The overall budget surpluses posted by the provincial governments, increased sharply to Rs 149.5 billion in FY14, against the target of Rs 23 billion for the year. According to State Bank of Pakistan (SBP), there is an understanding that the provincial governments will support the overall fiscal consolidation efforts by posting surpluses particularly after the 7th NFC Award, when provincial shares in the divisible pool increased sharply.
Province-wise details reveal that the budget surplus generated by Punjab was the largest, followed by Khyber Pakhtunkhwa, Sindh and Balochistan. In relative terms, Punjab and Sindh performed better compared to others, in being able to post surpluses while increasing their development spending over the previous year. On the other hand, Balochistan's surplus declined by Rs 5.3 billion compared to last year's, because of an increase in their current expenditures.
"Though a sharp increase in provincial surpluses helped contain overall fiscal deficit, this was perhaps not the intended policy objective. Indeed, there is a need to further push fiscal devolution, whereby revenue collection is increasingly done by the provinces, so that a more assured revenue stream would allow the provincial governments to better manage their development spending," the report said.
In particular, the element of certainty in provincial cash flows needs more attention. About 80 percent of provincial revenues come from their shares in the divisible pool, which depends on the pace of FBR tax collection. It is, however, encouraging that the provinces' own revenue generation is also gathering pace, mainly due to GST collection on services. The share of provincial tax collection in total revenues has increased from 5.3 percent in FY11 (before the 18th Amendment) to 10.7 percent in FY14.
Although, this is a good sign, however more efforts are needed on this front, as the provinces are too dependent on sales tax on services. While, agriculture income tax, which is also under the provincial domain, is still untapped given its potential, the report said.
Revenue generation by Sindh and Punjab was also encouraging. More than 90 percent of total provincial tax collection was contributed by Sindh and Punjab, as they have strengthened their collection machinery for sales tax on services. While KPK has established its own revenue authority (following Punjab and Sindh), Balochistan is in the process of setting up a similar authority.
However, there is a need to focus on other sources of taxes, apart from sales tax on services. Although, the provinces have been setting targets for agriculture income tax collection, actual realisation is much lower than the understated targets. Currently, tax collection from this head is only 0.02 percent of the value added by the country's agriculture sector.
Interestingly, Punjab set a target of Rs 2.0 billion for agriculture tax, compared with less than 1 billion collected in FY13. This was, probably in response to the federal government's decision to restrict the exemption on agricultural income, to only those who have paid provincial income tax on agri income. However, the actual tax collection by Punjab was only Rs 830 million under this head in FY14, the report pointed out.
Focusing on expenditure, the growth in provincial expenditures was 9.2 percent in FY14, almost the same as last year's. A disturbing aspect of provincial fiscal operations is the under-utilisation of the development budgets. When the annual budget for FY14 was prepared, Rs 615 billion were allocated for provincial Public Sector Development Programs (PSDP), but provinces could utilise only 70 percent of this amount during the year, the report mentioned.
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