KHYBER Pakhtunkhwa relies heavily on its share in the federal divisible pool and resource transfers that constitute 95 per cent of its overall revenue.

While the share of the province’s own revenue yields a dismal tax-to-GDP ratio of 0.46 per cent, more than 70 per cent 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 when compared to its revenue potential.

While the Seventh NFC Award had stipulated that the provinces would increase their share in tax revenue, this has not happened. It was very unlikely that any significant step would be taken to raise provincial revenues in an election year.

Of the total receipts from the federation, 72 per cent of the funds comes from the NFC Award, 10 per cent from straight transfers including general sales tax on services and 13 per cent net hydro profit (NHP) including arrears. The total revenue is estimated at over Rs149 billion for 2011-12. At the same time, due to war on terror, the non-tax revenue for the past few years stood at around Rs5 billion per annum.

The easy availability of resources through devolution has weakened efforts for mobilisation of potential tax revenues.

The dismal provincial tax-to- GDP ratio is attributed to weak tax administration, low taxable capacity, huge informal sector, limited revenue base and political unwillingness to exploit the potential because of pressures of interest groups, resulting in a smaller share of direct taxes.

The direct taxes constitute 30 per cent of the provincial tax revenues. These include taxes on agriculture, property, land revenue, trade, professionals etc. The direct tax, estimated at Rs1.188 billion in 2010-11, is projected to reach Rs1.3 billion by end June 2012 including around Rs758 million from land revenue. Again, this is not a tax but rent payable to the state.

This includes water rate (abiana) in lieu of water being provided for irrigation.

In fact, there are two taxes that apply to land-holders in the province: one is land tax and the other agriculture income tax (AIT). There is a wide gap between the expected and the actual tax collection in both these categories.

As per tax slabs levied on the cultivated land, the revenue should be Rs223.23 million in the province going by the land record of the Bureau of Statistic, Planning and Development Department of the province. But for the year 2011-12, the government has projected revenues of Rs21 million, of which one million is likely to be collected as AIT.

This speaks volumes about the revenue leakages.

According to the official record, there are 27,794 landlords owning in excess of five acres, but only 100 are registered as AIT payers. Interestingly, very few of these hundred taxpayers are linked with prominent land-holding families of the province nor do serving provincial minister or cabinet member figure there.

No wonder for the past three years, AIT has contributed a meagre 0.02 per cent, 0.10 pc and 0.3 pc to provincial tax receipts respectively, much lower than the expected turnovers.

This poor collection is also explained by the ambiguity in application of law for the assessment and collection of AIT. A major flaw in the law has been created by a notification, which makes filing of AIT returns compulsory only for those possessing more than 50 acres or having income from agriculture produce in excess of Rs100,000 per annum.

Interestingly, there is no threshold for exemption in the AIT ordinance 2000.

Contrary to this, the revenue staff in Khyber Pakhtunkhwa have adopted their own formula to calculate AIT on basis of the flat rate of land tax rather than making assessment of incomes derived from landholdings in a year as prescribed under the AIT Ordinance 2000. And they raised demands for AIT from the land-holding elite, who were in possession of more than 50 acres of irrigated or 100 acres of un-irrigated land.

As a result, AIT collection is confined to four districts of the province, Peshawar, Mardan, Charsadda and Dera Ismail Khan.

Here too, the landlords have minimised their land-holdings to evade taxes by transferring ownership on paper to their relatives and servants. And the other 12 districts are automatically exempted from the levy of agriculture income tax because there is reportedly not a single holding in excess of 50 acres.

The fragmentation of land has not only led to evasion of taxes but also reduced the numbers of AIT payers. The potential for AIT has been drastically reduced by wrongly linking it to fixed per acre levy.

Another factor for low collection is the focal person—the patwari—- who collects the AIT..A patwari is a four-scale (grade) employee of the revenue department, generally uneducated and dependent on indirect support of the land-owning elite.

The urban immovable property tax with a narrow base stagnates around Rs70 million despite massive increase in rental value of buildings and lands. This calls for revaluation of property values for tax assessment, followed by expansion of property tax base.

Indirect taxes comprise provincial excise duty, motor vehicle tax, stamp duties, entertainment tax, electricity duty etc. The collection of indirect taxes stood at Rs2.126 billion in 2010-11, 39 per cent of which came from motor vehicle tax, 24 per cent from stamp duty and 19.4 per cent from electricity duty.

More than 120 items are subject to stamp duty. The stamp duty rates vary by type or document, but bulk of the revenue is collected from stamps on property transfers. The stamp duty includes virtually all kinds of transfers and legal documents.

The entertainment tax shows a negative growth while there are still some big cinemas owned by the ruling ANP. They contribute nothing to the provincial revenue.

Collections from hotels, real estate dealers, motor dealers, tobacco development cess, etc show a nominal increase this fiscal year over the revenue of Rs290 million as also in the case of electricity duty at Rs393 million recorded in 2010-11.

There is a scope for increasing revenue from the revival of tourism industry.