The total combined revenue receipts — tax (including transfers from the federal tax pool) and non-tax — of all the four provinces are projected to grow at 7.5 per cent of the Gross Domestic Product (GDP) during the current fiscal from six per cent the previous year. In absolute terms, total provincial revenue receipts are targeted to surge to Rs657 billion this year from Rs525.6 billion last year, according to the data available in the State Bank of Pakistan’s annual report for the year 2006-07.

Of the total provincial receipts, the tax revenue is projected to grow to Rs460 billion or 5.3 per cent of the GDP from Rs401 billion or 4.6 per cent of the GDP, showing a growth of 0.7 per cent over the last year. That’s a healthy sign, indeed. But the bad news is that the provinces will continue to depend heavily on their share from the federal tax pool for their financial needs and operations because the provincial own tax revenue hovers around 13 per cent of their total tax receipts (inclusive of federal transfers from the divisible pool) or 0.7 per cent of the GDP.

Though the share of provincial own tax revenue in Sindh’s total tax receipts (inclusive of federal transfers from the divisible pool) is expected to drop to 17 per cent this year from 18 per cent last year, it still remains the least reliant province on the federal pool. In absolute terms, Sindh will enhance its own provincial tax revenue to Rs18 billion this year from Rs15.4 billion the previous year.

Punjab’s own tax collection has stagnated at over 13 per cent of its total tax revenue receipts (inclusive of federal transfers from the divisible pool), although it is projected to swell to Rs37 billion from Rs30 billion last year.

On the other hand the provincial own contribution of Balochistan and the NWFP to their respective total tax revenues (inclusive of federal transfers from the divisible pool) remains below three per cent and two per cent. In case of the NWFP, the provincial tax receipts are projected to drop to Rs1.7 billion this fiscal from Rs4.3 billion last year. The drop in the budgetary estimates, it appears from the statistics available in the State Bank report, stems from an abysmally low actual collection of Rs900 million against the target the previous year. Balochistan’s target for the current financial year remains unchanged.

The provincial own tax resources have historically formed a very small part of their total tax revenues because of the control exercised by the federal government over the collection of taxes and its distribution to and among the federating units under the National Finance Commission (NFC) Award arrangement.

In the case of Punjab, for example, the provincial own tax resource has on an average hovered around 10 per cent of its total revenue receipts. In the fiscal 2001-02, the provincial tax revenue of Rs11.770 billion formed just 9.78 per cent of its total revenue receipts. The share of the provincial taxes as percentage of Punjab’s total revenues has since grown, it still remains stagnated at 13 per cent of the total tax revenues (inclusive of federal transfers from the divisible pool). That goes to show that Punjab’s reliance on federal transfers from the tax pool has increased to 87 per cent. This compares to 83 per cent in 2001-02.

Though the State Bank report celebrates the increase in the total provincial revenue receipts as well as the surge in the combined provincial own tax collection both as percentages of the GDP and in absolute terms during the financial year 2006-07, it points out that “the heavy reliance of provincial governments on federal tax assignments cannot be considered a healthy aspect of fiscal system in the light of the undergoing process of devolution plan”.

The report also underlines the fact that the provinces have the potential to generate money from “taxation on the major sectors of the economy like agriculture and services that are out of the jurisdiction of the federal government.”

“The central bank report actually highlights the rigid and highly centralised tax administration system in the country, which impedes the provinces’ desire for greater financial autonomy,” says a former Punjab finance department official. Recounting his experience of working in the provincial finance department during the 1990s, he says all the attempts made during that period or before for enhancing the province’s tax base resulted in the piling up of inefficient, low revenue generating taxes and levies without any substantial growth in revenues.

“Since the national economy wasn’t performing well during that period and the Central (now Federal) Board of Revenue’s actual tax collection always fell far short of the target, the provinces never received enough money to fund their current and development expenditure. The province’s development had always to be funded by borrowing expensive federal cash development loans (CDL), which added to the burden on the meagre provincial resources,” he says. The conditions in the other provinces were even worse, he says, because of poor financial management of the resources.

Experts firmly believe that the services sector is one such area from where the province, if allowed by the federal government, can generate enormous tax revenues for meeting their development needs. “If we leave the services out of the provincial tax net, we are left with no space to increase our own tax revenue,” says a provincial finance department official. “It is also important to tax the services because it can help the province reduce the number of its levies and make their collection efficient and corruption-free,” he says.

Punjab has already brought down the number of taxes from 36 to nine in 2001-02 and wants to further cut down their number to 2-3 if the federal government allows it to tax the services.

“If the federal government allows us to levy the most robust sales tax on services, we can bring down the number of existing provincial levies to 2-3, as well as raise our tax revenues substantially,” a senior Punjab government official says.

Both Punjab and Sindh have a stake in the provincial sales tax on services as this sector is the fastest growing sector of the economy and is expected to become the main driving force for their future economic growth. At the same time, it will simplify tax collection and help eliminate inefficient levies that usually obstruct economic growth and block development of private businesses.

Under the constitution, as is also pointed out in the State Bank report, sales tax on services is a provincial tax. But the problem is that the federal government has Central Excise Duty (CED) on most services, and under the law where there is an excise duty, no taxation can be made. And Islamabad is delaying a decision on the removal of excise duty on major revenue generating services because of its reluctance to lose this big source of revenue to the provinces, which is crucial for their financial autonomy and freedom.