Resource mobilisation is a critical component of all budgets - be they federal, provincial or local government. And the significant element is the source of revenue as that alone would determine whether the taxpayers would be incentivized to pay, seek to circumvent payment of due taxes either by looking for loopholes (including offshore accounts) or simply go off the grid or relocate to either those areas where taxes are lower within the country (if say the sales tax is lower in Sindh relative to Punjab) or outside the country.
A look at three provincial budgets for 2016-17, the Balochistan budget has yet to be presented, reveals that the much debated agriculture income tax, a tax on the income of rich landlords that should be commensurate to the tax levied and collected by the Federal Board of Revenue (FBR) from salaried individuals, continued to be levied at rates well below what can be termed as fair. Farm income tax, fully supported by economists and the general public but almost completely ignored by parliamentarians, federal and provincial, remains as per the constitution a provincial subject and this in spite of the year long deliberations between all political parties represented in the national assembly to comprehensively amend the constitution leading to the passage of the eighteenth constitutional amendment in 2010. Only the MQM added a dissenting note on this issue; Pakistan Tehreek-e-Insaf (PTI) was not represented in parliament at the time as it chose to boycott the 2008 polls. Three years after the 2013 elections, eight years of rule of PML-N in Punjab and PPP in Sindh the revenue sourced to agriculture remains appallingly low.
Punjab, regarded as the bread basket of the country, with massive landholdings of major and minor politicians associated with all three national political parties notably the PML-N, the PPP and the PTI collected a mere 1.55 billion rupees from tax on agriculture income in 2015-16 while the budgeted amount was also ridiculously low at 2.3 billion rupees. The budget for 2016-17 has earmarked the same amount as in the outgoing year - at 2.3 billion rupees.
In Sindh, with a significant number of powerful waderas, farm income tax generated only 350 million rupees in 2015-16 though the budgeted amount was 650 million rupees or only 53 percent of what was budgeted was collected. In fiscal year 2016-17, the Sindh government has budgeted the same amount as last year and one wonders whether it expects to generate this amount.
KPK, with a smaller number of rich landlords than Sindh, generated 80 million rupees in 2015-16 from tax on agriculture (income) against the budgeted amount of one billion rupees and 88 million rupees budgeted for next fiscal year.
Clearly this tax requires political will to meet its potential revenue target in all the three provinces which continues to be lacking. However, once levied at the rate of income tax payable by the salaried farm income tax imposition would go a long way towards rendering the tax system of the country more equitable.
A major source of revenue for all provinces in 2015-16 was sales tax on services with Sindh collecting 61 billion rupees under this head thereby meeting the budget estimate and projecting collections at 78 billion rupees in 2016-17 - a rise of 13 percent. The higher expectations for next year are premised on not only increasing the number of services under its ambit but also on a basic economic principle: a lower tax rate will attract higher revenue and Sindh government has reduced the applicable sales tax rate each year by one percent and proposes 13 percent for 2016-17.
The Punjab Finance Minister termed the sales tax "vibrant" and vibrancy implied generating 62 billion rupees in 2015-16 under this head. The target for 2016-17 is 85 billion rupees. However unlike Sindh, Punjab government overestimated its revenue from this source in 2015-16 by around 14 percent and in absolute terms by 10 billion rupees - it budgeted 72 billion rupees and collected 62 billion rupees. The Punjab Finance Minister envisages a further increase of 20 percent in revenue from this source next year with cosmetic surgery, hair transplants, warehouses and cold storage to be brought within its ambit. It is difficult to comprehend why warehouses and cold storage, subsectors that the government is being urged to support by economists to increase our exports of perishable items, were added to the list.
Tax receipts from KPK's own resources accounted for 37.6 percent of total revenue and non tax revenue accounted for the rest. Indirect taxes fell short of the budgeted target by 7,286 million rupees in 2015-16 with 6,000 million rupees attributed to a shortfall in sales tax collections. What is important to note is that since the PTI came to power in 2013 revenue of the government (tax as well as non-tax revenue) has increased from the budgeted 14.4 billion rupees (actual recovery 11.7 billion rupees) in 2012-13 to 25.48 billion rupees (actual 21.6 billion rupees till May 2016) in 2015-16 or a rise in actual collections by 54 percent, well above the national average. Total tax receipts are budgeted at 18.171 billion rupees with sales tax estimated at 10 billion rupees in 2016-17.
Sales tax on services appears to be the preferred tax with respect to any envisaged increase in tax collections by all the three provinces and this reflects a mindset that appears to be in synch with the federal government: higher indirect taxes relative to direct taxes though one would assume that the rationale used is that the service providers are well able to bear the cost of the tax; however ignored is the fact that the service providers pass on the tax in its entirety as higher fees.
What is baffling and is likely to be resisted by provinces, which were not consulted on this measure, is the federal budget 2016-17's proposal assigning provinces as its withholding agents and deducting a 3 percent turnover tax on all non filers who file sales tax returns with the provinces.
The bulk of direct taxes collected in Punjab were from mutation fees (10.2 billion rupees in the revised estimates of 2015-16), urban immovable property tax (9.2 billion rupees collected in 2015-16) as well as capital value tax on immovable property (11 billion rupees collected). For indirect taxes apart from sales tax, stamp duty and motor vehicles tax were big revenue earners with 25.3 billion rupees and 11.4 billion rupees collected respectively in 2015-16.
For Sindh, the share of direct taxes was a very low 19 percent of total tax collections and this trend is budgeted to continue in 2016-17 with sales tax the major source of funding - around 70 percent of direct and indirect taxes, if the 31.6 billion rupees from the Sindh Development Maintenance of Infrastructure (under other taxes) is not included.
KPK has come up with an innovative non-tax revenue receipt - from forestry to the tune of 6.028 billion rupees and, if successful, this would enable the province to get some international credits allowed for environmental improvement. This is a good measure and one hopes that other provinces follow suit.