Sindh: tax collection performance

Like other provinces, Sindh is heavily dependent on the Federal Government for transfer of receipts from divisible pool. In the past these transfers remained highly unpredictable as Federal Board of Revenue (FBR) perpetually failed to meet the assigned targets, though revised downward many a times. In fiscal year 2013-14, the initial target for FBR was fixed at Rs 2475 billion; it was first revised downwards to Rs 2345 billion and then further revised to Rs 2275 billion in May 2014. FBR finally collected only Rs 2254.5 billion and not Rs 2266.6 billion as claimed by Chairman FBR at the close of fiscal year 2013-14. This discrepancy, according to the Finance Minister, was due to 'wrong posting of petroleum levy of Rs 9 billion' as tax collection, which was finally rectified when final distribution with provinces was settled. The provinces received Rs 1264 billion out of FBR's collection of Rs 2254.5 billion against the promised amount of Rs 1720 billion.
The share of Sindh government in federal transfers according to 'Budget Estimates 2013-14' of Rs 409.013 billion was significantly curtailed due to FBR's failure to meet the original target of Rs 2475 billion. Province's own receipts were Rs 100.079 billion as against budgeted figure of Rs 120.183 billion.
It is worth mentioning that Sindh's financial year 2013-14 commenced with a positive cash balance of Rs 18.5 billion. The total budget outlay was of Rs 457.5 billion with an estimated receipt of Rs 458.4 billion. Due to shortfalls in federal transfers, the Sindh government had to slash its development expenditure downwards and could manage to release only Rs 115 billion against ADP allocation of Rs 185 billion. This is the same bleak story as in the case of all other provinces. Provinces have shown complete apathy towards levying progressive taxes transferred to them after the 18th Constitutional Amendment to become self-reliant and reduce dependence on the federal government. On the contrary, their reliance has increased. The weakest link of all provincial revenue collection is lack of political will to tax the rich and mighty, especially big owners of agricultural land and urban immovable property. The main reliance of Sindh, like others is also on regressive indirect taxes.
The federal government has illegally imposed capital gain tax (CGT), which is the sole prerogative of the provinces (Tax on gain of immovable property: who is violating Constitution? Business Recorder, March 14, 2014). No province, except Punjab has taken up the matter with the federal government. In a letter addressed to Finance Minister, the Punjab Chief Minister has pointed out that in the wake of the 18th Constitutional Amendment; the provincial assembly is competent authority to levy any kind of tax on immovable property including CGT. The government of Punjab has introduced CGT through Punjab Finance Act 2013, but has kept it in abeyance till the time federal government revokes its CGT.
Sindh was the first province in Pakistan that established an efficient and automated revenue collection authority in 2011 under the name of Sindh Revenue Board (SRB) consequent upon the 18th Constitutional Amendment (specifically in relation to item No 49 of Part A of the Fourth Schedule thereof) and pursuant to Articles 8 and 9(2) of the 7th NFC Award, notified in 2010 for collection of sales tax on services by the provinces. This initiative was followed by the Punjab in 2012 and by Khyber Pakhtunkhwa in 2013.
Established under the Sindh Revenue Board Act, 2010 (Sindh Act No XI of 2010), SRB proved in the very first year that provinces can outsmart Federal Board of Revenue (FBR) in collecting taxes and federal government's claim of lack of capacity is nothing but a myth. The mandate given to SRB was to regulate matters relating to fiscal and related economic policies; administration, management; imposition, levy and collection of taxes, duties, cess and other levies through application of modern techniques of information and developing automated system of collection and assessment of tax and matters ancillary thereto in Sindh.
From 2011 to 2013, SRB managed only levy and collection of Sindh Sales Tax (SST) on services provided or rendered, imposed under the Sindh Sales Tax on Service Act, 2011 (Sindh Act No XII of 2011). This Act became effective from July 01, 2011, and SRB was made responsible for the administration, collection and enforcement of SST under the said Act. Though SRB was envisaged to be the primary source and resource for provision of assistance and monitoring of all the tax revenue functions in Sindh, yet no other tax is assigned to it till today and the following are collected through the traditional Excise & Taxation Department that is wrought with inefficiency and corruption like any other government departments:
1. Property Tax
2. Motor Vehicle
3. Entertainment Duty
4. Professional Tax
5. Hotel Tax
6. Excise Duty
7. Cotton Fee
8. Infrastructure Fee
The main source of revenue of Sindh is from sales tax on services, collected by SRB. Collection of agricultural income tax and other land related taxes is with Board of Revenue (BoR), the oldest taxation department. During the fiscal year 2013-14, collection by Excise & Taxation Department during the first nine months was Rs 23.7 billion compared to Rs 19.3 billion during the same period in the immediately preceding year, showing an increase of 23%. The highest increase of 33% was on account of motor vehicle registration that rose to Rs 3.4 billion from Rs 2.5 billion. Excise & Taxation Department collected Rs 15.9 billion against Rs 13.1 billion in case of infrastructure cess charged on all imports landing at Karachi, marking a 21% increase. Collections from property tax showed 26% increase-Rs 1.5 billion against Rs 1.1 billion. Revenue from excise duty was up by 21% to Rs 2.5 billion against Rs 2 billion. Collections from professional tax remained at the lowest ebb at Rs 216.5 million from Rs 201 million, an increase of only 7%. Collection of cotton cess was Rs 139.8 million while Rs 28.5 million came from entertainment duty. At the close of fiscal year, Excise & Taxation Department surpassed the allocated budget marginally [see Table 1.1 to 1.3].
Tax collection by Sindh could have been much better than what it actually achieved had concerted effort been made by the government to merge SRB, BoR and Excise & Taxation Department to avoid duplication of expenses and to make tax collection efficient. In Budget 2014-15, some reform initiatives like Sindh Tax Revenue Management Program (STRMP) and an independent Tax Reform Unit (TRU) and a Debt Management Unit (DMU) were notified, but these have yet not been made operational. BoR has not been automated and the same is the case with Excise & Taxation Department, whereas SRB is fully automated. Sindh could have collected taxes more efficiently had SRB been assigned collection of all taxes as evident from Table 2.2. The performance of SRB has been impressive since its inception in 2011.
Major provincial tax receipts are agricultural income tax, stamp duty, registration, provincial excise, motor vehicle, capital value tax, cotton fee, electricity duty, infrastructure development cess and sales tax on services. Major non-tax receipts from various sectors include interest, education, health, works, police, irrigation, mines and minerals, extraordinary and miscellaneous receipts.
Above figures reveal that the province's own receipts grew at an average rate of 32.4% per annum over the period 2009-10 to 2012-13, which is quite impressive, compared to all other provinces and the federal government. Revised estimates for fiscal year 2013-14 of Rs 100 billion shows 20.4% increase in province's own receipts against actual collection amounting to Rs 83 billion for 2012-13. This is also the highest in Pakistan and this increase was mainly due to the inclusion of GST on Services and Capital Value Tax (CVT) in Provincial Tax receipts. Earlier, GST on Services was a part of divisible pool taxes and straight transfers (GST on Services-Provincial). CVT was devolved to the provinces under 18th Amendment and the collection of Sales Tax on Services is being done by the Government of Sindh itself since 2011-12 after 7th NFC Award. From the province's own sources, tax receipts-though still below the real potential-have remained the dominant source.
(The writers, partners in law firm, Huzaima & Ikram, are Adjunct Faculty at Lahore University of Management Sciences)

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Table 1.1

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CURRENT REVENUE BUDGET (Rs In Million)

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RECEIPTS AND DISBURSEMENTS                                2013-14     2014-15

                                                       BE        RE        BE

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A - CURRENT REVENUE RECEIPTS                      529,196   488,736   599,321

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Federal Revenue Assignment (Divisible Taxes)      332,935   308,414   381,383

Provincial Receipts (excl. Sales Tax on Services)  78,183    58,079    76,061

Sindh Sales Tax on Services                        42,000    42,000    49,000

Straight Transfers                                 67,127    71,928    82,624

Grants to offset lossed of abolition of OZT-

(0066% of Provincial Share)-(incl. Others)          8,951     8,315    10,253

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B - CURRENT REVENUE EXPENDITURE                   355,974   368,403   436,091

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a) Provincial Government                          316,674   329,073   388,791

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General Public Services                            64,098    73,311    82,706

Public Order & Safety Affairs                      54,429    63,889    66,611

Economic Affairs                                   34,373    37,408    47,643

Environment Protection                                414       358     1,778

Housing and Community Amenities                     2,463     2,726     2,714

Health                                             36,401    36,210    43,584

Recreational, Culture and Religion                  1,790     4,862     5,301

Education Affairs and Services                    120,502   107,721   134,378

Social Protection                                   2,204     2,590     4,076

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b) Local Government/OZT Grant                      39,300    39,330    47,300

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NET REVENUE ACCOUNT (A-B)

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(+) SURPLUS/(-) DEFICIT                           173,222   120,333   163,230

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Source: Budget Analysis 2014-15, Government of Sindh.

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Table 1.2

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GENERAL REVENUE RECEIPTS (Rs In Million)

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                                                2013-14      BE 2014-15

                                             BE   RE                 BE

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I   Divisible Pool Taxes                  332,935    308,414    381,383

1   Tax on Income                         129,930    120,098    159,392

2   Wealth Tax                                  -          -          -

3   Land Customs                           37,217     32,504     37,955

4   Sales Tax                             144,185    138,279    161,040

5   GST (CE in Sales Tax Mode)                  -          -          -

6   Federal Excise                         21,603     17,451     22,903

7   Capital Value Tax                           -         82         94

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II  Straight Transfers                     67,127     71,928     82,624

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1   Excise Duty on Natural Gas              7,081      7,326      7,692

2   Gas Development Surcharge              20,851     25,802     31,027

3   Royality on Crude Oil                  12,822      9,075     12,335

4   Royality on Natural Gas                26,373     29,725     31,570

5   GST (Provincial)                            -          -          -

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III Federal Grants                         24,366     19,094     32,727

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1   Grant-in-Aid                                -          -          -

2   Other Grants from the

    Federal Govt. Development              15,415     10,803     22,474

3   Other Grants from the

    Federal Govt. Non Development           8,951      8,291     10,253

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A   Total Federal Transfers (I+II+III)    424,428    399,437    496,734

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IV  Provincial Tax Revenue                 91,370     89,220    107,025

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1   Direct Taxes                            9,500      8,300      9,900

2   Indirect Taxes                         57,248     56,680     67,813

3   Indirect Taxes - Others                24,622     24,240     29,312

V   Provincial Non Tax Revenue             28,813     10,859     18,035

1   Income from Property and Enterprise     2,578      1,230      1,194

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2   Receipts from Civil

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    Administration and Other Functions      3,042      2,498      3,444

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4   Extra Ordinary Receipts                 6,200      2,000      4,000

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5   Others                                 16,993      5,132      9,397

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B   Total Provincial Own Revenue (IV+V)   120,183    100,079    125,060

    Total General Revenue Receipts (A+B)  544,611    499,515    621,795

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Source: Budget Analysis 2014-15, Government of Sindh.

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Table 1.3: Detail of direct & indirect taxes

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                                   Tax Receipts (Rs In Millions)                                  Growth (%)    Ave (%)

                                            Actual               BE       RE            BE       RE      BE      Actual

                               2009-10  2010-11  2011-12  2012-13  2013-14  2013-14  2014-15  2013-14  2014-15  2009-12

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Taxes from Agriculture Income      152      210      123      406      550      500      600    23.15     9.09    38.75

Property Tax

 (Tax and Registration)            463      839    2,139    1,907    4,500    4,000    4,800   109.75     6.67    60.30

Land Revenue                       156      347      208      205      550      500      600   143.90     9.09     9.53

Taxes on Professions,

 Trades and Callings               222      230      280      265      400      300      400    13.21     0.00     6.08

Capital Value Tax                    0        0    2,379    2,146    3,500    3,000    3,500    39.79     0.00        -

Total Direct Taxes                 993    1,626    5,129    4,929    9,500    8,300    9,900    68.39     4.21    70.58

Sindh Sales Tax on Services          0   16,623   23,924   33,666   42,000   42,000   49,000    24.75    16.67        -

Provincial Excise                2.112    2,948    2,577    3,102    3,800    3,300    3,825     6.38     0.66    13.67

Stamp Duties                     3,947    4,274    4,766    5,016    6,500    6,500    9,828    29.59    51.20     8.32

Motor Vehicles                   2,169    2,964    3,193    3,327    4,948    4,880    5,160    46.68     4.28    15.33

Tax on Hotels                      200      143      160      160      196        0        0  -100.00  -100.00    -7.17

Cotton Fees (Net)                  125     1693       98      143      300      180      250    25.87   -16.67     4.59

Electricity duty                   109       72       74       69    4,040    2,000    4,000  2798.55    -0.99   -14.14

Other-All Types                      0       12       11        9       40       20       20   122.22   -50.00        -

Entertainment                        0        0       23       32       46       40       42    25.00    -8.70        -

S.D&M of I Structure            11,219   13,502   20,468   18,241   20,000   22,000   25,000    20.61    25.00    17.59

Total Indirect Taxes            19,881   40,701   55,294   63,765   81,870   80,920   97,125    26.90    18.63    47.47

Total Tax Receipts              20,874   42,327   60,423   68,694   91,370   89,220  107,025    29.88    17.13    48.74

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Source: Budget Analysis 2014-15, Government of Sindh.

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Table 1.4: Overview of Sindh Budget

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Overview of Provincial Budgets                  (Rs Billion)

Items                                        Sindh

                                    2012-13 RE    2013-14 BE

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A. Tax Revenue                       342.9             424.3

Provincial Taxes                      73.3              91.4

GST on Services

 (transferred by Federal govt)         0.0               0.0

Share in Federal Taxes               269.6             332.9

B. Non-Tax Revenue                    83.6              95.9

C. All Others                         47.7              28.4

Total Revenues (A+B+C)               474.2             548.6

a) Current Expenditure               342.1             356.0

b) Development Expenditure           143.3             229.9

Total Exp (a+b)                      485.4             585.9

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