base of provinces and provide incentives to increase own source revenue effort. This will include devolving the CVT on immovable properties to the provinces.
The general sales tax (GST) on all services needs to be made through a straight line transfer to the province even if it continues to be collected by the Federal Board of Revenue. It further recommended the government to design and introduce a system of performance transfers that make certain transfers conditional upon the province improving its own source revenue collection. Strengthening provincial own source revenue will help in reducing the vertical fiscal imbalances.
It will also help reduce provincial fiscal deficit and the problem of under-funded provincial expenditure mandates. Currently, the federal government is levying GST on services on electricity, telecommunications, gas, air travel etc and retaining a proportion of these taxes even though constitutionally GST on services is a provincial subject.
The issue is somewhat different in the case of "Capital Value Tax on Immovable Properties" where a Supreme Court of Pakistan judgement has given Federal government the right to levy and retain this tax. The latter limits the province's ability to utilise the full potential of a functional property tax, which the province with its much better developed capacity is in a more advantageous position to levy than the federal government.
At present, there are no incentives given by the federal government to the provinces for increasing own source revenues. Conditional transfers will ensure that provinces have incentives to increase own source revenue. The provincial and local government tax structures also raise the cost of production.
For instance, different levels of government levy multiple taxes on the same tax base, eg, GST is levied at the federal level, professional tax by the provincial government on a wide array of businesses (with an additional 'bed tax' in the case of hotels), while local governments impose a professional fee. Similarly, there is an entertainment tax levied by the provincial government and an entertainment fee by the district government, both of which should be replaced by the GST.
Referring to the NWFP, the panel said that the NWFP government depends on the federal government for 90 percent of its expenditures. The province generates only 10 percent of its revenue from its own sources. The federal transfers are in the form of net hydel profits, transfers from the federal divisible pool, subvention grants from the federal government, foreign and federal government loans. It is these rather vertical fiscal imbalances that need to be addressed since most of the revenue is collected at the federal level whereas the expenditures on service delivery are provincial and local.
For the Province to increase its share in revenue generation and stimulate growth in the long-term would require raising its own revenue from 0.7 to 0.8 percent of GDP over the next 3-5 years. This increase works out to a 13-15.5 percent nominal increase in own revenue. In order to mobilise more of its own resources, the government of the NWFP will have to improve its tax policy and tax administration.
A number of recently completed policy studies indicate that there is considerable potential to generate higher own revenues over the medium term - by as much as 2.3 times the current level, in real terms. There is even greater scope for increasing taxes such as Motor Vehicle Tax, Stamp Duty, Professional Tax and Urban Immovable Property Tax to 2.5-3.0 times.
This entails a thorough review of tax structure and exemptions. For instance, although the NWFP government took a bold step of imposing the Agricultural Income Tax (AIT) on all farmers, irrespective of their size, to-date AIT is levied in only 5 of the 24 districts in the province.
This requires an immediate correction, as it not only reduces the base of the tax considerably, but also creates fiscal inequities within the province. Similarly, the on-going conflict between the provincial government and the Cantonment Boards is adversely affecting revenue from the Profession and Calling Tax.
The province also needs to improve tax administration to increase collections within the existing tax statutes, adjust tax rates to remove exemptions and make them more equitable, expand the tax base by bringing in hitherto non-taxed areas under the tax base, create a better tax climate by opening Tax Facilitation Centers (with support from the private sector) to facilitate tax payments, abolishing taxes with little yield, likely to prove an effective way to invite new investment into the province.
Experience from around the world has shown that the focus should be on having a sound tax policy and an effective and corruption free tax administration. In addition to taxation measures, the provincial government should also find innovative ways to raise more resources for growth, the report added.
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