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WHILE the taxation effort in Punjab has been meaningless, except for the rising revenues from the general sales tax, the ratio of direct taxes in tax revenue has been on a consistent decline.
A paltry 24pc of the total tax revenue is likely to come from direct taxation in the current financial year.
The ‘white paper’ released with the budget 2015-16 claims that “the government will continue the shift from direct taxes to indirect taxes because these are less harmful to growth”.
Admittedly, there is no hard and fast rule. An indirect tax may be progressive and conversely a direct tax may be regressive. Having said that, the bulk of the burden of indirect taxes is widely perceived to be shouldered by the poor and the low income groups.
However, Punjab has chosen to consistently ignore two of the most under-taxed sectors — agriculture and properties — that fall under its fiscal mandate. Both are characterised by an immobile tax base that is convenient to tap.
Hence, the tax effort is not only minimal and regressive, but also compromises on equity. With the social fabric throughout Pakistan considerably weakened, it is but the minimal demand of good governance that the poor of the most populous province do not end up contributing to the exchequer in excess of what the richest of the land are paying.
The ‘white paper’ released with the budget 2015-16 claims that “the government will continue the shift from direct taxes to indirect taxes because these are less harmful to growth”
Punjab collected Rs8.7bn in property tax in the last fiscal year, and expects only an 18pc increase in collection in FY2015-16. The government has completed the automation of the property tax record through GIS mapping in six districts and has also updated the valuation tables.
Under the lame excuse that “the revision of valuation table was done after many years,” the government granted a remission to taxpayers to the tune of 50pc for the last fiscal year, and another 40pc for 2015-16.
The objectives of equity and efficiency are being undermined by not treating incomes uniformly for tax purposes. This encourages tax evasion by branding taxable income as accruing from a tax-exempt source or sector. The worst case is the exemption of agricultural income from the income tax. That agriculture in Punjab (as in the rest of the country) offers an ideal tax haven for industrial incomes is well-documented. Abysmally low targets are set and are never met.
After miserably falling short of the target of Rs2bn set for 2014-15, the government has revised the expected receipts for the current financial year to a ‘generous’ Rs2.3bn. These miserly returns accrue from the land tax levied on landholdings at fixed rates per acre —which have been unchanged since 2002-2003. The agriculture ‘income’ tax has never been implemented.
‘The Punjab Fiscal Study’ commissioned by the provincial government through the ‘DFID Technical Assistance Management Agency’ had estimated that by eliminating exemptions and levying a small withholding tax on sales of cash crops like wheat, cotton, rice and sugarcane to their respective mills, the government can generate over Rs9bn — almost four times the current target.
Three years back, the provincial government had set up the Punjab Revenue Authority, which was to gradually assume the function of collecting all taxes. This eventuality is not in sight. As things stand, the authority is just working to garner a larger share of revenue from the general sales tax on services. The GST collection target for 2015-16 is Rs72bn — or 45pc of the total expected tax receipts.
The enhancement in revenue from a single source will not be able to make up for the poor collection and unexploited potential under a number of other heads.
Ironically, the politician-bureaucracy nexus in Punjab remains reluctant to expand the tax base. The only prescription that the ‘white paper’ has come up with for the taxation inadequacies of the province is the “need to strengthen the provincial capacity for tax policy analysis via the establishment of a dedicated tax reform unit within the finance department”.
To borrow from international case studies, the absence of effective own-source revenues at the provincial level has been the ‘Achilles heel’ of the devolution process in the Latin America and East Asia regions.
The worst consequence was the erosion of accountability and responsibility for local service delivery.
Attempts to raise taxes in Punjab have been inadequate, regressive and inefficient, and lack uniformity. The existing tax collection effort also reflects weak, if not poor, governance.
The writer is a political economy analyst.
Published in Dawn, Economic & Business ,July 21st, 2015
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