KP tax revenue up, rich share fall

Source: Published in Business & Economy on Monday, May 09, 2016

THE total tax revenue raised by Khyber Pakhtunkhwa increased by 17pc, but all of it was virtually contributed by a 32pc growth in sales tax on services collection marked by a sharp drop in direct taxes by 16pc during the first three quarters of the current fiscal year.

Official figures show that the provincial government has collected Rs8.752bn during July-March, up from Rs7.493bn in the same period of the last fiscal year But it is unlikely to meet the annual tax revenue target fixed at Rs22.59bn for the current fiscal year.

Asked why the provincial revenue is not up to the mark, KP Finance Minister Muzafar Said said the economic activities had slowed down because of the ‘war on terror’ and the poor law and order situation. He was,however, confident that the provincial government will achieve the projected revenue target. He said the shortfalls will be bridged because many economic activities and the tax revenue pick up in the last quarter.

The finance minister said the financial health of his province is sound and moving well on set target. A combination of strict austerity measures and slightly better provincial revenue collection will help his government in maintaining healthy financial position. KP relies heavily on its share in the federal divisible pool and resource transfers that constitute over 90pc of its overall revenue.

While the share of the province’s own revenue yields a dismal tax-to-GDP ratio of 0.5pc, more than 83pc of it is contributed by indirect taxes.The rich are taxed lightly. In the absence of a strong political will, tax on farm incomes is meagre, much below its revenue potential.

The collection of provincial sales tax on services has surged to Rs5.307bn in the first nine month of this fiscal year as against Rs4.003bn a year ago. The target has been fixed at Rs14bn. It has turned out to be one of the the major revenue spinner of the province for

The flat rate of agricultural land tax reached Rs1.424bn, up from projected Rs1.350bn for three quarters. The land-holding class prefers to pay land tax instead of agriculture income tax

the indirect taxes. The Khyber Pakhtunkhwa Revenue Authority was set up on July 1, 2013 for collection of sales tax on services.

The direct taxes constitute 16.8pc of the provincial tax revenues. These include taxes on agriculture income, land revenue, stamp duty, urban CVT etc. In the first three quarters, the yield from,direct taxes at Rs2.326bn were lower than Rs2.789 for last year’s comparative figure, down by 16pc. The direct tax, estimated at Rs3.801bn in 2015-06, as against Rs2.6 of last year, show a challenging growth of 64pc.

In the direct taxes, major revenue spinners are land and agriculture income tax. Here one notices a wide gap between the expected and the actual tax collection.

The revenue collected from the agriculture income tax is just Rs51.3m against the projected sum of Rs750m for the three quarters, falling much short of the annual target of Rs1bn.

According to official record, there are 30,000 farmers who own lands in excess of five acres, but only a few hundred are registered as AIT payers. Over the past three years, AIT has contributed a meagre 0.020, 0.10pc and 0.3opc to provincial tax receipts respectively.

Contrary to this, the flat rate of agricultural land tax reached Rs1.424bn,up from projected Rs1.350bn for three quarters. This shows that land-holding class prefers to pay land tax instead of agriculture income tax.

Indirect taxes also comprise provincial excise duty, motor vehicle tax, property tax, entertainment tax, electricity duty etc. The collection of indirect taxes from these taxes was reported at Rs1.117bn in first nine months this year as against Rs1.41bn over the last year. No growth was witnessed in collection. In the budget, an annual revenue target of Rs4.793bn was projected to be collected from all these sectors.

The entertainment tax shows a paltry growth while there are still some big cinemas in the province. They contribute nothing to the provincial revenue. Also collections from hotels, real estate dealers, motor dealers, tobacco development cess, etc show a nominal increase this fiscal year over the last year. There is a scope for increasing revenue from the revival of tourism industry.

The urban immovable property tax reveune has stagnated around Rs185m despite increase in rental value of property. This calls for revaluation of property values for tax assessment.

More than 120 items are subject to stamp duty. The stamp duty rates vary but bulk of the revenue is collected from stamps on property transfers. The stamp duty includes virtually all kinds of transfers and legal documents. In July-March 2016, an amount of Rs58m was collected from stamp duties as against the target of Rs610m.

The dismal performance is attributed to weak tax administration, low taxable capacity, huge informal sector, limited revenue base and political unwillingness to exploit the potential because of pressure of interest groups.

Talking to this writer the provincial finance minister listed several steps taken by the provincial government for reduction in the non-development budget. These measures include: a complete ban on the holding of seminars and workshops in five-star hotels,and purchase of new cars; no permission for medical treatment abroad, and visits on government funding; and no phone calls from official and residential numbers beyond authorised limits.

The provincial government has stopped the use of all unauthorised vehicles and allowed use of 1000cc vehicle for local general duty by officials. The minister said the auction of used vehicles in a transparent manner also yielded revenue.