Tax Potential in NWFP: Exploring Revenue Sources for Provincial & Local Governments

Tax Potential in NWFP
Sponsored by
Department of Finance, Government of NWFP
By
Dr. Sohail J. Malik
Chairman
Innovative Development Strategies (Pvt.) Ltd
May 31, 2004

Tax Potential in NWFP ii
TABLE OF CONTENTS
1. Introduction ....................................................................................................... 1
2. Background - Review of Literature .................................................................. 3
2.1 Recent Studies ............................................................................................. 3
2.2. The Global Practice-Principles of Taxation ............................................... 5
2.3. Restructuring Reforms in the Provincial Finance ...................................... 7
3. Economy and Resources of NWFP .................................................................. 9
4. Taxation Regime in NWFP ............................................................................ 18
Structure, Issues and Revenue Prospects ............................................................ 18
4.1. Tax Structure ............................................................................................ 18
4.2. Tax Administration ................................................................................... 20
4.3. Multiplicity of Taxes ................................................................................ 21
4.4. Tax Regime-Issues and Prospects ............................................................ 22
4.4.1. Agriculture Income Tax ..................................................................... 22
4.4.2. Urban Immoveable Property Tax (UIPT) .......................................... 27
4.4.3. Motor Vehicle Tax (MVT) ................................................................ 30
4.4.4. Stamp Duties ...................................................................................... 36
4.4.5. Tax on Professions and Callings ........................................................ 37
4.4.6. Registration Fee ................................................................................. 38
4.4.7. Development Cess on Tobacco .......................................................... 39
4.4.8. Provincial Excise ................................................................................ 40
4.4.9. Electricity Duty .................................................................................. 40
4.5. Tax Potential of NWFP ............................................................................ 41
5. Non-tax Revenue Resources in NWFP ........................................................... 43
5.1.User Charges .............................................................................................. 43
5.2. GST on Services ....................................................................................... 46
5.3 Revenue Prospects from Other Provincial Resources ............................... 47
6. Local Government Financing ......................................................................... 49
References ........................................................................................................... 51
Annex 1 Taxation Authority at each Level of Government in Pakistan .............. 52
Annex 2 Export Performance of NWFP ............................................................. 54
Annex 3 Potential of AIT in NWFP ................................................................... 55
Annex 4 Revenue Reciepts of Government of NWFP ....................................... 57
Annex 5 Motor Vehicle Tax Rates ..................................................................... 59
Annex 6 Tax on Professions and Callings .......................................................... 61
Annex 7 User Charges in Tirtiary Health Care in NWFP .................................. 63
Annex 8 Report of Farm Household Survey for Determining Potential of AIT in NWFP .................................................................................................................. 67

Tax Potential in NWFP iii
Acronyms
AIT Agriculture Income Tax
BOR Board of Revenue
ETD Excise and Taxation Department
GoNWFP Government of NWFP
MVT Motor Vehicle Tax
NLC National Logistic Cell
TMA Tehsil/Town Municipal Administration
UIPT Urban immovable property tax
LG Local government

Study on
Tax Potential in NWFP
1. Introduction
The provincial governments are a vital component in the public finance structure of Pakistan. More recently, the devolution of major provincial functions to the district governments in 2001, making them responsible for delivering basic services to the people, like education, health, water supply, etc., has made the local governments a significant stakeholder in revenue sharing. Indeed the ability of the provincial and local governments to adequately provide for an increase in the quantity and quality of such services crucially depends upon the magnitude of financial resources made available to them.
2. The provincial governments ran into problems of growing deficits during the first four years of the 5th National Finance Commission Award 1997 because of structural problems in the organization of public finance in the country, in terms of allocation of functional responsibilities and fiscal powers. The problem became more acute because of structural shifts in favor of the Federal Government under the NFC Award and abolition of Octroi and Zila Tax collected by the local government. The existence of imbalance in revenues and expenditures has necessitated establishment of an elaborate revenue sharing arrangement between the federation, the provinces, and local governments. Revenues from the divisible pool of taxes have become an important source of income to the provinces. However some provinces still remain short of resources to finance their current expenditures and seek additional subventions and grants from the federal government. The large dependence on federal transfers is cited as the root cause of sluggish revenue performance by provinces. The problem is likely to continue unless the provinces raise their own revenues substantially and provincial share in the revenue sharing arrangement is increased.1
3. The local governments are creations of provincial ordinances and are administered through elected councils at the district, tehsil/town, and union council levels. The present structure of the local governments is a major departure from the past when these were administered effectively through district administration and perceived as political inputs into district administration and were neither intended to be, nor functioned as sovereign governments embodying the will of the local populace. The local governments have been given autonomy under provincial
1 Reportedly, a concensus is emerging in the NFC deliberations for a larger share for provinces, 50% of the net federal government revenues for the 6th NFC Award compared with 37.5% in the 5th Award.

Tax Potential in NWFP 2
Local Government Ordinances and under the Sixth Schedule of Constitution, which cannot be amended without prior permission of the President of Pakistan.2
4. Provincial and local governments would have not only to maintain the levels of expenditures on basic social and municipal services but also have to raise these levels considerably to make up for the growing population and needed quality improvements in the face of price inflation. In this connection, a number of measures would have to be taken to restore the financial viability and autonomy of the provinces and local governments. Thus there is a need to study in depth the problems of provincial finances. One of the principal areas of investigation has to be the scope for greater resource mobilization directly from provincial taxes and user charges, which is the objective of this study.
5. More specific objectives of the study are first, to examine the provincial revenues to identify the nature of fiscal problems currently confronted by the NWFP and second, to formulate proposals for enhancing revenues from provincial taxes and user charges. The study has to consider economic base of the province, elasticity and buoyancy of provincial revenue resources, and makes proposals for fiscal reforms. The basis of revenue sharing between the three tiers of the government is not to be discussed as it falls outside the scope of this study. Nevertheless, it would be touched upon cursorily in the larger context of fiscal framework for the province.
6. Henceforth this study is structured as follows. The next chapter reviews literature with a view to identify the areas to look into while doing such kind of research work. Chapter 3 reviews the economy of NWFP particularly highlighting its fiscal situation upon which tax proposal would be built in the following chapters. The next chapter examines in detail the taxation structure in NWFP and related issues, and explores the prospects of tax revenues. Chapter 5 cursorily highlights some prospective sources of non-tax revenues of interest to GoNWFP. The final chapter highlights possible revenue resources that local governments in NWFP may like to explore. Institutional reforms are very important for this kind of study, but are not covered here because they are being looked into in another study on tax administration reforms.3
2 Reportedly, a sunset clause for phasing out this protection has been agreed under the Government-MMA agreement for insertion in the Sixth Schedule. But by this time, two more elections of local governments would have taken place under the Local Government Ordinance, and the system of local government would have taken roots and is likely to stay. According to more recent report, local bodies’ elections have been postponed for political reasons.
3 As desired by GoNWFP, we shared our earlier draft of this study containing discussion on tax administration reforms with the consultant on the other study.

2. Background - Review of Literature
2.1 Recent Studies
Considerable work has been done to date on provincial finances as well as defining fiscal ratios and the signals they convey of on-going or impending fiscal crises. The issues of provincial and local government finances are eminently covered in various studies on provincial finances.4 The provincial tax effort has been lacking throughout nineties due to poor inter-government fiscal relations, weak tax administration, and lack of political will to levy agricultural income tax (AIT). Hence revenue collections by provinces have remained much below their revenue potential. Provinces have not adequately exploited the revenue potential of user charges, and cost recovery rate remains very low. The deteriorating provincial finances have been a major constraint hampering effective service delivery, and more generally on growth and poverty reduction in Pakistan. Reform in provincial government finances is absolutely necessary for restoring economic growth, reducing poverty, improving public services. This reform would require mounting efforts on several fronts, including addressing long standing structural issues like reducing vertical imbalances, fuller implementation of tax statutes, cultivating/assigning new tax bases to provincial/local governments, restructuring of tax related institutions, besides attending to more immediate problems of improving implementation of tax laws and governance.
2. These studies assert that the rising vertical fiscal imbalances in provincial finances have been a major reason for weak autonomy and accountability of provincial governments. While provincial governments are assigned with major public expenditure responsibilities, they have limited revenue generating authority and capacity. Overall provinces finance only 10-20% of their expenditure from their own revenues. The federal and provincial governments retain the most buoyant tax bases and local governments are left with the residual taxes having very low yields (see Annex 1 for a summary of taxation authority of different government levels). This, coupled with low utilization of provincial and local tax bases and user charges, has contributed to widening of gap between provincial expenditure and revenue collection. With most of provincial government expenditure being financed by federal transfers, the provincial governments’ fiscal position is vulnerable to changes in federal tax policy and revenue mobilization. In addition, the accountability of provincial government is weakened as expenditure and revenue decisions are made at two different levels of government.
3. The existing provincial taxes and user charges are inefficient and inequitable, and are incapable of generating enough revenues to meet a significant part of
4 The most notable one is the World Bank, Study on Provincial Finances.

provincial expenditure needs. The provincial tax bases are weak, tax effort has been lacklustre, and governments have wavered to collect the key provincial taxes like AIT. Until recently, the provinces relied on numerous low-yield tax instruments, multiplicity of taxes and poor tax records, which have created strong incentives for tax evasion. Weak and non-transparent tax administration with poor accountability has given rise to severe governance problems. The provincial tax systems have become overly complex, which distorted/hindered economic activity, discouraged tax compliance and facilitated high corruption. These problems are further compounded by levy of federal, provincial and local taxes on the same bases, which raise tax rates to very high levels, creating incentives for tax evasion and disincentives for economic activity. Provincial taxes have had an exclusive revenue focus and are not based on sound tax policy (efficiency or equity) considerations. Furthermore the tax policy changes have been frequent and adhoc, which have further disturbed the business environment.
4. The provincial governments have not utilized user charges adequately for public services to regulate their demand and enhance revenues. The cost recovery is thus abysmally low. The flaws in the design and implementation of user charges allow the subsidized services to be mostly utilized by relatively affluent segments. Furthermore, institutional incentives for collection of user charges are weak because these collections do not benefit the collecting institutions and become a part of general government revenues.
5. Lastly provincial revenue administrations are weak despite elaborate networks bifurcated in two departments. Taxes are regulated by obsolete legal frameworks devised prior to independence and marginally adjusted to meet immediate needs. Land and other tax related records are very poor, and rely on the discretion of the lowest level official, the patwari or ETO with elaborate but ineffective supervision.
6. These studies have recommended the following sets of reform measures.
One- Expand the provincial revenue base by:
a. Allowing sharing of selected federal tax bases (income tax and possibly GST) through provincial add-ons and federal tax rationalization to avoid over utilization of tax bases.
b. Vacation of provincial tax bases occupied by the federal government, e.g. CVT, and taxes on energy resources.
c. Assigning of specific-purpose excise duties to provinces.
d. Correcting horizontal imbalances by means of well-designed equalization grants.
Two- Rationalize taxes - reduce the number of provincial taxes (abolish taxes with low yield which have only nuisance value), rationalize tax rates, devolve some taxes to local level, and make concerted efforts to raise additional revenues from these broad-based taxes. In this

context, the studies specifically recommended to increase the revenue collection from agricultural income tax (AIT) by expanding the base of land-based farm tax in the short run and overtime transforming AIT into a real income tax.
Three- Rationalize user charges for better-cost recovery from irrigation, roads, professional and university education, tertiary health care, etc.
Four- Strengthen provincial tax administrations (by merging ETD and RD), better liaison with CBR, computerization of key taxes, training and improved incentives for tax officials and plugging tax leakages.
7. The studies also noted that the provinces’ financial management is inadequate mainly due to overall weak national and provincial institutions, worsening governance, lack of accountability and political interference. The recommended remedy was to strengthen institutions of financial management (practices relating to accounting, auditing, reporting, monitoring, information and databases) through civil service reforms, incentive structures (including decentralization and community participation), insulation of tax administration from political pressures by elaborating role of politicians in budget management.
2.2. The Global Practice-Principles of Taxation
8. A tax system needs to balance between simplicity and diversification. Governments universally employ balanced tax systems, which have the feature that different taxes apply to basically the same base. For example, general sales taxes, payroll taxes, and income taxes have bases, which overlap considerably. From the point of view of standard efficiency and equity argument, one should be able to manage with a single general tax base, yet no government behaves that way. A mix of taxes keeps the rate on any one tax low, and reduces incentives to evade/avoid the tax. Furthermore, by using a mix of taxes, taxpayers, who would otherwise be able to avoid taxation of one type, are caught in the net. Governments normally avoid the nuisance tax handles if their potential is low. The importance of various taxes in the overall mix remains, however, a matter of judgment.
9. National taxation is needed to provide for national goods and justified on efficiency and equity considerations, while sub-national tax authority is needed to exact accountability of local services provided by sub-national governments. Domestic common market functions efficiently if all resources (labor, capital, goods, and services) are free to move from one region to another without impediments or distortions. Decentralized tax systems can interfere with the efficiency of the common market. The decentralization of revenue powers can also serve to increase the costs of collection and compliance, both for the public sector and for the private sector. Tax-transfer system is one of the main instruments for

achieving the redistributive equity. However sub-national governments would have no incentive to spend these transfers efficiently. And to ensure accountability, revenue means of sub-national governments should be matched as closely as possible to revenue needs. Tax instruments intended to further specific policy/service objectives should be assigned to the level of government having the responsibility for such a service. Thus progressive re-distributive taxes, stabilization instruments, and resource rent taxes would be suitable for assignment to the national government, while tolls on inter-provincial roads and user charges are suitably assigned to provincial and local governments.
10. Several important functions are being transferred to local governments to improve service delivery, but there are few high-yield taxes, which can be assigned to local governments without creating economic distortions. Lower governments can perform major expenditure responsibilities in education, health and municipal functions much more effectively. Efficiency in tax administration suggests that local governments should levy taxes on immobile factors (e.g. property taxes) and recover costs through user charges, such as irrigation charges, tolls on local roads and poll taxes. Since these revenues are unlikely to be sufficient in many localities, intergovernmental transfers are required to mitigate this vertical imbalance. While taxation increases can create constituent pressures for good local performance, appropriate grant designs can create pressure from the federal government for local performance.
11. Another option is to permit sub national governments to levy their own broad- based taxes, as long as these taxes burden local beneficiaries only. In principle, a retail sales tax or a tax on personal income would be possible. In countries with a federal VAT, it is too cumbersome to have sub-national sales taxes. In practice, the only efficient, desirable broad-based sub-national tax that seems feasible is likely to be a flat-rate surtax (often called "piggybacking") on national personal income tax. For efficiency, it may be desirable to access the base centrally and even to have it collected by the central government. But for accountability it is critical that the local authorities are responsible (perhaps within limits) for rate- setting. The key criteria are to restrict sub-national government from exporting taxes and to permit them to set their own tax rates.
12. Several policies/methods are used for increasing tax compliance. One, tax statutes should be simple and easily enforceable, their compliance costs should be small, and they be believed as somewhat equitable. Two, efforts should be made to improve the tax climate by improving governance in the public sector programs, improving the image the tax department itself, disseminating information about the tax gap, and moral suasion of citizens based on their personal, social and political morality. Three, tax departments should improve taxpayer services, assist taxpayers, simplify filing requirements, educate/inform taxpayers, reduce

compliance costs and promptly attend to taxpayers’ problems. Sometimes tax authorities perform these functions by promoting/regulating private tax advisors. Four, information from cross-return matching, non-tax documents, related research and audits might be used to improve tax compliance. Five, make a better use of withholding and enforcement powers, and restructure of civil and criminal penalties.
13. An effective tax administration would consist of several wings including administration, self-assessment, policy/rules and litigation. The tax statutes/rules should prescribe clear procedures for establishment and settlement of the tax liability, through direct or indirect verifications. The tax procedures should clearly specify who must file a tax return, the authority to demand returns, the timing for filing of return, what information is to be provided, how to calculate tax liability, and where/how to pay the tax. The procedures should also give the methods of assessing/reassessing tax returns and giving notice of objection, and ensure the secrecy of taxpayer’s information.
2.3. Restructuring Reforms in the Provincial Finance
14. Provincial governments need access to adequate, stable and predictable means of revenues to provide local public services to promote outcomes such as reduced poverty, maintenance of law and order, and higher living standards and growth.5 These outcomes with a positive image for government are the key inputs for cultivating a climate of tax compliance.
15. Provincial taxes mainly aim to generate revenues and are mostly based on ability to pay. Some taxes have the regulatory objectives and should not be expected to generate substantial revenues. Under the present circumstances, we propose the following revenue reform strategy to boost the provincial government’s own revenues.
Tax mix: The province needs to have a manageable assortment of taxes (say about 7-9) to generate adequate revenues without over burdening citizens. Low yield taxes with only nuisance value should be abolished, and new prospective taxes with easily identifiable bases should be added in the mix. Tax instruments should be adapted to bases and rationalized, e.g. excise/income taxes for corporations and organized sector, presumptive taxes for the informal sector, land-based tax for agriculture, property tax rates per sq. ft. of plot/covered area/township, MVT on the basis of engine
5 This presumes that national public goods including some special merit goods of national importance, redistribution of income and wealth, macroeconomic stabilization are to be provided and financed by the federal government.

capacity/fuel used. The tax bases should be easily identifiable, and not amenable to misrepresentation by the taxpayer or administrator.
Rate structure: With progressive taxes having been left to the federal government, the provincial tax rates are advised to be low and uniform or with fewer tax brackets. Larger tax rates would not only be unaffordable but would also have adverse affect on investment and resource allocation via economic distortions. Large rates also create strong incentives for tax evasion.
Broad-basing: GoNWFP should broaden the tax bases by limiting or eliminating exemptions and exceptions. As stated earlier, provincial taxes should be low and affordable and the main concern should be revenue collection.
User charges: have a lot of scope for better-cost recovery in irrigation, roads, professional and university education, tertiary health care, etc.
Revenue Collection agency: The two tax collecting institutions may be merged for a more effective tax enforcement through better coordination, records, skills, other tax practices and climate.

3. Economy and Resources of NWFP
1. NWFP is the third largest province of Pakistan. NWFP houses 20 million
people, 13.6 percent of Pakistan’s population, which is growing at a rate of 2.82
percent per year. It is the least urbanized province, as only 17% of population lives
in urban areas against the national average of 32.5 percent, 32 percent in Punjab,
49 percent in Sindh, and 23 percent in Balochistan. NWFP comprises 9.4 percent
of country’s landmass, consisting of three distinct regions: northern mountainous
area encompassing Chitral, Dir, Swat, Kohistan, Manshera, protected areas in
Malakand and north eastern part of Abbotabad district; central hilly area covering
major parts of Kohat, Bannu, and portions of Peshawar and D.I.Khan with rugged
mountains, ridges, and valleys; and plain area comprises mainly of Peshawar,
Mardan, D.I.Khan, Bannu and Abbotabad. The province shares a long porous
border with Afghanistan and most of its population has the same ethnic
background as of the bordering Afghanistan areas. It has been the frontline
province for more than two decades, hosting over 2 million Afghan refugees
(majority of who have made the province its second home or permanent residence).
2. The mainstay of NWFP’s economy is agriculture and trade, though there is a
great potential for mining. NWFP is well endowed with abundant surface water
for agriculture, forests and livestock as well as generating hydropower. Its
economy is relatively less industrialized because of natural geographical
disadvantage as the seaport is located some 1,500 kilometers away to the south.
Agriculture accounts for 32 percent, followed by industry (17 percent), services
(51percent), and transport and communications. The province largely comprises of
mountainous areas with 30 percent cultivated land. The land holdings are small
and fragmented with average farm size of 2.2 acres compared to an average of 9.4
acres in Pakistan. Land routes to the north are difficult through the hilly terrains.
The continuing conflict in Afghanistan since 1977 has proved to be a heavy burden
on scarce resources of NWFP, causing a serious disruption in trade, putting
enormous pressure on social services
and amenities and physical
infrastructure. The provincial
economy is highly dependent on
workers’ remittances, both domestic
and abroad. A large part of the
province’s economy is undocumented
where informal markets operate and
where laws of the land are still to be
extended.
3. Despite its rich natural and human
resources, NWFP is one of the poorest provinces of Pakistan. Poverty is pervasive
Source: Poverty in Pakistan in the 1990s: An Interim Assessment,
The World Bank, 2001.
Chart 1: Poverty Trends
0
5
10
15
20
25
30
35
40
45
50
1992/93 1993.94 1996/97 1998/99
Pak
NWFP

and deep in the rural and mountainous regions where nearly 50 percent of the population lives. Presently, 31 percent of the urban and 47 percent of the rural population lives below the poverty line. The rural poverty in NWFP is much higher than the national average (see Chart 1). Even the non-income determinants of poverty are worse in NWFP compared to other provinces in Pakistan. These include a larger average family size (7.8 members per household compared to the national average of 6.8), higher dependency ratio, higher illiteracy ratio, and lower access to health and physical infrastructure. The skill base is very low and those with low skills are among the poorest group. The Multi-Indicator Cluster Survey (MICS) conducted in 2001-02 indicates that districts located in the mountainous zones rank very low in terms of social indicators. The literacy level is very low with low primary school enrolment, low coverage for safe water and sanitation and high levels of malnutrition.
4. The poor social indicators are accompanied by higher gender disparities. However, there has been an improvement during the last decade both in education and health as shown in Table 3.1. A major area requiring attention is the social and economic position of women that has remained weak. This position is manifested in several indicators. Girls’ enrolment is around 56% as compared to 97% for boys. As result, the female literacy in NWFP is only 20% compared with the national average of 32%.
5. The resource base of NWFP is weak. The estimated per capita income of the province is 30% lower than the national average, based on a study of the Planning and Development Department. The provincial economy is mostly dependent on agriculture (livestock, timber, tobacco, and horticulture production), services, public employment, and low-skill workers remittances from inside and outside the country. The fast increasing population (including the influx of Afghan refugees) outpaced low rate of
Table 3.1: NWFP Social Indicators
1990-91
2001-02
Gross Primary School Enrolment (%)
Overall, both sexes
67
77
Male
92
97
Female
44
56
Infant mortality rate (per 1000)
Overall, Both sexes
130
56
Male
143
61
Female
116
51
Immunization rate (%) for 12-23 months old
Overall, both sexes
41
57
Male
50
56
Female
31
57
Delivery by qualified health personnel (%)
Overall
29
46*
Rural
26
43
Urban
39
66
Contraceptive use
Prevalence Among (%) married women
9
14
Awareness
42
92
Operational Basic Health Units (BHUs) (%)
NA
85
Household access to clean water (%)
43
54
Source: PIHS and NWFP Statistical Book

economic growth that has led to depletion of natural resources, stagnant remittances, and underdevelopment. Besides the weaker resource base relative to other provinces, value added in agriculture and industry is very low and is dependent on food grains produced in other provinces to feed its population.
6. The estimates of regional GDP worked by Planning Department of NWFP based on pricing of production from major crops, minor crops, livestock, fisheries, and forestry as well as large scale, small scale and household industries in urban and rural areas for 1996-97 are given in Table 3.2. The RGDP guestimates for 1998-99, 1999- 00, and 2000-01 are Rs 63.1 billion, Rs 66.1 billion and Rs 67.9 billion respectively. The broad distribution of the NWFP GDP along with the national distributions is given in Table 3.3. The distribution clearly indicates a heavy reliance on agriculture, particularly livestock, trade, transport and public administration services.
7. The service sector in NWFP has expanded faster than national averages. The
Table 3.3: GDP Shares by Sector
percent
1980-81
1997-98
Sector
Pakistan
NWFP
Pakistan
NWFP
Agriculture
32.2
34
25
32
Major crops
16.8
13.5
10.5
7.2
Minor crops
5.6
8.2
4.5
5.5
Livestock
8.5
11.9
9.1
19.3
Industry
22.3
15.2
26.5
16.7
Mining
0.4
0.7
0.4
0.7
Manufacturing
14.5
6.4
18.3
7.2
Large-scale
11.6
4.2
11.9
3.9
Small-scale
4.2
2.2
6.4
3.3
Construction
4.9
5.8
3.7
4.3
Electricity/Gas
2.5
2.3
4.1
4.5
Services
45.3
50.8
48.2
51.1
Transport
10.1
11.8
10
11.5
Trade
15.8
11.5
15.6
16.1
Finance
2.3
2.2
2.2
1.9
Dwellings
4.8
4.7
5.7
2.7
Public Admin
8.2
10.6
4.1
7.8
Soc & Com Part
7.7
10
8.7
11
Source: GovNWFP P&DD, World Bank, PAD for SAC-I
Table 3.2: Regional GDP of NWFP by Districts, 1996/97
Mill Rs
District/Region
Agric
Mfg
Total
Peshawar
8,618
7,129
15,747
Peshawar
2,393
4,013
6,406
Charsadda
4,215
1,429
5,644
Nowshera
2,010
1,687
3,697
Mardan
8,715
3,904
12,619
Mardan
4,437
2,460
6,897
Swabi
4,278
1,444
5,722
Kohat
1,915
1,900
3,815
Kohat
860
1,327
2,187
Karak
574
4
578
Hangu
481
569
1,050
Hazara
6,008
5,257
11,265
Mansehra
2,420
150
2,570
Abbotabad
1,048
2,143
3,191
Kohistan
636
236
872
Haripur
1,380
2,418
3,798
Battagram
524
310
834
Malakand
9,995
1,477
11,472
Malakand
1,417
234
1,651
Swat
3,877
737
4,614
Upper Dir
775
118
893
Lower Dir
965
118
1,083
Chitral
609
50
659
Buner
1,612
86
1,698
Shangla
740
134
874
DIKhan
5,910
1,499
7,409
DIKhan
2,475
595
3,070
Tank
308
59
367
Bannu
2,139
515
2,654
Lakimarwat
988
330
1,318
Total NWFP
41,161
21,166
62,327
Source: SPDC (unpublished)

remittances and informal economy are the main contributors and have helped alleviate poverty to some extent. The sectoral growth rates of NWFP GDP have more or less followed the growth pattern of national economy as indicated at Table 3.4. More recently exports from NWFP have improved substantially. The trends of NWFP exports are given in Annex 2.
8. The economic potential of the province has remained under exploited. The mineral wealth such as precious and semi-precious stones, marble, granite as well as the tourism potential has not been fully exploited. The industrial base is small and attempts to expand industry by setting up industrial estates in the public sector have failed. The slump in the formal industrial sector is attributed to overall depressed market conditions, poor credit accessibility, lack of technical manpower, economic policy distortions including over-regulations, and trade restrictions. Besides the province suffers from locational disadvantages; it is landlocked and is over a thousand miles away from the Karachi seaport. As NWFP is highly dependent on the south for its inputs/raw materials and markets, higher transportation costs make it quite difficult for its industry to compete. However exports in stones, carpets, rugs, and handicrafts from the province have grown substantially over the last five years. This export led growth in the informal small industry sector has a potential to accelerate further.
9. Most abundant natural resource of NWFP is water which can be used for hydel electricity generation, although the Water and Power Development Authority manages major power generating stations. The new Power Policy approved by the Economic Coordination Committee encourages small hydel generation plants of up to 50 megawatts and development of off-grid localized energy distribution from these plants. The province has the potential to attract industrial investments by offering them localized and inexpensive sources of energy besides generating revenues for the provincial exchequer.
10. NWFP is heavily dependent on transfers from the federal government. In fact all the four provinces in Pakistan rely heavily on fiscal transfers from the federal government, although the level of dependence varies from province to
Table 3.4: GDP Growth in NWFP (% p.a.)
1997/98
1998/99
1999/00
2000/01
Agriculture
0.9
0.7
1.8
0.0
Major crops
1.0
0.2
1.3
-1.2
Livestock
-0.1
0.6
0.5
1.3
Industry
0.9
0.2
0.8
0.1
Mining
0.0
0.0
0.1
0.0
Manufacturing
0.5
0.3
0.1
0.5
Large scale
0.3
0.1
0.0
0.3
Small scale
0.2
0.2
0.2
0.2
Construction
0.1
-0.3
0.3
0.0
Elect & gas
0.4
0.2
0.4
-0.4
Services
1.2
2.0
2.3
2.8
Transp and Comm
0.8
0.4
0.4
0.7
Commerce
-0.2
0.3
0.4
0.8
Financial Inst.
-0.5
0.3
0.1
0.1
Dwellings
0.1
0.1
0.1
0.1
Public Admn
0.2
0.2
0.4
0.4
Other services
0.7
0.7
0.7
0.7
NWFP GDP FC
3.0
3.0
4.9
3.0
Pakistan GDP FC
3.5
3.1
4.8
2.7

Provincial Dependence on Federal Govt.
89% 89%
90%
91%
92%
79%
76%
79%
81%
82%
65%
75%
77%
75%
74%
90%
92% 91%
87% 87%
60%
65%
70%
75%
80%
85%
90%
95%
1997/98 1998/99 1999/00 2000/01 2001/02
NWFP Punjab Sindh Balochistan
province. The trends in the level of dependence across provinces in recent years
are given in Chart 2. These trends indicate a very high level (92%) of
dependency for NWFP in 2001-02, followed by 87% in Balochistan, 82% in
Punjab and 74% in Sindh. This rising trends in provincial dependence was
largely due to provincial tax and non-tax receipts which declined between 1998-
99 and 2001-02. Some of the
non-tax receipts that show a
sharp decline between these
years include user charges
interest, dividends, and foreign
grants. Tax revenues during the
same time period however
showed a steady increase
except for a slight dip in 2000-
01. The level of NWFP’s
dependency on federal transfers declined slightly in 1998-99 and has risen
steadily ever since. Presently NWFP meets 90% of its revenue needs from
federal transfers and only 10% of its revenue receipts from provincial taxes,
user charges and other revenue receipts.
11. The federal government controls and collects the dynamic taxes, i.e. income
tax, sales tax on goods, custom duty, federal excise duty, CVT, petroleum
surcharges and air travel tax, and shares the proceeds among provinces on the
basis of NFC awards (see Annex 1).
12. The Government of NWFP (GoNWFP) has faced extreme uncertainties in
financing of its budgets. GoNWFP budgets are determined by the availability of
finances rather than by the needs of public provision. Up to 1999-2000, a major
component of the development portfolio was funded by donors or from capital
development loans (CDLs) provided by the federal government. The collection
and sharing of the federal taxes has remained volatile because of unstable
economic conditions in the past, the ongoing tax reforms, and administrative
inefficiencies. Second, GoNWFP has been preparing its budgets on the
assumption of its share in hydro electricity profit from WAPDA on the basis of the
Kazi Committee Award, but actual transfers of profit have been much smaller, i.e.
capped at Rs 6 billion p.a., representing a hefty shortfall of over Rs 10 billion in
recent years. Furthermore, the federal grants have declined in recent years since
they were non-obligatory and depended on the inflation rate.
13. GoNWFP recorded extraordinary revenue shortfalls during the Fifth National
Finance Commission (NFC) Award. The shortfalls in hydel profits and tax
assignment were indeed quite hefty, 49% and 40%, respectively, and the overall

share of NWFP in the federal revenue assignment fell short 39.6% of the Award
amount (see Table 3.5).
Table 3.5: Performance of the Fifth NFC Award
Hydel Profits Tax Assignment Subventions Total NFC Award
Year Proj Actual S.fall Proj Actual S.fall Proj Actual S.fall Proj Actual S.fall % S.fall
1997-
98
9.4 6.0 3.4 18.9 13.9 5.0 3.3 3.3 0.0 31.6 23.2 8.5
26.7
1998-
99
10.5 6.0 4.5 22.3 14.6 7.7 3.7 3.7 0.0 36.5 24.3 12.2
33.5
1999-
00
11.6 6.0 5.6 26.4 16.0 10.5 4.1 3.7 0.4 42.1 25.7 16.5
39.0
2000-
01
12.9 6.0 6.9 31.3 18.4 13.0 4.5 3.8 0.7 48.7 28.2 20.6
42.2
2001-
02
14.3 6.0 8.3 37.2 19.0 18.2 5.0 3.9 1.1 56.5 28.8 27.7
48.9
Total 58.7 30.0 28.7 136.1 81.8 54.4 20.6 18.4 2.2 215.5 130.2 85.3 39.6
Proj-projection
S.fall-Shortfall
14. Even the timing of federal transfers adds to uncertainties and makes the
financial management extremely difficult. The transfers have been far below
NWFP’s pro-rata share of estimated revenues during the first 9-11 months, and
then jump in the last month(s) of the financial year. Consequently, it has been
impossible to implement the government activities according to the planned
schedule.
15. Like other provincial governments, GoNWFP’s own revenue system relies on a
number of tax instruments
(see Chart 3). Provincial
revenue bases relate to taxes
on property, agriculture,
land, transfer fees and user
charges. GoNWFP has been
trying to restructure and
exploit these bases for the
past several years. The
main provincial tax bases
are MVT, electricity duty,
land revenue6, stamp duty,
UIPT, education cess, and
professional tax.
6 Most landowners are Sunni Muslims, who pay ushr and hence are exempt from land
revenue. Thus land revenue figures mostly comprise of collections on local rate, mutation
fee, etc.
Chart 3: Tax Structure in NWFP, 2001-02
31%
14%
11%
3%
1%2%
3%
1%
1%
4%
29%
Motor Vehicle
Land Revenue
Stamp Duties
AIT
UPIT (Net)
Registration
Professional Tax
Prov.Excise
Entertainment
Development Cess
Electricity Duty

16. The provincial tax structures mirror provincial economic conditions. Tax structures in the four provinces are given in Table 3.6. Commercial activity in NWFP is much smaller compared with Punjab and Sindh, hence NWFP’s revenues from stamp duties and registration fees are much lower. The scope of agriculture income tax appears more limited in NWFP because of dominance by small farms, while the small size of the urban sector in NWFP inhibits significant increase in the yield from UIPT. AIT reportedly has some potential but this base has not been decisively cultivated; hence its yield has remained low and volatile. Except for electricity duty, the remaining provincial taxes, provincial excise, entertainment tax, hotel tax have very low potential and yields. The government efforts on revenue generation and tax restructuring are partly responsible for the volatility in revenue collection. Historical data indicates that the provincial government has had a limited success in generating significant increase in revenues despite its best efforts.
17. GoNWFP also recorded large shortfalls in the province’s own revenues in recent years. The accumulated to 17.5% during the last NFC Award period. Year-wise shortfalls in the past few years are shown in Table 3.7.
18. GoNWFP derives almost three fifth of its own revenues from non-tax receipts (see Table 3.8). The non-tax receipts are mostly user charges from education, health, irrigation and other works. Some revenues are generated by receipts of civil administration and interest collections on loans to local governments, corporations
Table 3.8: Tax and Non-tax Provincial Own Receipts
Mill Rs
1997-98
1998-99
1999-00
2000-01
2001-02
Tax Receipts
828.4
930.0
1209.5
1249.7
1418.4
Non-Tax Receipts
793.6
1.089.0
847.5
1133.3
638.3
User Charges
1042.0
1107.0
1153.0
1206.0
1140.3
Proportion (%):
Tax Receipts
31.1
29.8
37.7
34.8
44.4
Non-Tax Receipts
29.8
34.8
26.4
31.6
20.0
User Charges
39.1
35.4
35.9
33.6
35.6
Table 3.7: Provincial Revenue Receipts (Bill Rs.)
Year
Budget
Actual
Shortfall
% Shortfall
1997-98
3.28
2.66
0.61
18.7
1998-99
3.6
3.13
0.47
13.1
1999-00
4.04
3.21
0.83
20.6
2000-01
4.25
3.59
0.66
15.6
2001-02
3.96
3.2
0.76
19.2
2002-03
3.66
3.19
0.47
12.9
Total
22.79
18.98
3.81
16.7
Table 3.6: Provincial Tax Structure in 2001-02
NWFP
Punjab
Sindh
Balochistan
Motor Vehicle
31.6
17.2
17.6
30.6
Electricity Duty
28.8
1.7
8.9
0.0
Land Revenue
14.1
23.0
1.9
4.5
Stamp Duties
10.7
36.9
37.0
13.2
Development Cess
4.0
3.8
0.0
0.0
AIT
3.3
5.9
6.4
1.0
Professional Tax
2.9
1.9
2.8
0.2
UPIT (Net)
1.7
0.2
5.2
9.2
Prov.Excise
1.5
5.6
12.0
31.8
Registration
0.7
2.5
5.8
1.2
Entertainment
0.6
0.5
0.8
0.0
Others
0.0
0.9
1.5
8.3
Source: Calculation based on Provincial Accounts

and employees. Reportedly the user charges have not been fully exploited and cost recovery remains very low. Similar slacks are reported in the collections of AIT, other tax and non-tax revenues.
19. The revenue shortfalls have largely been made up through expensive cash development loans (CDLs) from the federal government. As a result, the province has accumulated large and unsustainable debt and debt service. By the end of FY 2002, the total outstanding debt burden of NWFP had reached to Rs 73.9 billion, i.e. over 100% of its approximate Gross Regional Domestic Product (GRDP). This debt included Rs 36.56 billion in CDLs and Rs 37.35 billion in Foreign Project Assistance (FPA). GoNWFP paid Rs 73.83 billion to the federal government against CDLs of Rs 43.93 billion obtained from 1972-73 to 2001-02. This included repayment of principle amount of Rs 7.37 billion and Rs 66.47 billion interest payment. The debt servicing has used around 25-28% of GoNWFP’s total revenue resources, with debt to interest ratio of 1:2.86.
20. The high dependence of the federal government, uncertainty and shortage of public resources has had a telling effect on economic and social development and poverty reduction efforts in the province. The uncertain resource position has adversely affected GoNWFP’s control on planning, budgeting and expenditures for social and economic development. The large resource shortages have led to delays in implementation of public sector programs and the consequent loss of social and economic benefits. High dependence on the federal government and uncertainty with regards to resources limited accountability and effectiveness of provincial government, and adversely affected the province’s participation in economic development. Thus widespread poverty, related socio-economic problems, increase in crime and narcotic-related activities, and strong public reaction against the federation and inter-provincial disharmony have been the natural outcomes.
21. On the other hand the provincial budgets have suffered from inherent rigidities. With salaries, pensions, and debt servicing claiming around 70% of total receipts, and leave little flexibility within the budget for other expenditures such as operation, maintenance and development. Naturally the revenue shortfalls have led to meager provision for these accounts, thereby leading to deteriorations in public services, maintenance backlogs, and little development and pervasive poverty conditions. These problems have become more acute after the devolution and the uncertainty in provincial resource position is impacting the effectiveness of district governments also.
22. The need for reforming the revenue system has been well-recognized, and concerted efforts need to be made on several fronts to ensure an adequate and smooth flow of resources commensurate with expenditure responsibility of GoNWFP. The provincial government should aim at meeting one-fifth of its expenditure needs from own local revenue resources. The grants for poverty

programs and other public services, which are provided on national standards, should continue be given by the federal government. GoNWFP’s assignment of relatively immobile bases, i.e. taxes on agriculture, property, registration, is roughly in line with the norms of global practice, although these taxes need restructuring, better implementation, and improving its revenue administration. User charges/fees for services such as irrigation, roads, health, education, etc. have some revenue potential, and GoNWFP may try to harness it. GoNWFP should work with the federal government to get its due share of hydroelectricity profits from WAPDA and explore possibilities of further harnessing its hydro generation potential. GoNWFP, in concert with other provincial governments, may explore possibility of using some of the dynamic tax bases jointly with the federal government on piggyback or other basis.
23. The GoNWFP has been working on these lines in the past few years. It has tried some improvements in its tax administration and is closely monitoring its performance. The provincial government has committed to raise the provincial receipts to Rs 5.55 billion by 2004-05 under NWFP Structural Adjustment Credit (SAC). Provincial governments are lobbying for a raise in the federal divisible pool to 50%. But the reform effort has been more haphazard, piecemeal and not very well articulated. The present study partly would meet this gap.

4. Taxation Regime in NWFP
Structure, Issues and Revenue Prospects
The legal basis of provincial government’s fiscal authority is the Constitution. The Constitution assigns the rate setting and collection of buoyant taxes to the federal government. These include income tax, general sales tax, customs, and excise duties. The revenue proceeds from these taxes are shared between the federation and among the provinces through NFC awards generally on population basis, without any consideration for backwardness, revenue potential and economic base of a province. Provincial government taxation powers are mostly residual; hence the provincial tax bases have relatively meager potential. However, the NFC awards do compensate backwardness by providing subventions to smaller provinces. Provinces have full discretion to raise revenues through user charges to recover the cost of services but have been reluctant to employ this instrument vigorously partly because of the concerns for economic conditions and poverty and partly because of political reasons. Provinces also receive discretionary grants from the Federal Government that are mostly earmarked for specific purposes.
2. Greater revenue authority at the provincial level, in line with its functional assignment, is absolutely essential for effective service delivery and poverty reduction, meaningful political choice and decision-making, and to exact responsibility and accountability of the provincial government. Fiscal decision- making at provincial and local levels is the best way to promote local development, inter-provincial harmony and resolve divergent regional/local expenditure demands in a multi-party political system. It would also give local constituencies an effective voice in decision-making, unleash local talent and initiative, and help remove alienation. Above all, decentralized fiscal decision-making is the best mean to satisfy the needs of political participation.
4.1. Tax Structure
3. GoNWFP, like other provinces, collects several taxes and non-tax revenues. The provincial tax revenues derive mainly from taxes on agriculture, assets values, assets exchange transactions and some professions’ incomes. Traditionally, motor vehicle tax and land revenue have been the largest source of tax revenues followed by stamp duties. On average, these three bases account for over 60% of total tax collection in the province (see Table 4.1). In recent years, electricity duty and tobacco development cess have become prominent, which accounted for about 23% of the provincial tax collection. All other taxes account for the remaining 17% of the tax receipts.
4. GoNWFP’s own revenues grew by 10% p.a. from FY95 to Rs 3.6 billion in FY01 and contributed about 11% of the total GoNWFP revenues, except for

Table 4.1: Provincial Tax Collections in NWFP
Mill Rs.
1998-99
1999- 2000
2000- 01
2001- 02
2002-03
2003-04
Growth*
Actual
Budget
Budget
% Share
% p.a.
Tax Receipts
930
1,210
1,250
1,418
1,775
1,742
100.0
13.4
Motor Vehicle
357
417
444
448
606
611
35.1
11.3
Land Revenue
176
172
177
200
220
220
12.6
4.6
Stamp Duties
113
142
139
152
210
220
12.6
14.3
AIT
46
71
23
47
60
65
3.7
7.4
UPIT (Net)
24
33
20
24
41
41
2.4
11.3
Registration
8
11
9
10
50
50
2.9
42.8
Professional Tax
16
19
26
41
75
75
4.3
36.9
Prov.Excise
17
16
15
21
25
25
1.4
7.9
Entertainment
18
23
10
8
10
12
0.7
-8.0
Development Cess
149
41
51
57
157
158
9.1
1.1
Electricity Duty
6
265
220
409
300
240
13.8
4.3
Others
0
0
0
0
20
25
1.4
Source: White Paper 2003-04, Finance Department, GoNWFP
* average growth over the five years except for the electric duty which is for the last four years.
FY99 and FY00 when this ratio was about 13%. Within the provincial government revenues, tax revenues recorded a marginally higher growth than the non-tax revenues during FY95-01, and accounted for over two fifth of the GoNWFP’s own revenues.
5. The most buoyant provincial taxes are MVT which accounts for more than on third of total tax collection in of GoNWFP, and stamp duties whose share in total taxes has increased from 11% to 13% in the last three years despite tax reduction (see Table 4.1). The share of land revenue has fallen from 19% in 1998-99 to 13% in 2003-04. The AIT reportedly has a much larger potential but this tax has not been enforced decisively either because of lack of understanding of the system on the part of tax collectors or inappropriate assessment in connivance of the assessing authority. So AIT collections have fluctuated, Rs 46, 71, 23, 47, 60 millions in FY99-FY03. Similarly, UIPT collection at Rs 24 million or 2% of total taxes in FY02 appear to be lower than its true potential despite increase in rate areas and change of assessment formula. Other significant provincial taxes are electricity duty, development cess and professional tax.
6. Table 4.1 also indicates some other erratic trends besides in AIT. These include a decline in the shares of UIPT and electricity duty, and a niggardish growth in the collection of stamp duties and registration fees. Besides, the growth in collection of MVT does not appear commensurate with increase in vehicular traffic. Provincial excise, entertainment tax and miscellaneous levies yield 1% each of

total taxes. These erratic trends reportedly are due to leakages and laxity in tax administration.
4.2. Tax Administration
7. GoNWFP collects its own tax revenues through two departments: Excise and Taxation Department (ETD) and Board of Revenue (BOR). ETD collects Motor Vehicle Tax, Urban Immoveable Property Tax, tobacco development cess, motor vehicle registration fees, tax on professions, trades and callings, provincial excise on alcoholic liquors, opium and other narcotics, entertainment duty, hotel tax, registration of video cassette shops, and tax on motor vehicle dealers and real estate agents. Tax potential varies grossly among districts, and almost 60% of these tax bases are located in three of the 24 districts, i.e. Peshawar, Mardan and Nowshera.
8. ETD is headed by a Secretary and has District Offices, which are supervised by a Director General. A Deputy Secretary and a Taxation Analyst assist the Secretary ETD. Three Section Officers assist the Deputy Secretary. A Deputy Director, a System Analyst and an Assistant Director assist the Director General. A typical ETD District Office consists of an Excise and Taxation Officer (ETO), an Assistant ETO, three Inspectors for UIPT, excise duty and other taxes, each assisted by a clerk and a constable, and other support staff.
9. BOR is responsible for collecting land and agriculture related revenues and maintaining the record of rights. The Department collects ushr, irrigation charges, land tax, agriculture income tax and mutation fees. All these taxes are related to land and production/income from land, on which records of land rights and ‘girdawari’ of crops are of crucial importance. But the quality of these and cadastral records is very poor. Similarly the record of input/outputs with taxpayers is mostly poor inhibiting proper estimation of tax liability.
10. BOR is administered by a Board consisting of two Members with the Senior Member acting as the Chairman/Head of BOR. Two Secretaries and a Director of Land Records assist the Board Members in performing their duties. The Board oversees the revenue collection by the District Revenue Officers, who supervise the Deputy District Officers Revenue (DDOR) of each Sub-Division. Tehsildar(s), Revenue Accountant(s) and Kanungo(s) assist DDOR and facilitate the work of tax collections at the tehsil level. The lynch pin of the system, however, is the Patwari who conducts crop survey (girdawari), prepares ‘khasra girdawari’, assessment, prepares land records, and is called upon to give evidence in courts. While the Patwari seems overworked, the remaining revenue officials, the Kanungo Circle, Naib Tehsildar, Tehsildar, DDOR, etc. mostly concur with Patwari’s work rather than carrying out any checking/inspection as required under the standing

instructions. The system provides for a DDO Judicial at the District level and Regional Revenue Appellate Courts at the provincial headquarters for settlement of disputes7.
11. The revenue generation from land/agriculture based taxes reportedly has been much lower than the full potential due to several reasons: (i) landholdings in NWFP are small, consequently most of them either fall in the tax-exempt category or attract very low rates; (ii) most of the landholder population is Sunni who have the option of paying ushr, a voluntary tax, and hence are exempt from land revenue; (iii) land and crop records are poor and there is a lot of underestimation of crops; (iv) governments have wavered in strict enforcement of AIT and land tax; and (v) the BOR remains an antiquated organization and is not very effective.
12. Poor tax administration, lackluster attitude of the tax collectors towards tax collection, non-availability of sound data base, and pressures, political, kinship of revenue collection staff, and low-remuneration, have been the major causes for not achieving the true revenue potential, notwithstanding small economic base. There is a general public reluctance to pay government revenues and revenue staff lacks desired motivation to make extra effort to raise provincial revenues. The quarterly or bi-annually review of province’s own revenue inflow is generally a routine exercise without any accountability. Resultantly, no one feels the pressure of meeting the tax target.
13. Antiquated processes and administration, poor records, and weak statutory/legal processes are all breeding grounds for inefficiency, mal- administration and tax evasion and provide the opportunity for corruption. There is a large underground economy that has grown overtime. Revenue collection can be given a boost by tax restructuring, reorientation of the tax administration, recovery of user charges, and process reengineering.
4.3. Multiplicity of Taxes
14. The number of taxes at the provincial level was reduced from 21 to 11 in 2000/01 following comprehensive deliberations by a Committee constituted by the federal Ministry of Finance headed by the then Finance Minister of Punjab. A comparative statement of taxes before and after this change is given in Table 4.2.
Table 4.2: Multiplicity of Taxes
S.No.
Taxes in FY1999-00
Taxes Since 2000-01
1.
Agriculture Income Tax
Agriculture Income Tax
2.
Land Revenue
---
7 In a meeting held on May 28, 2004, Senior Member Board of Revenue, Mr Riaat Khan, told us that four Regional Revenue Appellate Courts are working and another has just started its functions.

3.
Stamp Duty
Stamp Duty
4.
Urban Immoveable Property Tax
Urban Immoveable Property Tax
5.
Registration Fee
Registration Fee
6.
Tax on Professions
Tax on Professions
7.
Tax on Marriage Halls
---
8.
Tax on Video Shops
---
9.
Excise on Liquor and Prov.Excise
Excise on Liquor and Prov.Excise
10.
Entertainment Tax
Entertainment Tax
11.
Motor Vehicle Tax
Motor Vehicle Tax
12.
Hotel Tax
Hotel Tax
13.
Tax on Private Hospitals
---
14.
Education Cess
---
15.
Cess on Tobacco
Cess on Tobacco
16
---
GST on Services
17.
Tax on Mobile Telephones
---
18.
Tax on Advertisements
---
19.
Stamp Duty on Air Tickets
---
20.
Stamp Duty on Letter of Credit
---
21.
Stamp Duty on Bill of Lading
---
4.4. Tax Regime-Issues and Prospects
15. The following paragraphs describe a brief background on individual taxes and user charges, highlight their issues and prospects, and suggest measures to increase the provincial tax revenues.
4.4.1. Agriculture Income Tax
16. The Constitution of Pakistan is silent about Agriculture Income Tax (AIT) and for this reason it remained a controversial issue in the country. AIT is only defined under the Income Tax Ordinance. Meanwhile, the provincial government has witnessed a major erosion of the rural tax base due to replacement of land revenue by ushr since 1982. Although, agriculture generates about 25% of national income, provincial tax revenue from agriculture constitutes a far lower share. NWFP introduced agriculture income tax for the first time in 1996-97 through Finance Act, and amended it several times since then.
17. Presently AIT is collected in NWFP under the Land and Agriculture Income Tax Ordinance enforced in year 2000. Under the said Ordinance, Land Tax has been levied on cultivable land of an owner without any exemption for every assessment year (July 1 to June 30) at the following rates:
a) Not exceeding 5 acres Rs 50 per acre
b) Exceeding 5 acres but not exceeding
12.5 acres 72 per acre
c) Exceeding Rs 12.5 acres 100 per acre

d) Orchards 300 per acre
Note: one irrigated acre is considered equal to two un-irrigated acres
18. The Agriculture Income Tax is assessed on agriculture income of a land owner during an agriculture income year (July 1 to June 30) at the following rates:
a) Where the net agricultural income
does not exceed Rs 100,000 5% of the taxable income
b) Where the agriculture income exceeds Rs 5000 plus 7.5% of the
Rs 100,000 but does not exceed Rs amount exceeding Rs
200,000 100,000
c) Where the agriculture income exceeds Rs 12,500 plus 10% of
Rs 200,000 but does not exceed Rs the amount exceeding
300,000 Rs 200,000
d) Where the agriculture income exceeds Rs 22,500 plus 15% of
Rs 300,000 the amount exceeding
Rs 300,000
Provided that
a) No tax shall be payable on the first eighty thousands rupees of the aforementioned income
b) The agriculture income liable to tax will be net of costs as prescribed
c) If in any case the agriculture income tax assessed is less than the land tax calculated, then the landowner will pay the land tax worked out in accordance with paragraph 17 supra.
19. AIT has been the most controversial in the past several years and its potential has been mooted by governments and donors. However perceptions about the significance of AIT collections have varied grossly. The most common view is that AIT potential is much larger than the existing level of collections. We have tried to estimate the potential of AIT by three alternative ways, estimating presumptive land tax on the basis of land distribution given in the Agricultural Census 2000, estimating AIT using the land distribution and proxies of net income per acre from Agriculture Price Commission (APCOM) data on cost of production of crops, and a snapshot survey in six selected districts expressly designed for this purpose. Our results have varied largely because of the rudimentary data/information although we tend to agree that the AIT potential is way above the present level of collections.
20. The data on distribution of farm size and cultivated area in NWFP is given in Table 4.3. This data indicates that as the farm size increases, the percentage of irrigated land also rises. The irrigated land as a percentage of cultivated area is on the average around 50% up to farm size of 50 acres, 71 percent for farm size of 50 to 100 acres, 82 percent for farm size of 100 to 150 acres, and 80 percent for farm size above 150 acres. This clearly establishes that tax assessees are in the higher

Table 4.3: Land Distribution by Farm Size in NWFP
Acres
Farm Size
Farm Area
Cultivated Area
Net
Irrigated
Un-
(Acres)
%
(Acres)
%
Sown
irrigated
All Farms
5,592,628
4,096,033
3,900,382
2,256,518
1,839,515
Govt.Farms
3,549
2,414
2,086
2,271
143
Private Farms
5,589,079
100
4,093,619
73
3,898,296
2,254,247
1,839,372
< 1.0
155,716
3
139,271
89
137,675
73,320
65,951
1.0 to < 2.5
710,786
13
634,503
89
624,477
308,591
325,912
2.5 to < 5.0
866,604
16
741,897
86
727,901
383,937
357,960
5.0 to < 7.5
726,218
13
591,398
81
575,605
316,867
274,531
7.1 to < 12.5
855,756
15
643,086
75
617,420
359,488
283,598
12.5 to < 25.0
723,658
13
491,899
68
459,393
258,750
233,149
25.0 to < 50.0
619,154
11
391,901
63
362,082
203,571
188,330
50.0 to < 100
414,634
7
215,082
52
180,656
152,105
62,977
100 to < 150
185,008
3
95,600
52
85,985
78,118
17,482
150 and above
331,547
6
148,980
45
127,101
119,485
29,495
Source: Agriculture Census 2000, NWFP
bracket of farm holdings, i.e. from 25 acres and above where most of the cultivated land is irrigated and thus have better access to irrigation water.
21. Alternative 1: Using the foregoing data on the land distribution and the existing land tax rates, the revenue potential from land tax equals Rs 249 million including the differential tax revenue from orchards. These calculations are given in Table 4.4.
Table 4.4: Land Tax Potential
Farm Distribution as Agricultural Census 2000
Potential of Land Tax - Base Scenario
Cultivated
Irrigated
Of which
Unirrigated
Irrigated
Differential
Unirrigated
Farm Size
Area
Area
Orchards
Area
Land-Rs
For Orchards- Rs
Land-Rs
All Farms
4,096,033
2,256,518
68,202
1,839,515
Govt.Farms
2,414
2,271
203
143
Private Farms
4,093,619
2,254,247
67,999
1,839,372
< 1.0
139,271
73,320
8,503
65,951
3,666,000
21,25,750
1,648,775
1.0 to < 2.5
634,503
308,591
20,080
325,912
15,429,550
5,020,000
8,147,800
2.5 to < 5.0
741,897
383,937
9,134
357,960
19,196,850
2,283,500
8,949,000
5.0 to < 7.5
591,398
316,867
4,731
274,531
22,814,424
1,078,668
9,883,116
7.1 to < 12.5
643,086
359,488
6,514
283,598
25,883,136
1,485,192
10,209,528
12.5 to < 25.0
491,899
258,750
4,432
233,149
25,875,000
886,400
11,657,450
25.0 to < 50.0
391,901
203,571
6,825
188,330
20,357,100
1,365,000
9,416,500
50.0 to < 100
215,082
152,105
2,637
62,977
15,210,500
527,400
3,148,850
100 to < 150
95,600
78,118
2,871
17,482
7,811,800
574,200
874,100
150 and above
148,980
119,485
2,273
29,495
11,948,500
454,600
1,474,750
Totals
168,192,860
15,800,710
65,409,869
Total Land Tax
249,403,439

22. Alternative 2: This alternative uses the estimates of farm incomes based on APCOM data on cost of all major crops (wheat, sugarcane, tobacco and cotton) and the foregoing farm size distribution figures from the Agriculture Census. We used various estimates of the net income per acre in estimating the AIT potential. According to the APCOM data, the minimum income is given by wheat crop, although farmers do sow at least one more crop during the year. The maximum income yielding crop according to the APCOM data is the sugarcane crop. Further more we assumed comparable agricultural productivity in NWFP is comparable in Sindh although it could be higher. Thus the minimum and maximum proxies of net income are Rs 4,262 (i.e. twice the land income from wheat crop in Sindh province) and Rs 14,227 (i.e. land income of from sugarcane crop in Sindh). The resulting calculation of AIT range from Rs 86 million to Rs 808 million. These calculations a re given in Annex 3. The true AIT potential is perhaps in between since NWFP grow a variety of crops including wheat, sugarcane, horticulture, etc.
23. Alternative 3: This alternative uses the results of the sample survey expressly designed to estimate the AIT potential in NWFP. While the detailed report on the survey is given in Annex 8, the summary of results is given in Table 4.5. According to these results, the estimated AIT potential over the sample six districts is 745 million, i.e. 12.41 times the budget figure in 2002-03. Using this factor over the budget figure for NWFP (Rs 60 million) estimates the AIT potential of Rs 745 million. Similarly the estimated potential of land tax is Rs 206 million, i.e. 3.44 times the budget figure. These calculations confirm the hypothesis that a fully enforced AIT could generate much larger revenues.
24. Besides land tax and/or AIT, a closely related land revenue item is the mutation fees which is levied on transfer of agricultural lands. The collections from mutation fees were budgeted at Rs 200-220 million in recent years. Thus the total potential form land tax under the base scenario may range between Rs 400 million to Rs 470 million. This base (minimum) potential compares much more favorably against the total collection of Rs 247 million in 2001-02 and the budget figure of
Table 4.5: Agricultural Income Tax
Rs.
Districts
2001-02 Actual
2002-03 Budget
Estimated Land Tax
Estimated AIT
Peshawar
1,217,779
2,500,000
2,872,528
15,645,934
Bannu
2,295,182
2,621,325
2,788,149
13,984,905
D.I Khan
6,060,947
9,667,209
58,082,184
235,368,585
Swabi
3,476,608
7,427,443
43,22,054
29,212,149
Haripur
3,001,054
34,122,32
9,035,053
Kohistan
11,004,108
23,910,905
Six Districts
16,051,570
25,628,209
88,104,076
318,122,478
Estimated potential/2002-3 Budget
3.44
12.41
Estimated tax potential
206,000,000
745,000,000
Source: Sample survey and Budget books

Rs 285 million in 2003-048, and a fully enforced AIT could even have a higher potential.
25. The foregoing calculations thus confirm that revenue potential fully enforced AIT is much larger given the land distribution and productivity of cultivated and irrigated landholdings including orchards. We believe that this substantial untapped revenue potential can be exploited and AIT collections increased substantially by fuller implementation of AIT, particularly in cases of large farmers and orchards. However we suggest that GoNWFP target a collection of Rs 500 million in AIT although the potential of a fully enforced AIT is a way above. This may be further complemented by rate rationalizations in mutation fees, which could yield additional revenue between Rs 150 million and Rs 200 million.
Suggestions:
26. Proper implementation of AIT requires a good information database and collection capacity. Any system that uses cropped area as the base suffers from the discretion available to the patwari (lowest level land revenue official responsible for khasra girdawri) whose assessment and records form basis of tax valuation. Without a system of checks and balances, there is ample scope for evasion and corruption. A move towards a modern taxation system for agriculture should be accompanied by upgrading the revenue record system in agriculture and reforming of the antiquated institution of the patwari. The BoR should devise a mechanism for cross checking of inputs cost and detail audit of tax returns. Unless an effective system is developed, the Province will not be able to exploit full potential of AIT.
27. Agriculture income base is thus under utilized and there is a lot of potential to raise revenues from this source. Thus the government may like to take the following measures to improve revenue collection from this base.
i. The threshold for filing of returns may be revised upward to improve AIT returns. The policy for asking to file tax return from only those landholders possessing 50 acres and above land was pursued in the initial stages of promulgation of AIT Ordinance. That threshold may be revised to 12.5 acres and above and in case of orchards it may be revised to 1 acre and above.
ii. Efforts should be made to reconcile the reported agriculture produce and cultivated area by the revenue staff, as the capacity of the Provincial Revenue staff to implement AIT effectively and monitoring the income- based part of AIT is limited.
iii. Coordinate with Regional Income Tax Office to obtain details of those taxpayers who had been reporting income from agriculture during three years prior to levy of Agriculture Income Tax in their returns.
8 Includes both AIT and land revenue which is mostly the mutation fees.

iv. The rate structure of mutation fee on transfer of lands is very old which may be revised upward to bring more buoyancy in revenues. The existing fee structure is as under.
Type of Transfer Rate of Fee
Inheritance Rs 100 for 25 acres or less
Agriculture land Rs 100 for 25 acres or less
Gift Rs 100 for 25 acres or less
Change of agriculture land Rs 100 for 25 acres or less
As Haq Mahar Rs 100 for 25 acres or less
On Orders of Court Rs 100 for 25 acres or less
 The government may consider the following two alternative measures to raise revenues from this source.
Alternate 1: Enhance mutation fee rates as follows:
Option I: Rs 100 for 5 acres or less
Rs 100 per acre above 5 acres
Option II: Rs 50 for 5 acres or less
Rs 100 per acre above 5 acres
Option III: Rs 100 per acre of agriculture land
Alternate 2: BOR may develop valuation tables for rural immoveable property on the lines of urban immoveable property and the transfer of land may be affected through levy of stamp duty and registration fee. For this Stamp Act would be required to be amended. In the Stamp Act 1899, in its application to the Province of NWFP, in Schedule 1, after Section 27-A, the following shall be inserted:
“Where any instrument is chargeable with ad valorem duty under Article 23 or Article 31 or Article 33 of Schedule 1, the value of the property involved shall be calculated according to the valuation table notified by the Collector in respect of properties situated in particular rural areas;
Provided that where the value given in the valuation table, when applied to any property appears to be excessive, the Board of Revenue may on application made to it by the aggrieved person, determine its correct value and for that purpose the provisions of section 31 and section 32 shall apply mutatis mutandis.”
4.4.2. Urban Immoveable Property Tax (UIPT)
28. Tax on immovable property is the oldest form of taxation that provides revenues to local/provincial governments. It is levied under the West Pakistan Urban Immovable Property Tax Act of 1958 as amended from time to time. This Act is restricted to buildings and lands within the limits of urban areas. The tax

Recent Trends in Collection of UIPT
40
90
140
190
1997 1998 1999 2000 2001 2002 2003
Financial Year
UIPT Collection-Mill Rs.
base is actual annual rent in the case of rented buildings and imputed (estimated)
annual rent in other cases. Like in other developing economies, property tax is one
of the most important sources of revenue for GoNWFP. However this source
remains under utilized and contributes only 2 percent to NWFP’s tax revenue on
net basis.
29. GoNWFP restructured its UIPT in 2001-02 by making UIPT formula based and
shifting the assessment basis from area alone to several characteristics of urban
property like plot size, covered area, location and age. The Ordinance amending
UIPT was promulgated on August 13, 2001 in the province. The same Ordinance
was extended UIPT to 9 new rating areas, raising the number of rating areas from
18 to 27. GoNWFP shares a large part of UIPT (85%) with local governments. In
addition on the commencement of NWFP Local Government Ordinance, 2001, all
tehsils and towns have become rating areas for levy of UIPT. The revenue now
accrues to Tehsil/Town Municipal Administration (TMA).
30. UIPT collections had recorded a
respectable growth of 30% p.a. from
FY99 to FY03 despite large under
coverage of properties. However, the
rapid urbanization and rising real estate
values in recent years indicates that
there needs to be much greater effort to
enforce this tax on existing and newly
constructed buildings. Indeed there has
been a tremendous growth in residential
and commercial properties recent years.
Several reasons have been cited for low collection under UIPT.
i. The urban sector in NWFP is small and a large part comprises government
buildings and cantonments, which are exempt from UIPT.
ii. The provincial governments have had little incentive to make efforts for
increasing revenues from UIPT since most of these revenues are used by
local bodies.
iii. Properties are undervalued, particularly the old and self-occupied units, and
the new housing units are not covered. Although these trends are universal
but they are more pronounced in NWFP. Even the new formula based
taxation structure is biased in favor of old, large, independent, owner
occupied properties in high income localities that results in regressivity of
this tax.
iv. The resolution by the Provincial Assembly for abolition of UIPT has been
instrumental in encouraging the taxpayer and tax collectors to coalesce and
avoid tax.

31. The ETD and Local Governments have to make serious efforts for extending UIPT Act to all Towns and Tehsils to exploit the full potential of UIPT. GoNWFP may attempt to extend full coverage of the Local Government Ordinance, 2001 to expand rating areas as soon as possible. Better collection of UIPT would improve the financial position of TMAs and help increase their ability to manage municipal services and water supply more effectively, and help reduce pressures on the provincial government. A detailed survey of properties is urgently needed for enforcement of the formula-based assessment. Simultaneously, there is a need to review property tax exemptions and rebates. The ETD should pursue litigation actively as many potential taxpayers are not paying UIPT since long under the garb of litigation.
32. We believe that the potential of UIPT collections is much higher than the present level of collection. GoNWFP should target a growth rate of over 20% p.a. to increase UIPT collections by 2-3 times in the next five years, and may consider the following suggestions.
i. Revise and rationalize the assessment formula and review of the administrative structures.
ii. Update valuation tables of properties to better reflect true prices, and undertake a general survey of properties to bring new properties under the tax net.
iii. Simultaneously, there is a need to review property tax exemptions and rebates, particularly for the retired and widows.
iv. Strictly enforce the Local Government Ordinance to cover properties in areas not covered presently.
v. Separate tax functions by assigning assessment of UIPT to ETD and transferring collection to the District Governments. NWFP has recently transferred collection of UIPT to local governments in Nowshera and Swabi on pilot basis. The results of this pilot should be carefully analyzed. It is believed that the assessment at the provincial government would help ensure that revenues do not decline.
vi. Computerize all records as the present software developed by PRAL is not covering entire database
33. Suggestions have also been advanced from time to time that the property owner be given the option to assess the renting value of his house and pay the property tax accordingly and if on revaluation by the ETD, if it is found less than the market value or rental value, the owner be required either to offer his house at self-assessed value to the government or pay the differential with high penalty rate. While there is logic to the proposal, there is every prospect of wide misuse of powers to harass taxpayers, given the ethical standards prevalent in the tax departments. Nevertheless, self-assessment may be tried in selected areas.

4.4.3. Motor Vehicle Tax (MVT)
34. A levy was imposed for the first time on motor vehicles throughout British India in the form of fees under the Indian Motor Vehicle Act, 1914. It provided for different fees for registration, driving licenses, etc. for various types of motor vehicles. Its objective was primarily to regulate motor traffic. With increased vehicular traffic and the consequent increase in expenditures on road maintenance, the need was felt for a scientific system of taxation for motor vehicles. The Road Development Commission recommended in 1927 that there should be a special tax on motor spirit levied by the Central Government and a motor vehicle tax by the provincial government to finance road development. The Government of NWFP levied the tax under NWFP Motor Vehicle Taxation Act, 1936 following Punjab where this tax was imposed in 1924. Sindh followed the suit. Presently, motor vehicle tax is levied under the West Pakistan Motor Vehicles Taxation Act, 1958.
35. According to laws presently in force, the MVT liability is determined as follows.
i. On lump sum basis in case of motor cycles and scooters linked with the age of vehicle.
ii. On seating capacity in case of cars, jeeps, taxis, and buses. However, in case of cars and jeeps, engine power is also the determining factor.
iii. On laden weight in case of trucks, trailers, delivery vans and other heavy vehicles.
The tax payment on all vehicles is made quarterly basis except those where the Government has allowed a lump sum payment scheme. The MVT rates were revised last time in FY01 after harmonizing with rates in Punjab and Sindh. These MVT rates are given in Annex 5.
36. MVT is budgeted at Rs 611 million in 2003-04 including registration fees and accounts for 35 percent of NWFP’s own revenue. MVT collections however recorded a meager growth during the past five years despite a spectacular increase in vehicular traffic and rate revisions. The growth rate in MVT collections averaged 11.3%, which reduces to about 5% by excluding the 2001-02 when MVT collection grew by 35%. Hence buoyancy of MVT to less than 1. Despite being the largest source of the provincial government tax revenues, MVT hardly finances the operation and maintenance (O&M) cost of road network in the province.9
37. The following are the oft-cited reasons for slow growth in MVT collections as compared to growth in vehicular traffic.
9 This network is frequently damaged by heavy duty trucks and trailers due to absence of law regulating the axle load, thereby attracting larger O&M expenditures.

i. At least one-third of vehicles plying in the province are out of the tax net because of non-registration especially those plying in Federally Administered Tribal Areas (FATA) and Provincially Administered Tribal Areas (PATA), although they are using provincial road network.
ii. Exemptions for a variety of vehicles which do not pay MVT. These vehicles include ambulances, school buses, National Logistic Cell (NLC), etc. Government vehicles are not exempt, but a number of government vehicles do not pay MVT because of the owning department’s influence.
iii. The taxation is on specific rates (rather than on ad valorem rates and infrequent revisions. The basic motivation behind establishing lump sum payment for motor cycles and scooters is to reduce compliance cost of tax and save cost of collection. But the major flaw with the specific rates is that they prevent the future possibilities of revenue growth and governments are sluggish in frequent upward revisions.
iv. The MVT base is highly mobile, and in the absence of tax rate harmonization with Balochistan and Northern Areas, many vehicles, particularly trucks, get registered in these areas due to their very low tax rates.
v. Sale of vehicles on power of attorney and their non-registration.
vi. High incidence of corruption amongst tax collectors.
38. The potential of MVT is difficult to estimate in view of weak statistics. The available published data on vehicular traffic are given in Tables 4.6. The last year for which such data are available in published form is 1999. According to these data in 1999, motor cars/jeeps accounted for 30% of the vehicular traffic in NWFP, motor cycles accounted for 23%, trucks 10%, buses 9%, tractors 9%, taxis 6% pickups 5%, rickshaws 4% and other vehicle types accounted for 3%. The statistics show a meager growth of 5% in vehicular traffic in 1999, and there is very large dispersion in inter-district growth rates, i.e. between -41% in Charsadda to 346% in 346 in Chitral. The difference between vehicles on road and those registered with Taxation Department is 379,946 or 108%. The data beyond 1999 has not been collated/updated. The Secretary Excise and Taxation Department hotly challenges these numbers10. The Secretary of the Department states that 100 percent of the vehicles on the roads in NWFP are registered and there is absolutely NO possibility of a vehicle plying on the roads in NWFP that is not registered11. He admits the possibility of tax evasion in the form of vehicles plying on the roads that were not paying token tax but states that the proportion of such vehicles is very small and the possibility of these plying without registration is zero. In the absence of more recent information it is extremely difficult to test this assertion. However, in order to give the department the benefit of the doubt we do not use the
10 A meeting with Mr. Syed Khalid Hussain Gillani, Secretary Excise and Taxation was held on May 5, 2004 in Peshawar.
11Except those plying in FATA and PATA

Bureau of Statistics published information for 1999 (the last year for which such published information is available) but rely instead on information given to us by the ETD itself for six districts of the NWFP for our collections of the tax potential in the Province.
39. Our rudimentary calculations of the tax potential based on the data from the six districts indicate a large MVT potential; 96 % more than the tax collected. Our calculations on information for 2002-3 on tax paying vehicular traffic in 6 districts (Peshawar, Bannu, D I Khan, Sawabi, Haripur and Kohistan) for the year 2002-3 reveals a sizeable MVT potential (see Table 4.7). Table 4.8 which summarizes the potential calculated in Table 4.7 and presents it along with the actual collection clearly indicates that potential of MVT in these districts was nearly twice (1.96 times) as much as the revenue that was actually collected in 2003.
40. The Finance Department in collaboration with ETD should undertake a motor vehicles census on a priority basis to determine the exact potential as well as to verify the extend of unregistered cars or cars with bogus registration on the roads in NWFP.
Table 4.6: District-Wise Population of Motor Vehicles
Registered Vehicles
Average
Vehicles
District
in 1998
in 1999
Growth
On Road
N.W.F.P.
334,392
351,100
5%
731,046
Abbotabad
24,872
21,031
-15%
8,325
Bannu
21,175
21,325
1%
17,308
Chitral
1,433
6,396
346%
1,505
Charsadda
17,190
10,208
-41%
6,968
Dir
6,373
10048
58%
8,483
D.I.Khan
29,490
34,062
16%
11,342
Haripur
661
2,126
222%
662
Karak
1,079
1,430
33%
571
Kohat
14,420
15,839
10%
20,777
Mardan
31,535
35,508
13%
31,604
Manshera/Kohistan
10,869
11,433
5%
10,896
Peshawar/Nowshera
155,583
159,839
3%
593,068
Swabi
2,197
3,404
55%
2,132
Swat
17,625
18,451
5%
17,405
N.W.F.P.
334,392
351,100
5%
731,046
Source: Bureau of Statistics, NWFP
Note: Tank, Lakki, Hangu, Nowshera, Buner, Shangla, Malakand,
Lower Dir, Kohistan, and Battagram are included in
their parent districts.

Table 4.7: Estimation of MVT Potential Vs MVT collections (token only) in 2002-03
Vehicle type
Peshawar
Bannu
D.I. Khan
Sawabi
Haripur
Kohistan*
Total
Approximate Tax Rate
Revenue potential
No.
No.
No.
No.
No.
No.
No.
Rs.
Rs.
MotorCycle/Scooter
16,454
6,249
12,907
1,478
575
687
38,350
50
1,917,500
MotorCar/Jeep
31,725
3,396
5,015
1,033
1,465
2,727
45,361
750
34,020,750
Tractors
1,423
2,020
3,093
367
132
628
7,663
600
4,597,800
Buses/Mini Buses
8,518
1,392
2,814
530
313
13,567
8,000
108,536,000
Vans/ Taxi
3,912
492
1,914
222
575
7,115
520
3,699,800
Pickups (Suzuki/Tyota) Taxi
7,878
3,244
1,266
610
12,998
2,104
27,347,792
Motor Cab/ Rickshaws
7,143
100
757
150
716
0
8,866
400
3,546,400
Private and Public Trucks
12,003
4,910
6,216
59
708
410
24,306
6,000
145,836,000
Private Pickups
10,931
2,497
0
4,756
18,184
2,500
45,460,000
Others
2,247
13
80
4
43
2,387
500
1,193,500
Tax Collection (Rs)*
117,331,048
18,155,183
24,459,964
10,973,510
20,361,352
296,238
191,577,295
376,155,542
Tax Potential/Tax Collection Ratio
1.96
Source: ETD (The ETD data on MVT collections is for 10 moths which has been extrapolated).

Table 4.8: MVT Potential in six districts of NWFP 2002-3 (million Rs)
Districts
Tax Collection
Tax Potential
Peshawar
117
216
Bannu
18
58
D.I. Khan
24
70
Sawabi
11
6
Haripur
20
6
Kohistan*
0
21
Total 6 districts
192
376
MVT Potential NWFP
673
Note: * indicates data refers to Kohistan and Mansehra
41. Suggestions
i. ETD should implement the MVT
forcefully. GoNWFP may take
administrative and punitive
measures for stricter enforcement
of MVT and bringing un-registered
vehicles under the tax net.
ii. Some concessions and moratoria
may be necessary to motivate
people to bring their vehicles under
the MVT net.
a. Moratoria may take the form of
exemption/concession in tax
evaded in the past and penalties
thereof.
b. Some rate rationalizations may necessary.
c. GoNWFP may like to lower the high-end rates, both for token and registration, since tax evasion is largely due to the high-end rates.
d. Concessions may be given in MVT on old vehicles to make it more affordable. These incentives should aim to improve the tax climate. The
e. following provision may thus be added at the end in Serial No. 5 of Annex 4.
“Provided that the tax in respect of the motor vehicles referred to in clauses (a), (b), and (c) other than the commercial vehicles shall, on completion of ten years and fifteen years of the payment of the tax since first registration of the vehicles, be paid at the rate of seventy five percent and fifty percent of the tax, respectively.”
iii. The MVT base is highly mobile, and therefore the tax rates need harmonization with other provinces/administrations, particularly with Balochistan, AJK and Northern Areas.
iv. Some studies suggest to convert MVT from specific rate to ad valorem basis could improve the yield and will be most progressive. A modest levy of one percent ad valorem tax on the value of vehicle would yield a much larger level of revenues. Nevertheless, due to mobile nature of the tax, this would have to be negotiated with other provinces/jurisdictions.

v. GoNWFP may consider levying the fuel consumption cess to compensate for tax evasion/leakages. The collections can generate the needed resources
for maintenance of road infrastructure. Crude estimates of revenue potential from the fuel cess, based on 2001-02 consumption of fuel for the purpose of transportation, are given in Table 4.9. Levying the
fuel consumption cess at the rate of 50 paisa per litre or 75 paisa per litre would yield Rs 550 million and Rs 800 million, respectively. The cess has the advantage of being easy to collect since it is based on consumption at the retail level. It would also capture those vehicles, which are not paying MVT or not getting registered. Later on, the Government may consider replacing MVT with fuel consumption cess as the recovery picks up. The registration fee may however stay. The Secretary ETD informed us that the Government of NWFP had considered and rejected this recommendation since according to him the consumption of fuel had declined by 50 % in 2003-4 as compared to the previous year and at that level the fuel cess would not yield enough revenue to justify using it instead of the existing MVT. While it is extremely difficult to comprehend how the consumption of fuel in the province would go down by 50 % in one year when there is no reason to expect that the numbers of vehicles or the extend of their use had declined in any way. There is also no reason to expect that the vehicles have suddenly become extremely fuel efficient. Only three explanations are possible. Either fuel was being smuggled out of the province in large quantities in the previous years or it is now being smuggled into the province in large quantities or the figures being used by the ETD for the most recent year are incorrect or inconsistently measured with the previous year. We found considerable evidence in support of the second explanation i.e. that fuel smuggled from Iran was being sold quite openly in the Province. There is need to establish the extent of this smuggling – because without such an assessment throwing out the recommendation of using a fuel cess could result in the province taking a path away from a tax that would be extremely easy to collect at very little cost and without the potential of mal governance. It is therefore recommended that the Government of the NWFP conduct a study of the smuggling into the province of fuel from abroad and find ways of stopping this in order to be able to make use of more efficient methods of collection.
Table 4.9: Estimates of Fuel Consumption Cess 2002-3
Energy
Consumption
Estimated Fuel Cess
Product
in M.Tons
in litres
@Rs.50/litre
@Rs.75/litre
MS 87 RON
67,452
91,667,268
45.8
68.8
HSD
831,058
993,031,204
496.5
744.8
Total
542.3
813.5
Source Oil Companies accounts

4.4.4. Stamp Duties
42. The Government of British India introduced stamps in the Civil Courts in 1847. The law provided for both judicial and non-judicial stamps. After various changes, the Stamp Act 1899 was enacted, which is still in force. Initially, it was a central enactment. Later on in 1935, the Government of India Act made stamp duties a provincial subject.
43. The Stamp Act is not only a fiscal statute, but its objective is also to help in the detection of forgery of documents. Stamp duty is a tax on certain types of documents constituting evidence of legal rights. The duty becomes payable only when a documentary evidence of a particular transaction is created. Almost all legal documents connected with the civil and commercial laws of the country are covered by the Stamp Act. Whenever an agreement is executed in the legal form, the appropriate stamp duty becomes payable irrespective of the fact whether the agreement is given effect to or not. Although stamp duty is not a tax on transactions, it is very closely related to business activity.
44. The tax base of stamp duty consists of the following legal instruments:
i. Every instrument mentioned in the Schedule.
ii. Every bill of exchange payable otherwise than on demand or promissory note drawn or made out of Pakistan and accepted or paid or presented for acceptance or endorsed, transferred, or otherwise negotiated in Pakistan.
iii. Memorandum of an Agreement, Articles of Association of a Company, Bill of Exchange, Bill of Lading, Promissory Notes, etc.
45. Transactions not included in the Schedule are exempted from Stamp Duties. Most of these exemptions were granted at the time of formulation of the Stamp Act and have not been changed since then.
46. Stamp duties are levied at specific or ad valorem rates depending on whether a value can or can not be placed on the underlying assets or transaction. A large part of the revenues comes from leases, mortgage deeds, conveyances, property transactions, and transfer of financial assets.
47. The Stamp Duties account for 13 percent of the provincial own revenues, having grown on average by 11.7 percent over the previous four years. Given the growth in real estate business/prices in the last decade, the revenue yield appears very low. The government may target a more reasonable growth in line with growth in real estate/business activity, say 20-30%, and may consider the following measures for better exploitation of the potential of stamp duties.
i. Bring property valuations closer to market values.
ii. Remove exemptions granted on the sale of properties.

iii. Amend the Stamp Act to ensure proper valuation of transaction or assets and to prevent misuse of Power of Attorney12.
48. Updating of the Valuation Tables is crucial to improve revenue collection. The valuation tables for levying stamp duty and registration fee have not been updated for quite some time. As a result, the transactions are being registered at below their true market prices. One of the key potential areas is to formulate valuation tables for rural lands and properties to eliminate discretion of the revenue staff. If valuation table for urban and rural areas are updated, it will boost resources under stamp duty and registration fee, both of which are levied on ad valorem basis. While updating the valuation tables, GoNWFP may consider rationalizing tariffs for stamp duty and registration fee at revenue neutral plus 20 percent basis. This would also motivate people to get their properties registered instead of holding it on attorneys to evade tax. This measure would be more effective if Power of Attorney Act is amended simultaneously to limit its use either by increasing fees/rates or imposing other restrictions.
4.4.5. Tax on Professions and Callings
49. Tax on callings and professions was first levied by the Central Government in 1950 under the Finance (Supplementary) Act, 1950. This tax was continued by the provincial government w.e.f. September 23, 1956 under the West Pakistan Continuance of Supplementary Taxes Ordinance, 1957. The Central Government also levied another tax under the Finance Act, 1950 known as the Tax on Trades, Import and Export Licenses. This tax was originally levied in Karachi and was continued by the provincial government after inclusion of Karachi in West Pakistan with effect from July 1, 1962. The tax was levied and collected from every person engaged in the import and export trade and who held a license issued under the Import and Export (Control) Act, 1950. The basis of this tax was the value of goods imported and exported against such license. The two taxes were merged together with effect from July 1,1964, since the administration of the first tax presented some difficulties and the constitutional validity of the second tax was doubtful.
50. Tax on callings and professions is the only tax that has been expressly assigned to provinces under the 1973 Constitution (Article 163). This is the only tax that is levied on income at a lower tier of government. The present rates were last revised during FY2002-03 and are given in Annex 5. The revenue from this source recorded a sharp growth during FY99 to FY03, although the figure of revenues from this source is small, about 4.3% of the provincial tax revenues in FY04.
12 This has already been enacted by the GoNWFP

Tax Potential in NWFP: Exploring Revenue Sources for Provincial & Local Governments

Tax Potential in NWFP: Exploring Revenue Sources for Provincial & Local Governments

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