When it comes to provincial growth targets, the Punjab government has certainly got ambitious ones. Under its Economic Growth Strategy, it hopes to realise economic growth of eight percent and also create a million jobs in a year. The considerable budgetary allocations to building up economic infrastructure which include urban development, energy and skill development are also reflective of these aspirations.
However, the realisation of these targets ultimately hinges upon accumulating the requisite financial resources and the dexterity of the provincial government in utilizing those resources in an effective manner. Starting from the top, Punjab’s major source of revenue comes from its share in the federal divisible tax pool based on the National Finance Commission (NFC) Award which constitutes 77 percent of provincial revenues.
The remainder comes through borrowing and finally taxes which provide the least contribution when it comes to provincial revenue streams. A major reason for this is the narrow domain under which provinces can collect taxes with the collection of almost all buoyant taxes, with the exception of sales tax on services, still residing with the federal government.
As services contribute over 55 percent to Punjab’s economy, the current yield of sales tax on services hovers roughly around 0.37 percent of the province’s gross regional product (GRP). However, there is still huge untapped potential when it comes to collection of sales tax on services.
The major issues include the informal nature of the majority of the services sector located in the province as well as the federal government’s levying of withholding tax on most services. There is also the need to resolve the issues of input tax adjustment between the Punjab government and the federal government which result in the province losing out on its entitled revenue share.
An analysis done recently by an independent financial institution highlights a potential of over Rs150 billion in Punjab from tax on services. It cites telecommunications, banking, insurance and construction services as sectors with the largest potential for unlocking incremental tax revenues.
However, to tap this potential certain measures are necessary. These include fine-tuning the law on services tax particularly when it comes to improving definitions of taxpayer and taxable activities. There also needs to be a reduction in exemptions for specific services as well as lowering the overall tax rate. Going after the negative list of services will also be instrumental in eventually increasing the tax.
Finally there is the role and capacity of the Punjab Revenue Authority which needs to be further enhanced. The organisation has been active in broadening the tax base and an integration of databases with other government agencies will help it in this endeavour.
There are less than 15,000 registered and active tax payers in the province which are limited to only five to six major cities.
A recent survey by the PRA in collaboration with the UK’s Department for International Development (DFID) has identified more than 20,000 prospective taxpayers which are providing 58 different services in 22 districts in province’s eight divisions.
The PRA is already intent on opening up field offices in Bahawalpur, Sahiwal and Gujrat and aims to deploy additional field staff in a bid to bring the identified entities into the tax net. Given that the eventual success of the Punjab government’s economic vision depends upon digging up more tax coffers to support the expansive development agenda, the province will have to tighten its belt and implement the above mentioned reforms to fulfill its ambitious economic strategy.