Provinces are under pressure from their people to improve public service delivery ever since the transfer of several federal functions under the 18th amendment.

Growing public pressure for better, efficient public services means that the provinces need to substantially increase their financial resources for development through a rapid increase in their own tax resources.

Economists say provinces need to boost their tax revenues for effective use of financial resources to cut dependence on federal transfers, push growth, and create jobs for young people entering the labour market every year.

The Punjab government has significantly raised its tax revenues over the last couple of years. But the provincial tax receipts remain very low as part of Punjab’s total provincial income.

In case of Punjab, for example, almost 60 per cent of its total financial resources come from its share in the federal divisible tax pool transfers under the National Finance Commission (NFC) award, 20pc from bilateral and multilateral borrowings, 11pc from provincial tax collection and nine per cent from provincial non-tax resources.

Some insist that Punjab needs to at least double its provincial own tax revenues in the medium term to create room for increasing development expenditure and improving social and economic infrastructure across the province.

Provinces need to substantially increase their financial resources to improve public service

The provincial accounts for the first quarter of the present fiscal to September suggest that Punjab may not be able to meet its tax target of Rs230.9 billion for the year, mainly because of lower than expected collection of provincial services tax.

Punjab’s provincial own tax collection has improved by a quarter in absolute terms to Rs45.7bn during the first quarter of the present fiscal to September from Rs36.6bn a year ago but it fell short of the target for the period under review by over a fifth as the Punjab Revenue Authority (PRA) struggles to keep pace with the increasing revenue demands of the province.

The PRA sales tax on services collection for the first quarter of the year was short of the target of Rs31.7bn by more than 31pc to Rs21.7bn. The authority’s provincial services tax revenue target for the current fiscal was enhanced by almost 50pc to Rs127bn from Rs85bn last year.

The PRA officials defended the authority’s performance so far, arguing the service tax collection had increased by around a third in the first three months of this year from Rs16.3bn last year.

“This is a big achievement because collection normally picks up in the second half of the fiscal year and peaks in the last quarter of the year. So we are expected to close the year not very far from our target,” a senior PRA official told this reporter.

Overall, Punjab has spiked its tax target for the present financial year by a quarter from Rs184.4bn last fiscal with a view to improve fiscal space for its hefty development programme of Rsa635bn in the province. The government has successfully achieved a faster tax revenue growth over the last couple of years on account of tax reforms it has implemented to broaden the taxpayers’ base and improve compliance.

“The government has already created a tax reform unit to strengthen provincial capacity for tax policy analysis,” a provincial finance department official said.

“The tax reforms have started delivering result. Going forward we plan to significantly raise the share of the provincial taxes in the overall provincial revenues to support the large development needs of the province.”

He conceded that the thrust of the reforms was on provincial services tax that is contributing almost half of the total provincial own tax revenues rather than on other areas. But he added the tax reform unit has also been tasked to review all provincial taxes including tax on agriculture income and suggest ways to increase their collection.

Analysts say the provincial services tax has a very large potential to grow. “The current yield of the services tax is merely 0.37pc of Punjab’s gross regional product (GRP) because a number of issues continue to hamper realisation of its true potential,” a tax policy analyst argued.

Economists believe that the tax gap may be reduced by refining tax on services law and eliminating exemptions for certain services in taxable sectors and reducing the overall tax rate; moving to a negative list of services to expand the net; improving tax administration and tax payment facilitation, and improving operational capacity’s of the PRA to broaden its tax net outside Lahore.

Published in Dawn, The Business and Finance Weekly, November 6th, 2017