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June 15, 2021

Revenue rows

LAHORE: Provinces are comfortable in presenting budgets as the resources mostly come from the federation; however, the latter’s failure to meet the ambitious revenue target is bad news for their share in the pie.

The federal government is basically authorised to impose and collect income tax, wealth tax, sales tax on goods, and customs duties. Their powers to impose excise duty have been restricted. These three main taxes have little potential for growth. Additional taxes would come mostly if the tax evaders are nabbed and corruption eliminated, which is a tall order.

Ideally it would be best if the provinces make efforts to generate their own resources to run their operations. The share from the federal government should be considered as a bonus. The potential is there but the will is not. Easy money coming from the federation has made them lethargic.

The provinces prepare their annual budgets from 75-95 percent of the cash they receive from the federal government and generate the rest from their own revenue collection. The potential of tax generation in provinces is very high because they are entitled to collect taxes on services. None of the provinces exploits even half that potential. All doctors remain out of service tax in all provinces. Some of them earn as much as Rs1 million on the services they provide (two-three heart, orthopaedic, gynecology procedures from normal to operation). In addition they earn around Rs50000-100000 daily as consultation fee. This service has the potential to generate billions of rupees. The argument given for not bringing the doctors in the services tax regime is that it will increase the burden on the patient as services tax is a pass through tax.

We have been hearing this argument for the last three decades. During this period the consultation fees of the doctors have increased from Rs500-Rs3000 per visit. A 10 percent service tax would increase it to Rs3300 but the doctors would be forced to pay not only this service tax but also the income tax that will be calculated on the basis of service tax deposited by them.

Then there are beauty parlours that are partially taxed while most escape from this tax by paying bribes. The bribe takers report that no beauty parlour exists in that locality. The lawyers, accountants and engineers all evade their actual income tax by evading the services sales tax. Increase in income tax of the federal government would result in an increase in share of the provinces from the federal divisible pool. They have a lion’s share of 60 percent in federal tax revenues.

Provinces collect nominal tax in Pakistan while the most developed global cities run budget surplus simply by collecting property tax transparently and fairly. There are no exemptions in this regard. Hospitals charging room rents equivalent to or higher than five star hotels pay no service tax on it, while the five star hotels do. Transporters operate without paying any tax.

The route permit to the transporters is granted by the province or district governments. The authorities should slap a fixed tax based on the average trip a bus or wagon makes in a day. Each province has the potential to collect revenue equivalent to or higher than the resources they receive from the federal government.

The provinces are not pushed to collect more taxes because most of their financial needs including the development expenditure is met through the federal transfers. However if they do make an effort on provincial tax collection each federating unit would have enough resources to invest on agriculture and quality seed availability. The increased economic activity would eliminate unemployment.

The federal government itself is not concentrating on increasing the direct taxes because it has to part with 60 percent of these taxes to the provinces. It for instance is reducing sales tax on petroleum products which it has to share with the provinces. Instead it is increasing the petroleum levy from which the provinces get no share. It imposes excise duties though it is the prerogative of provinces because federal excise is not shared with the provinces.