Tax Potential in NWFP

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%2%1%

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

UIP

T C

ollecti

on

-Mill R

s.

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. 11

Except 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


51. The experience of taxing professions and callings to date by the provincial

governments is one of substantial non-compliance by the taxpayers. Evasion and

non-detection has been the reasons for the low revenues from this source. Another

major reason for non-compliance is the prevalent confusion, as local governments

insist on collecting this tax not appreciating the fact that it is only the domain of

provincial government and the former can collect only the license fee.

52. Tax on professional and callings is essentially income tax imposed in a non-

transparent way, which not only yields low collections but is also quite

distortionary. The ideal solution is to replace this with a more transparent income

tax. In this context, two ad valorem rates are proposed.

i. 0.25 percent of their sale, turnover, or income for those taxpayers who pay

income tax. This part may take the form of piggyback arrangement with

federal tax authorities.

ii. The other rate may be higher, say 0.4%-0.5% of income, for those taxpayers

who do not pay income tax. GoNWFP would have to consider imposing and

collecting this tax by itself.

53. Short of the ideal solution, GoNWFP may like to undertake the following

measures to improve collections from this tax in the range of 20-30% p.a. over the

next five years.

i. A survey of professionals engaged in different categories of employment

may be undertaken to correctly assess tax bases and rationalize tax rates. No

such survey has been carried out so far and the rate setting has been arbitrary

which lead to a lot of evasion.

ii. May rationalize/increase rates. Some suggestions are given in Annex 6.

iii. May convert specific rates to ad valorem rates wherever possible.

iv. May review tax statutes with a view to bring in more clarity about the

legality and domain of this tax.

4.4.6. Registration Fee

54. The Registration Act was first promulgated in 1866 and finally took the

form of a consolidated Act in 1908. The objective of registering a document is to

give notify that such a document has been executed, to prevent fraud and forgery,

and to secure a reliable and complete account of all transactions on the part of

Registering Officer. The base of the Registration Fee is the value of the

consideration or the period involved or the type and characteristics of the

document registered.

55. The rates for registration fees were fixed in 1971 and notified in 1973. The

provincial government shifted from taxation at specific rates to taxation on an ad

valorem rate of 1.5% of the value of the document in 2002-03. Hence a much


larger revenue collection from registration fees (Rs 50 million compared with Rs

10 million collected in the previous year). The revenue collection reportedly

amounted to Rs 37 million. More recently, the provincial government has decided

to reduce the rate from 1.5 percent to 0.5 percent, the budgetary target has been

kept the same.13

56. Valuation Tables are crucial to improve revenue collection from the

registration fees. As noted elsewhere, these valuation tables have not been

updated for quite some time, and transactions are being registered at below their

true market prices. Thus the key revenue potential area is to revise and prepare

the valuation tables for rural lands and other properties. Up to date valuation

tables would also eliminate discretion of the revenue staff and help boost

revenue collection.

4.4.7. Development Cess on Tobacco

57. The NWFP levied development cess on Tobacco initially at the rate of Rs

0.50 per kg on the quota of tobacco allotted by Pakistan Tobacco Board to the

factories located in NWFP. Subsequently, the rate has been gradually raised to Rs

2 per kg. The manufacturing companies have filed a number of petitions against

the levy of cess, and pending these petitions the province has been deprived of this

revenue source. The factories used to purchase tobacco over and above their quota

from the open market and thus evade the cess. To plug this leakage, GoNWFP has

extended the scope of cess to tobacco purchases from the open market. For this

purpose, tobacco dealers have been issued licenses.

58. It is quite evident that ETD is not collecting due amounts from this source

and there seems to be a lot of leakage. The average cultivated area under Tobacco

is about 31,530 hectares with estimated production of 70 million Kg. The

production at this level can yield Rs 140 million annually instead of Rs 57 million

actually collected in 2001-02. Hence a more reasonable figure is budgeted in

subsequent years, and a more effective implementation is needed to exploit the true

potential of this cess.

13

The revised rate is lower than the rates prevalent since 1971, and some people have questioned

the wisdom of this measure. Indeed there is no empirical evidence to substantiate that higher

registration fee would dissuade the people from registering their documents. We presume this

rate reduction is in harmonization with other provinces, although it would adversely affect

revenues from registration fees.


4.4.8. Provincial Excise

59. The provincial excise duty is levied on licenses and permits issued for

consumption or use of liquor and prohibited intoxicants. The presently used tax

rates, revised in FY02 and FY03, are given in Table 4.11.

Table 4.11: Provincial Excise Rates

License/Permits Rate

Permit fee on denature spirit Rs 3 per litre

Permit fee on rectify spirit Rs 6 per gallon

Rectified spirit for industrial purpose Rs 6 per gallon

L-2 Rs 50,000

Distillery Fee Rs 50,000

Vend Fee Rs 1000 PG

Wine Rs 120 PG

Beer Rs 100 PG

Liquor License Fee (Club) Rs 50000 PA

Permit Fee PR-I (Non-Muslims Pak) Rs 100 per permit

Permit Fee PR-II (Non-Muslim

Foreigner)

Rs 100 per permit

60. The provincial excise is meant for discouraging social bads rather than

being a revenue instrument. The revenues from this levy are small, although

there appears a lot of leakage because of boot-legging and smuggling. The

provincial excises amounted to Rs 21 million in 2001-02 and were budgeted at

Rs 25 million in the later years. Some more revenue collection is obvious from

a more forceful implementation and removing malpractices but this instrument

should not used enhancing revenues.

4.4.9. Electricity Duty

61. Electricity Act was promulgated in 1910 to regulate the generation,

transmission, distribution and utilization of electrical energy in British India. An

electricity duty was levied for the first time in 1932 and is presently levied and

collected under the West Pakistan Finance Act, 1964. The duty is collected as a

part of monthly bills by WAPDA. The duty is payable by consumers of

electricity for residential, commercial, industrial and agricultural purposes. The

duty rates are ad valorem.


62. Electricity duty could be an important source of revenue for the NWFP

Government. However, since WAPDA is not paying this duty in cash but has

been adjusting it against WAPDA dues owed by government connections, there

has been little effort for reconciliation and cultivation of this base.

Consequently, collections from electricity duty have not increased much during

the past many years despite increases in electricity tariffs, new meter

connections and enormous increases in consumption levels. Plausible

explanations are tax evasion and inefficiency in the tax collection arrangement.

GoNWFP can harness this resource much better by improving collection

efficiency and timely settlement of its electricity bills. Rather electricity duty

has the potential of becoming possibly one of the major sources of revenue.

4.5. Tax Potential of NWFP

63. The foregoing paragraphs amply establish that there is a large untapped tax

revenue potential which GoNWFP can exploit by better implementation of

existing tax statutes, adjusting tax statutes to remove exemptions and make

them more equitable, harmonizing tax statutes and coordinating with other tax

jurisdictions, and creating a better tax climate by helping taxpayers, abolishing

taxes with little yield, avoiding using regulatory taxes for revenue purposes.

The strategy should be to expand the tax net gradually but decisively over the

next five years. We suggest that GoNWFP announce its taxation strategy for

the next five years.

64. Tax statutes should be applied evenly to be equitable and enforce

compliance and generate revenues. NWFP also faces serious issues of political

economy. A number tribal districts like Kohistan do not pay any tax altogether

although tax statutes are applicable there.

65. In line with these recommendations, we suggest the tax revenue targets in

Table 4.12, which we believe are modest and hence implement able. According

to these targets, the provincial tax revenues would rise from Rs 1,742 million in

2003-04 to Rs 3,952 million in 2008-09, i.e. an increase of 127% over the five

years. Most of the increase would be contributed by the increase in the

collection of four taxes, i.e. MVT(57%), stamp duties 20%, AIT (10%) and tax

on professions and callings (7%). The collection of these taxes is proposed to

increase by 25% p.a. each except AIT which increases by 12% p.a. Also the

scope of increase in UIPT is tremendous, hence we have proposed an increase

of 149% in five years. But its contribution to the increase in the provincial tax

revenues is only 2.8% since 85% of UIPT is shared with local governments.

Electricity duty increases by a modest 5% p.a. and contributes 3% to the total

increase in taxes. Registration fees is suggested to increase by 10% p.a. but

contributes only 1.4% of the total increase because of the low base. We have


postulated no increase in tobacco development cess, provincial excises and

entertainment tax.

Table 4.12: Tax Potential of NWFP

Tax Instrument 2003-04

Budget

Growth

in last 5

years

Potential

Growth in

next 5

years

Tax

Potential in

2008-09

Increase

2008-09 to

2003-04

Ratio of

2008-09

to 2003-

04

Mill Rs. % p.a. % p.a. Mill Rs Mill Rs Ratio

Tax Receipts 1,742 13.4 17.8 3952 2209 2.27

Motor Vehicle 611 11.3 25 1865 1,254 3.05

Stamp Duties 220 14.3 25 671 451 3.05

Land Revenue 220 4.6

AIT 65 7.4

AIT+Land

tax+Mutation 285 12 502 217 1.76

Professional Tax 75 36.9 25 229 154 3.05

Electricity Duty 240 4.3 5 306 66 1.28

UPIT (Net) 41 11.3 20 103 61 2.49

Registration 50 42.8 10 81 31 1.61

Prov.Excise 25 7.9 0 25 0 1.00

Entertainment 12 -8.0 12 0 1.00

Development Cess 158 1.1 0 158 0 1.00

Others 25 -25


5. Non-tax Revenue Resources in NWFP

GoNWFP may explore three other areas for its own revenue mobilization.

These areas are user charges for recovering of cost of government services, GST

on services collected by the federal government for sharing with provinces on

population basis, and fuller exploitation of NWFP’s share in federal enterprise

including the hydel profits and debt relief. These areas would generate

enormous resources needed by the provincial and local governments in NWFP.

5.1.User Charges

2. GoNWFP collects over 60% of its revenues from non-tax receipts of its

general administration (i.e. justice department, police, jails, provincial border

forces, civil defense, etc.), from civil works (building and communications),

public health (sale of sera/vaccines, contributions, income/endowments,

collection of payments for services rendered etc.), education (tuition fees from

universities, professional colleges, schools, and special institutes, hostels fee,

admission fee, payment for services rendered, archeological museums, etc.),

health services (tuition fees from medical schools and colleges, hospital

receipts, sale of medicines/vaccines, contributions, etc.), irrigation charges (on

account of water rates, and embankments/drainage charges like sale of water,

hill torrents, recoveries of expenditure, payments for services rendered), and

other economic services (i.e. agriculture, fisheries, forestry, industrial and

mineral resources, printing, industries, transport and communications, etc.). A

summary of user

Table 5.1: Summary of User Charges

Heads 1999-00 2000-01 2001-02 2002-03 2003-04

Jails and Convict settlements 2.223 8.661 6.662 3.600 4.000

Administration of Justice 63.816 57.162 40.596 41.457 66.000

Police 83.657 81.449 99.406 106.118 126.728

Abiana/Irrigation 169.701 185.226 160.051 159.750 369.000

Education 152.457 146.734 146.344 94.827 100.000

Health 179.796 94.619 102.490 111.517 150.000

Public Health 54.178 40.092 45.541 45.608 55.000

Agriculture 85.901 60.969 126.419 71.158 90.585

Fisheries 3.941 6.032 5.003 5.712 6.500

Animal Husbandry 15.173 15.966 14.584 17.226 17.200

Cooperation 0.183 0.207 0.116 0.135 0.200

Industries 1.672 8.957 9.002 1.700

Civil Works & Communicat 175.273 110.722 82.332 93.605 130.000

Forest 264.080 253.498 324.702 353.511 367.000

Arms License Fee 86.839 86.822 89.647 88.134 105.000

Source: Finance and Accounts and Budget books

charges collected is given at Table 5.1. These user charges cover only a part of

the costs and most of these government services are heavily subsidized.


3. The user charges on full/partial cost recovery basis have a lot of revenue

potential in NWFP. User charges form an important means for financing the

cost of services rendered by any government. In an environment in which tax

revenues are not rising as fast as expenditure, there is considerable scope for

raising revenue through user charges:

4. There is a great potential to raise revenues through rationalization of user

charges, especially in irrigation, tertiary level social services, agriculture

machinery, licensing, and drinking water and sanitation. The revenue collection

in these areas is still far below the cost that the government is incurring in

delivery of these services. Consequently there is a lot of burden on the revenue

budget. The rich and poor get subsidized equally in availing the government

services. Levy of user charges based on benefit principal can simultaneously

generate revenues and regulate demand for efficient use of public services. In

fact many of the so-called provincial taxes have a large component, which is in

the nature of a user charge. Subsidy for certain social services is desirable on

ground of poverty and merit good considerations, but this should be well-

targeted. Non-recovery of user charges leads to wastes, misappropriation of

public services by the relatively well-to-do, and under-funding of these services.

User charges are the usual resource for sub-national governments and have a

huge revenue potential. The following paragraphs give more specific

suggestions for improving collection of user charges in respective areas.

5. Abiana: The revenue collection from Abiana is almost one-third of the

maintenance cost of the system and about 14% of the total expenditure. The

Government is committed under the World Bank funded National Drainage

Program (NDP) to raise it to a level where it not only meets the cost of

maintaining the system but also finances future capital investment. The

Irrigation Department should also work out the details of levying ‘Drainage

Cess” as envisaged under NDP. Modus operandi should be to increase cost

recovery by increasing the rate of Abiana, as well as by improving the

collection of Abiana.

6. Given the situation, an average growth rate of 24.6% p.a. in abiana

collections is necessary to achieve full recovery of O&M costs in the next five

years. Similarly a growth rate of 48.2% p.a. in abiana is needed for recovery of

total expenditures on irrigation. Director Irrigation Department14

told us that the

Irrigation Department has been increasing abiana rate at 25 percent per annum.

Currently this rate is substantially higher than the rates prevailing in other

provinces. In this light we suggest that GoNWFP should try to reduce the O&M

14

In a meeting with Director Irrigation Department, Mr Qaiser Abbas, on May 28, 2004 in Peshawar, we

discussed our suggestions regarding the rate of abiana in NWFP.


charges15

through providing electricity at cheaper rates. To motivate farmer to

pay the Abiana, its receipts may be accumulated in a dedicated fund to be

utilized for O&M and rehabilitation of the irrigation system, which may be

administered by emerging public and private partnerships under the Provincial

Irrigation and Drainage Authority.

7. Road User Charges: The road sector suffers from inadequate budgetary

resources. Budgetary allocations for maintenance and rehabilitation (M&R) of

roads are meager, and as a result the system has been eroding and there is a

large backlog of road repair works. Sometimes ADP funds are utilized for

projects for maintenance of roads. But government funds are spread thinly over

many projects, and implementation delays are common, which lead to large cost

overruns and inhibit timely flow of project benefits. The Government may

recover road user charges either through toll taxes or through a road user charge

levied on petrol sales as already discussed. As reportedly decided, these

collections may be set aside in a fund for their exclusive use on maintenance

and rehabilitation of the existing road network.

8. Cost Recovery in Education: The Government should recover a part of

the costs of secondary education and full costs of higher education with suitable

exemptions for the poor. This cost recovery would go a long way for improving

the quality of education in an otherwise resource-constrained environment. This

improvement of quality in public sector institutions will bring about

improvements in the private institutions. It is suggested to phase out this cost

recovery over three years.

9. Cost Recovery in Health Sector: The Government may start recovering

the cost of health services, phased over three years, increasing from nominal at

the BHU/RHC level to nearly full at the tertiary level, with appropriate

exemptions for patients of low income groups16

. This recovery would generate

necessary resources to improve service delivery, as well as discourage misuse

and overuse (e.g., of medicines) of public sector facilities.

10. Some proposals regarding user charges for the tertiary health care vis-à-

vis the existing tariffs are given in Annex 6. The user charges for the tertiary

health care were last revised in September 1996. Since then the costs of

medicines and allied services have increased substantially. Thus the user

15

These charges are high in the areas of lift irrigation because of high rates of electricity. 16

We are grateful to Dr. Samad, Chief Executive of Lady Reading Hospital Peshawar and his team for

discussing our recommendations and giving us valuable suggestion to increase the cost recovery at the tertiary

health level. This meeting was arranged by the Secretary Health, Dr. Ihsanullah, and held on May 28, 2004 in

Government Lady Reading Hospital, Peshawar


charges should be revised. This would certainly raise the revenues of tertiary

hospitals and facilitate them in improving conditions of service delivery.

11. Furthermore to create institutional incentives for better recovery, these

user charges may become a part of budget of the collecting institutions and local

governments. Similarly, to provide for some urgent functions, like O&M in

irrigation, roads, etc., user charges from these sources may be earmarked or

accumulated in separate funds to ensure carrying out of these functions and

better tax compliance. The TMAs should be geared up to collect drinking water

charges to make their water supply schemes sustainable.

5.2. GST on Services

12. Pprovincial governments levied general sales tax on services with effect from

July 1, 2000 through an Ordinance on the following groups of services.

i. Services provided or rendered by hotels, marriage halls, clubs, and caterers.

ii. Advertisement on TV and Radio.

iii. Services provided or rendered by persons authorised to transact business on

behalf of others.

iv. Courier Services.

v. Services provided or rendered for personal care by beauty parlours, beauty

clinics, slimming clinics.

vi. Services provided or rendered by laundries and dry cleaners.

13. The sales tax on these services is collected by the federal Collect orate of

Sales Tax in respective provinces. The entire collection net of collection charges

(2%) is being disbursed to the provinces on population basis. GoNWFP

received Rs 256 million from this resource in 2001-02.

14. NWFP is a net beneficiary of the sales tax on services and therefore must

pursue expansion of the tax net as it would enhance its revenues from this

source. It is proposed that NWFP must take it up with the Federal Government

along with other provinces vigorously to extend the GST to the following

services.

a. Cable

b. Newspapers and Periodicals

a. Dry Ports

b. Travel Agents

c. Tour Operators

d. Shipping Agents

e. Freight Forwarding Agents

f. Recruiting Agents

g. Indenting Agents


h. Commission Agents

i. Brokers

j. Property Dealers

k. Motor Vehicle Dealers

l. Travel by means other than by air and train

m. Contractors for

i. Building including water supply, gas supply and sanitary

works

ii. Roads and bridges

iii. Electrical and Mechanical Works including air conditioning

iv. Horticultural Works

v. Property Developers and promoters

vi. Interior Decorators

vii. Landscape Designers

q. Services supplied by dyers, painters, cleaners

r. Services supplied by industrial and manufacturing units

s. Medical Practitioners and consultants

t. Legal Practitioners and Consultants

u. Accountants and Auditors

v. Management Consultants

w. Technical, Scientific, engineering Consultants

x. Services Supplied by professionals

y. Services provided or rendered by

i. pathological laboratories

ii. Scientific Laboratories

iii. Chemical Laboratories

iv. Electrical or electronic Laboratories

5.3 Revenue Prospects from Other Provincial Resources

15. Provinces may be assigned due revenues from natural/other public

resources assigned to them, e.g. royalty for petroleum resources, profits form

hydro power generation, etc. Provinces may be given share of profits from the

federal SOEs, although they have mostly been in loss and are therefore being

privatized. The proceeds of privatization may be shared among the provinces.

16. NWFP has enormous untapped hydropower potential besides Tarbela, which

can be exploited for generating resources for development. Reportedly,

feasibility studies for projects with a sizable capacity have already been

completed, while potential for more projects is being studied/explored.

However, GoNWFP neither has its own resources nor it has been successful in

luring the private sector investors in this sector primarily because of

inappropriate investment environment. To improve the investment environment


for private sector hydro power projects, the provincial government should (a)

firm up the results of the feasibility studies of hydro projects; (b) seek

clarification on roles of the Provincial and federal governments in the

development of hydropower, and (c) establish a more suitable policy framework

for developing, managing, and financing hydropower projects by the private

sector.

17. Debt service takes up substantial budgetary resources in NWFP, and a more

orderly debt management strategy would help minimize costs and risks, and

bring the debt level in line with debt carrying capacity of the province.

GoNWFP’s debt is limited to borrowings from the federal government,

overdraft from SBP, contingent and pension liabilities, and some deferred utility

bills. The federal debt is large with respect to the current provincial revenue

flows and quite costly because of high interest (16%). The pension system is

mostly unfunded17

, pension/gratuity formulae are lavish, and the pension

payments have been growing sharply. Other contingent liabilities are debt

guaranties and workers’ compensation obligations of GoNWFP’s autonomous

bodies. GoNWFP has never borrowed from the open market. Like other

provincial governments, GoNWFP being a borrower requires NOC from the

federal government to borrow from the open market. Market borrowing may be

a worth while option given the fact that interest rates have fallen. GoNWFP

should revisit these areas to create fiscal space which could be substantial.

17

Reportedly a pension fund has been established recently, which is far from adequate to

cover the full pension liability.


6. Local Government Financing

Local government (LG) finances in Pakistan/NWFP have atrophied as a result

of centralization of local government functions over time. Social services

delivery in education and health and local infrastructure were provincialized on

the pretext of inadequate local capacities. Local governments vary grossly in

terms of their fiscal capacities, and only a few LGs have surplus budgets. Many

LGs have divested them from their original service responsibilities. Local

budgets are far from being complete, and many expenditure liabilities like

pensions are not covered. Some local governments are running into large

arrears on utility charges. Local government lost their main source of financing

in 1999/00, when octroi and local export taxes were abolished with more adhoc

financing arrangements.

2. The recent devolution initiative is an attempt to strengthen local governments

and to make them effective in their service delivery. The devolution plan is

well in line with global wisdom and politically well thought with appropriate

accountability checks. The initiative has a great potential for enhancing

efficiency and effectiveness of public services if it is implemented successfully.

However weak administrative capacity and local finances are the two major

constraints and the effective implementation is a challenge.

3. LGs under the new law are responsible for development, maintenance and

delivery of local services, water supply and sanitation, local roads, community

infrastructure, primary education, preventive/primary health, etc. The LGs

critically rely on the assistance from the federal and provincial governments in

terms of their capacity building, making policies and regulatory frameworks,

and strengthening of their finances and broadening of their revenue bases.

4. Providing adequate fiscal resources to LGs in line with their assigned

functional responsibilities is essential for their effectiveness. However a large

part of the LGs’ finances in NWFP would have to come from transfers from the

higher-level governments, as LGs cannot be expected to generate sufficient

resources to finance all of their expenditure responsibilities. In this regards,

GoNWFP has set up a provincial finance commission and its recommendations

are expected very soon.

5. However a substantial part of needed finances must be generated by LGs

themselves to make them responsible and accountable. So that LGs would need

to be assigned appropriate revenue bases. With progressive and dynamic tax

bases being occupied by higher governments, the only choices are the immobile

bases (property and land related taxes, toll taxes, etc.) and user charges (water

and sanitation rates, conservancy charges, tolls, parking fees, etc.). Given the


context, GoNWFP may consider allowing LGs in NWFP to cultivate the

following tax bases for generating their own revenues.

i. tax on annual rental value of buildings and land. Better collection of UIPT

as already proposed under the provincial taxes should also help, since 85%

of the UIPT collections are shared with LGs.

ii. entertainment tax on cinemas, cinema tickets, dramatic and theatrical

shows. GoNWFP may assign this base exclusively to LGs. Presently

GoNWFP collects a paltry Rs 12 million from this base, which may be

assigned to LGs.

iii. surcharges or piggybacks on taxes levied by the federal and/or provincial

governments

iv. tax on some professions, trades, callings and employment. This would

require coordination with the provincial government.

v. tax on the transfer of immovable property. This would require

coordination with the provincial government.

vi. Octroi

vii. tolls on roads and bridges

viii. rates on municipal services like water supply, drainage, lighting, etc.

ix. fees for licenses, sanctions and permissions

x. conservancy rate

xi. tax on births, marriages and feasts

xii. school fees

xiii. hospital/BHU fees

xiv. fees at fairs, agricultural shows, etc.

xv. taxes on vehicles other than motor vehicles

xvi. market fees

xvii. tax on animals

xviii. fees on sale of cattle at cattle fairs

xix. fees for slaughtering animals

xx. tax for export of goods and animals

xxi. tax on lands not subject to local rate

xxii. tax on hearths

xxiii. fees for erecting buildings

xxiv. tax for the construction or maintenance of any work of public utility

xxv. community tax on adult males for public work of general utility

xxvi. tax on advertisements

xxvii. fees for specific services

xxviii. other taxes permissible under the LGO


References

1. Government of NWFP, Annual Budget Statements, 1997-98 to 2003-04

2. Government of NWFP, Finance Department, White Papers, for 2001-02 to

2003-04

3. Government of NWFP, Planning and Development Department, Annual

Statistical Data

4. Government of Pakistan, Agricultural Census NWFP 2000

5. Federal bureau of Statistics, Census of Manufacturing Industries, 1995

6. World Bank, NWFP Structural Adjustment Credit, Project Appraisal

Document. 2002

7. World Bank, Study on Provincial Finances SASPR 1999


Annex 1

TAXATION AUTHORITY

AT EACH LEVEL OF GOVERNMENT

IN PAKISTAN

Federal government

The 1973 Constitution of Pakistan specifies the following as areas of taxing

responsibility for the federal government:

(i) custom duties, including export duties;

(ii) excise duties, including duties on salt, but excluding duties on alcoholic

liquors, opium and other narcotics;

(iii) duties in respect to succession of property;

(iv) estate duty in respect to property;

(v) income taxes other than on agricultural income;

(vi) corporation tax;

(vii) taxes on sales and purchase of goods imported, exported, produced,

manufactured or consumed;

(viii) taxes on the capital value of assets, not including taxes on capital gains on

immovable property;

(ix) taxes on mineral oil, natural gas and mineral for use in generation of

nuclear energy;

(x) taxes and duties on production capacity of any plant, machinery,

undertaking, establishment or installation in lieu of any or more of them;

and

(xi) terminal taxes on goods or passengers carried by railway, sea or air and

taxes on their fares and freights.

Provincial governments

All other forms of taxes fall under the purview of the provincial governments.

The provincial governments then allocate some of these to the local governments

on the basis of the Local Government Ordinances (LGOs). Taxes retained by the

provincial governments under the LGOs include:

(i) tax on agricultural income;

(ii) capital gains tax on immovable property;

(iii) excise duties on alcoholic liquors, opium and other narcotics;

(iv) tax on professions, trades, callings or employment;

(v) tax on immovable property;

(vi) land revenue;


(vii) motor vehicle taxes;

(viii) stamp duties;

(ix) entertainment taxes; and

(x) taxes on purchase and sale of services (excluding railway, sea or air;

transport).

Local governments

The fiscal powers delegated to the local governments by the LGOs include the

following taxation powers:

(i) Octroi;

(ii) tax on annual rental value of buildings and land (except in Sindh);

(iii) tax on cinemas and cinema tickets;

(iv) entertainment tax on dramatic and theatrical shows;

(v) tax on the transfer of immovable property;

(vi) fees for licenses, sanctions and permissions;

(vii) market fees;

(viii) rates on services like water supply, drainage, lighting etc;

(ix) fees at fairs, agricultural shows, etc;

(x) fees for specific services;

(xi) tax for export of goods and animals;

(xii) tolls on roads and bridges;

(xiii) tax for the construction or maintenance of any work of public utility;

(xiv) taxes on vehicles other than motor vehicles;

(xv) tax on professions, trades, callings and employment;

(xvi) tax on advertisements;

(xvii) school fees;

(xviii) fees on sale of cattle at cattle fairs;

(xix) tax on the annual rental value of buildings and land;

(xx) tax on lands not subject to local rate;

(xxi) tax on hearths;

(xxii) tax on births, marriages and feasts;

(xxiii) tax on animals;

(xxiv) conservancy rate;

(xxv) fees for erecting buildings;

(xxvi) fees for slaughtering animals;

(xxvii) community tax on adult males for public work of general utility;

(xxviii) surcharge on taxes levied by the federal and/or provincial

governments; and

(xxix) any other tax levied/permissible under the LGP


Annex 2

Export Performance of NWFP

Sr. No. Commodities 1996-97 1997-98 1998-99 1999-2000 2000-01

1 Cotton Yarn 5,682 12,341,153 27,073,523 29,356,670 2 Tobacco 11,367 4,680,000 5,396,000 9,950,938 3 Precious/Semi Precious Stones 3,431,818 4,610,932 8,155,211 12,872,207 16,280,000 4 Carpets & Rugs 22,227,273 38,848,984 45,453,270 95,203,138 130,000,000 5 Handicrafts 1,477,273 2,974,008 4,456,986 294,263 7,000,000 6 Dry Fruits 2,188,636 2,968,155 956,122 736,882 821,000 7 Shoes 161,364 9,621 1,676 63,885 5,304 8 Cloth 31,818 86,886 1,300 2,888 950 9 Spices 34,074 928 10 Leather & Leather Products 1,243,182 1,939,019 1,109,410 11,664,711 9,490,000 11 Plants and Seeds 98 5,846 30,500 1,275 12 Furniture 79,091 189,763 353,357 2,808,104 1,274,418 13 Medical Herbs 283,636 298,458 156,201 1,502,041 1,798,093 14 Honey 542,046 699,612 1,558,462 7,729,858 7,859,121 15 Socks and gloves 93,864 134,654 48,375 16 Engineering goods 96,364 656 970 17 Match Boxes 2,993,182 11,068,123 5,059,393 3,908,530 6,429,693 18 Artificial Jewelry 36,818 2,794 42,930 35,737 19,839 19 Towels 7,321 20 Caps 6,136 1,320 1,286 21 Sheep Casing 126,591 58,920 4,696 22 Lamb Skins 909 23 Books and Calendars 1,120 40,650 400 14,126 24 Tiles and Marbles 38,409 71,238 54,088 11,140 1,950 25 Garments 30,000 6,757 20,862 244,266 34,330 26 Machines Tools/Machinery 1,165 83,250 118,130 27 Food Stuff/Bubble Gums 479,546 326,366 1,764,998 28 Plastic Sheets/Plastic goods 29,309 2,105 29 Shopping Bags/Polythylene bag 2,000 1,663 30 Rice 403,864 293,424 44,140 15,694 44,825 31 Vegetable 650,386 733,946 32 Stainless Steel utinsils 5,000 2,902 24,342 33 Cassettes 1,876 76,812 1,974 3,220 34 Electrical Goods 4,773 15,120 35 Fresh Fruits 4,389 352,091 5,305,769 897,254 36 Medical Equipment 18,816 37 Cigarettes 130,328 106,903 38 Green Tea 27,440 14,125 39 Mushroom 1,311,468 40 Chemicals 30,395 41 Conical tails Unit Bomb Bodies 254,080

(Semi Finished) 42 Misc. 149,862 1,573,805 434,904 14,112,627 550,443

Total US Dollars 37,487,957 66,118,603 87,299,956 191,319,114 223,165,643 Source: Export Promotion Bureau, Peshawar.

Table : EXPORT PERFORMANCE OF NWFP N.W.F.P.


Annex 3

Potential of AIT in NWFP

Table 1: Potential of Agricultural Income Tax in NWFP - Low Base Scenario*

Farm Size (acres) Area No of Net Income* Income AIT

Range Cultivated Irrigated Unirrigated farms Irrigated Unirrigated Total income per

farmer

per

farmer

Total AIT

All Farms 4,096,033 2,256,518 1,839,515 11,905,388,968 4,852,640,570 16,758,029,538

Govt.Farms 2,414 2,271 143 11,981,796 377,234 12,359,030

Private Farms 4,093,619 2,254,247 1,839,372 11,893,407,172 4,852,263,336 16,745,670,508

< 1.0 139,271 73,320 65,951 334413 312,636,480 140,607,532 453,244,012 1355 N/a

1.0 to < 2.5 634,503 308,591 325,912 470321 1,315,832,024 694,844,384 2,010,676,408 4275 N/a

2.5 to < 5.0 741,897 383,937 357,960 260559 1,637,107,368 763,170,720 2,400,278,088 9212 N/a

5.0 to < 7.5 591,398 316,867 274,531 127504 1,351,120,888 585,300,092 1,936,420,980 15187 N/a

7.1 to < 12.5 643,086 359,488 283,598 90939 1,532,856,832 604,630,936 2,137,487,768 23505 N/a

12.5 to < 25.0 491,899 258,750 233,149 43405 1,103,310,000 497,073,668 1,600,383,668 36871 N/a

25.0 to < 50.0 391,901 203,571 188,330 19480 868,026,744 401,519,560 1,269,546,304 65172 N/a

50.0 to < 100 215,082 152,105 62,977 6737 648,575,720 134,266,964 782,842,684 116200 2215 14922701

100 to < 150 95,600 78,118 17,482 1640 333,095,152 37,271,624 370,366,776 225833 11083 18176678

150 and above 148,980 119,485 29,495 1237 509,484,040 62,883,340 572,367,380 462706 42906 53074607

* By using land income of Rs 4,264/acre, as estimated for wheat crop in Sindh on the basis of APCOM data on cost of production. Total 86,173,986


Table 2: Potential of Agricultural Income Tax in NWFP - High Base Scenario*

Farm Size (acres) Area No of Net Income* Income AIT

Range Cultivated Irrigated Unirrigated farms Irrigated Unirrigated Total income per

farmer

per

farmer

Total AIT

All Farms 4,096,033 2,256,518 1,839,515 11,905,388,968 4,852,640,570 16,758,029,538

Govt.Farms 2,414 2,271 143 11,981,796 377,234 12,359,030

Private Farms 4,093,619 2,254,247 1,839,372 11,893,407,172 4,852,263,336 16,745,670,508

< 1.0 139,271 73,320 65,951 334413 1,043,123,640 469,142,439 1,512,266,079 4522 N/a

1.0 to < 2.5 634,503 308,591 325,912 470321 4,390,324,157 2,318,375,012 6,708,699,169 14264 N/a

2.5 to < 5.0 741,897 383,937 357,960 260559 5,462,271,699 2,546,348,460 8,008,620,159 30736 N/a

5.0 to < 7.5 591,398 316,867 274,531 127504 4,508,066,809 1,952,876,269 6,460,943,078 50672 N/a

7.1 to < 12.5 643,086 359,488 283,598 90939 5,114,435,776 2,017,374,373 7,131,810,149 78424 N/a

12.5 to < 25.0 491,899 258,750 233,149 43405 3,681,236,250 1,658,505,412 5,339,741,662 123021 2727 118348125

25.0 to < 50.0 391,901 203,571 188,330 19480 2,896,204,617 1,339,685,455 4,235,890,072 217448 10245 199569007

50.0 to < 100 215,082 152,105 62,977 6737 2,163,997,835 447,986,890 2,611,984,725 387707 31656 213267209

100 to < 150 95,600 78,118 17,482 1640 1,111,384,786 124,358,207 1,235,742,993 753502 86525 141901449

150 and above 148,980 119,485 29,495 1237 1,699,913,095 209,812,683 1,909,725,778 1543837 205075 253678367

* By using land income of Rs 14,227/acre, as estimated for sugarcane crop in Sindh on the basis of APCOM data on cost of production. Total 808,416,031


Annex 4

REVENUE RECEIPTS OF GOVERNMENT OF NWFP (Rs.Million)

1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals June Final

TOTAL CURRENT RECEIPTS 9,021 10,023 11,415 14,784 17,766 19,074 19,802 21,709 24,414 26,258 30,168

TAX RECEIPTS 6,874 7,852 9,724 12,092 15,122 17,034 14,416 15,390 17,678 19,909 20,731

Federal tax assignments 6,444 7,366 9,189 11,465 14,345 16,134 13,554 14,422 16,392 18,440 19,031

Income and corporation tax 2,629 3,448 4,362 5,508 7,396 8,511 4,419 5,008 5,205 5,529 6,544

Sales tax 2,212 2,468 3,303 4,425 5,148 5,763 2,542 3,350 5,597 7,303 7,978

Others 1,603 1,451 1,524 1,532 1,801 1,861 6,594 6,063 5,589 5,609 4,509

Customs 209 51 45 0 0 0 3,584 3,003 3,009 3,067 2,387

Excise duty & Royalty on Natural Gas 0 0 0 0 0 0 0 0 0 0 64

Surcharge on Natural Gas/petro./ferti. 0 0 0 0 0 0 0 0 0 0 0

Other Federal Excise Duties 1,393 1,399 1,479 1,522 1,801 1,861 2,807 2,818 2,580 2,227 2,047

Gift tax\Wealth\CVT 0 0 0 10 0 0 203 242 0 315 11

Provincial taxes 430 486 535 626 777 900 862 969 1,286 1,469 1,700

Direct taxes 87 82 86 116 221 303 291 305 341 369 450

Urban immovable property tax 14 15 12 51 21 56 54 62 67 136 160

Agriculture income tax 0 0 0 0 1 5 42 45 71 23 47

Registration fee 10 7 5 11 8 5 7 8 11 9 10

Land revenue (tax) 60 58 65 47 183 228 177 176 172 177 192

Taxes on profes,trades and callings 3 3 4 7 8 8 11 13 21 25 41

Indirect taxes 343 403 449 511 556 597 570 664 945 1,099 1,250

Motor vehicle tax 165 171 184 184 221 281 312 357 417 444 448

GST on services 218 256

Stamp duties 103 117 104 204 169 149 116 113 142 139 160

Entertainment tax 5 5 5 5 5 4 7 18 23 9 8

Electricity duties 60 100 146 106 140 142 7 6 265 219 299

Hotel tax 3 3 4 4 8 8 29 18 17 1 0

Provincial excises 4 5 5 6 9 9 12 17 16 15 21

Education cess 0 0 0 0 0 1 54 109 24 0.2 0

Other 2 1 1 1 4 3 34 25 40 52 57


1991/92 1992/93 1993/94 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02

Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals Actuals June Final

NON-TAX RECEIPTS 2,147 2,171 1,691 2,693 2,644 2,040 5,387 6,318 6,737 6,349 9,437

Interest 38 45 67 27 57 82 112 98 90 70 29

Dividends 6 7 13 3 3 13 10 12 2 4 1

Royality on Natural Gas and Oil 0 0 0 0 0 0 0 0 0 0

Civil Adminstration Receipts 102 121 147 135 154 132 152 149 182 180 224

General Administration 30 52 71 63 72 47 52 46 32 33 77

Defence services receipts 0 0 0 0 0 0 0 0 0 0 0

Law and Order 72 70 76 72 82 85 101 102 150 147 147

User Charges 679 789 754 943 1,044 1,141 1,042 1,107 1,153 946 1,042

Community Services 107 133 121 137 173 164 197 219 229 151 127

Works 86 112 93 107 140 114 149 153 175 105 81

Public Health 21 21 28 30 33 51 48 66 54 45 46

Social Services 46 65 59 80 118 264 304 246 345 244 252

Education 21 23 26 47 75 159 217 122 162 147 146

Health 25 29 29 32 41 104 86 121 180 95 102

Others 1 13 4 2 2 1 2 3 3 3 3

Economic Services 525 591 574 726 753 713 540 642 578 551 664

Irrigation (largely water charges) 51 53 71 77 123 148 144 146 170 185 160

Others 474 538 503 649 630 564 396 496 409 366 504

Others 0 0 0 0 0 0 0 0 0 0 0

Excise duty on minerals 0 0 0 0 0 0 0 0 0 0 0

Physical, Planning and Housing 0 0 0 0 0 0 0 0 0 0 0

Naturalization. Citizenship,passport etc. 0 0 0 0 0 0 0 0 0 0 0

Electricity Profits from WAPDA 5,150 6,140 5,032 7,347 6,539 6,000 5,442 6,000 5,956 6,044 6,000

Grants; non-development 414 205 217 12 5 5 3,338 3,801 3,882 3,828 3,915

Grants;development 778 833 280 1,321 1,217 374 229 464 995 744 4,008

Federal Govt. Non Development 414 205 217 12 5 5 3,338 3,801 3,882 3,828 3,915

Foreign Non-Development 0 0 0 0 0 0 0 0 0 0 0

Federal Govt. Development 766 514 269 1,309 1,205 362 217 372 989 739 3,992

Foreign Development 12 319 12 12 12 12 12 92 6 5 17

Others 130 170 212 252 165 293 504 687 432 578 216


Annex 5

Motor Vehicle Tax Rates (need data from E&T to update rates, district-wise registered vehicles, by type and revenue

collected during last 5 years)

S.No. Description of Vehicle Tax Rate

1. (a) Motor Cycle/Scooter not already registered

(b) Motor Cycle/Scooter already registered and since

first registration, the vehicle

(i) has not completed 5 years

(ii) has completed 5 years but not completed

10 years

(iii) has completed 10 years but has not

completed 15 years

Rs 1000 once at the time of

registration with extra tax

of Rs 200 if the vehicle is

fitted with trailer or cabin

Rs 600 once for all or Rs

80 per annum


80 per annum


80 per annum

2. Motor vehicles not exceeding 250 Kgs. in unladen

Weight adopted and used for invalids

No Tax

3. Vehicle (trucks/trailers/delivery vans) used for the

transport or haulage of goods or materials:

(a) electricity propelled vehicles not exceeding 1250 kgs in

unladen weight

(b) vehicles including delivery van) with maximum

laden capacity upto 2030 kgs.

(c) vehicle with maximum laden capacity exceeding

2030 kgs. but not exceeding 4060 kgs.

(a) vehicle with maximum laden capacity exceeding

4060 kg but not exceeding 6090 kg.

(b) vehicle with maximum laden capacity exceeding

6090 kg but not exceeding 8120 kg

(c) vehicle with maximum laden capacity exceeding

8120 kg but not exceeding 12000 kg.

(d) vehicle with long trailers or other vehicles with

maximum laden capacity exceeding 12000kg but

not exceeding 16000 kg

(e) vehicles with long trailer or other vehicle with

maximum laden capacity exceeding 16000 kg

Rs 500

Rs800

Rs 800

Rs 1200

Rs 2000

Rs 4000

Rs 6000

Rs 8000

4. Vehicles plying for hire and ordinarily used for

Transport of passengers (Taxis and Buses)

(a) tricycle propelled by mechanical power (rickshaws/

cabs) with seating capacity of not more than 3

persons

(b) Motor vehicles with a seating capacity if more than

20 persons plying for hire exclusively within the

limit of a corporation, municipality or cantonment or

partly within and partly outside such limits with sixty

Rs 400

Rs 100 per seat


percent of the total length of the route falling within

the limits of a corporation, municipality or

cantonment

(c) Mini buses with a seating capacity of more than 6 and

less than 20 persons plying for hire exclusively

within the limits of a corporation, municipality or

cantonment

(d) Other vehicles with a seating capacity of

(f) Not more than four persons

(ii) More than four but not more than 6 persons

(iii) More than 6 persons

(a) Air –Conditioned

(b) Non-airconditioned

Rs 160 per seat

Rs 520

Rs 660

Rs 150 for every extra seat

Rs 100 for every extra seat

5. Vehicles (cars/jeeps) other than those mentioned above

and having:

a. seating capacity of not more than three persons

b. seating capacity of more than three persons but not

more than six persons

(i) with engine power not exceeding 1000 cc

(j) (ii) with engine power exceeding 1000 cc but not

(k) exceeding 1300 cc

(l) (iii) with engine power exceeding 1300cc but not

(m) exceeding 1500cc

c. seating capacity for more than 6 persons

Rs 500

Rs 1000

Rs 1500

Rs 2000

Rs 400 per seat

6. a. Tractor without trailer

b. If trailer is attached with tractor

i. With engine power exceeding 1500cc but not

Exceeding 2500cc

ii. with engine power exceeding 2500cc

Rs 200

Rs 300

Rs 3000

Rs 5000


Annex 6

Tax on Professions and Callings

EXISTING CATEGORIES EXISTING

RATES

PROPOSED CATEGORIES PROPOSE

D RATES

Persons engaged in any Profession, trade,

calling either wholly or part time within the

Province whose monthly income or earning

i) When exceeds Rs 3000 but does not

exceed Rs 5000

ii) when exceeds Rs 5000 but does not

exceed Rs 10,000

iii) When exceeds Rs 10,000

Rs 100

Rs 150

Rs 200

All persons engaged in any

Profession, trade, calling or

employment, other than those

mentioned hereinafter, within the

Province of NWFP, whether

Provincial or Federal employees

i) When exceeds Rs 6000 but does not

exceed Rs 10,000

ii) when exceeds Rs 10,000 but does

not exceed Rs 20,000

iii) When exceeds Rs20 ,000

Rs 100

Rs 150

Rs 200

Companies registered under the

Companies Ordinance 1984 with paid up

capital

a. Exceeding Rs 0.2 million but

not exceeding Rs 1.0 million

b. Exceeding Rs 1.0 million but

not exceeding Rs 2.5 million

c. Exceeding Rs 2.5 million but not

exceeding Rs 10 million

d. Exceeding Rs 10 million but not


e. Exceeding Rs 50 million but not


f. Exceeding RS 100 million

Rs 1000

Rs 3000

Rs 6000

Rs 10,000

Rs 25,000

Rs 50,000

All limited Companies, Modarbas,

Mutual Funds, and any other body

corporate with paid capital or paid up

capital and reserves in the preceding

year which ever is more

a. not exceeding Rs 10 m

b. exceeding Rs 10 m but not


c. exceeding Rs 25 m but not


d. exceeding Rs 50 m but not


e.exceeding Rs 100 m but not

exceeding Rs 200 m

f. exceeding Rs 200 million

EXPLANATION:

The paid capital in the case of foreign

banks shall be the minimum paid up

capital as determined by the State

Bank of Pakistan

Rs 10,000

15,000

20,000

50,000

75,000

100,000

Persons other than Companies owning

factories and commercial establishments

with ten or more employees

Rs 750

Persons other than Companies owning

factories, commercial

establishments,Private Educational

Institutions and Private Hospitals with ten or more employees

Rs 1500

Persons holding licenses under the Import and

Export Control Act who during the preceding

financial year have imported or exported

goods of the value of

a. not exceeding Rs 50,000

b. exceeding Rs 50,000

Rs 1000

Rs 1500

Holders of import or export license under

the Import and Export Act assessed to

income tax in the preceding year

with annual turn over

a. not exceeding Rs 500,000

b. exceeding Rs 0.5 million but not

exceeding Rs 5 m

c. exceeding Rs 5 m but not exceeding

Rs 25 m

d. exceeding Rs 25 m but not

exceeding Rs 100 m

e. exceeding Rs 100 m but not

exceeding Rs 500 m

f. exceeding Rs 500 m but not

Rs 1500

Rs 2500

Rs 5,000

Rs 7,500

10,000

30,000


exceeding Rs 1000 m

g. exceeding Rs 1000m

75,000

Clearing Agents licensed or approved as

Custom House Agents

Rs 1000 Same Rs 1500

Travel Agents

n. IATA

o. Non-Iata

Rs 5000

Rs 2000

Travel Agents

a.IATA

b.Non-IATA

Rs 7500

Rs 3000

Restaurants and Marriage Halls Rs 5000 Restaurants Rs 7500

Advertising Agencies RS 1000 Advertising Agencies Rs 5000

Doctors

a. Specialists

b. Non Specialists including Medical

Practitioners, Hakeems and Homeopaths

RS 1000

Rs 300

Same

Rs 1500

Rs 500

Clinical Laboratories

a. Located at Peshawar and Abbotabad

b. Located at other places

Rs 5000

Rs 1000

Clinical Laboratories including

pathological and chemical laboratories

a. Located at Peshawar and Abbotabad

b. Located at other places

Rs 7500

Rs 1500

Contractors/Suppliers/Consultant who

during the preceding financial year

supplied to the federal or any provincial

government or any local authority goods,

commodities, or rendered service of the

value

a. exceeding Rs 10,000 but not exceeding

Rs 1 million

b. Exceeding Rs 1 million but not

exceeding Rs 2.5 million

c. Exceeding Rs 2.5 million

Rs 1000

Rs 1500

Rs 5000

Contractors/Suppliers/Consultant who

during the preceding financial year

supplied to the federal or any

provincial government or any local

authority goods, commodities, or

rendered service of the value

a. exceeding Rs 10,000 but not


b. Exceeding Rs 1 million but not

exceeding Rs 2.5 million

c. Exceeding Rs 2.5 million

Rs 2000

Rs 3000

10000

Petrol Pumps whose commission

earned in the preceding year

a. does not exceed Rs 0.2 m

b. exceeding Rs 0.2 m but does not

exceed Rs 0.4 m

c. exceeding Rs 0.4 m but does not

exceed Rs 0.6 m

d. exceeding Rs 0.6 million

Rs 1500

Rs 2500

Rs 3500

Rs 4000

All establishments including video

shops, real estate shops/agencies, car

dealers not assessed to income tax in

the preceding financial year

Rs 1000


Annex 7

User Charges in Tirtiary Health Care in NWFP

Existing rates Proposed

S.No. Name of Item Sep: 1996 Rates.

1. O.P.D. Chit.

a. Teh: Headquarter Hospitals. Rs.2/- Rs.3/-

b. Divl:/Distt: Headquarter Hosp. Rs.3/- Rs.5/-

c. Teaching Hospitals. Rs.5/- Rs.10/-

2. Admission Fees.

a. Teh: Headquarter Hospitals. Rs.10/- Rs.15/-

b. Divl:/Distt: Headquarter Hosp. Rs.15/- Rs.20/-

c. Teaching Hospitals. Rs.20/- Rs.50/-

3. Room Rent(Per day

a. Teh: Headquarter Hospitals.

i) Without airconditioner. Rs.75/- Rs.100/-

ii) With airconditioner. Rs.150/- Rs.300/-

b. Distt: Headquarter Hosp.

i) Without airconditioner. Rs.100/- Rs.125/-

ii) With airconditioner. Rs.200/- Rs.400/-

c. Teaching Hospitals.

i) Side Room. Rs.75/- Rs.150/-

ii) Private room without A.C. Rs.250/- Rs.350/-

iii) Private room with Heating/

Air-conditioner facilities. Rs.400/- Rs.500/-

iv) Bolton Block Room with

Heating/A.C., facilities. Rs.700/- Rs.1000

4. Diagnostic & Other Tests.

a. X-Ray Film. Rs.35/- Rs.70/-

b. Laboratory Tests.

Teh: Headquarter Hospitals.

i) Routine Blood Examination. Rs.30/- Rs.50/-

ii) Routine Urine Examination. Rs.15/- Rs.20/-

iii) Routine Stool Examination. Rs.15/- Rs.20/-


Distt: Headquarter Hosp.




Teaching Hospitals.




5. Ambulance Charges. Rs.3/- Rs.10/-

per Km per Km

6. Dentistry

1. O.P.D. Chit Rs.5/- Rs.5/-

DEPARTMENT OF CONSERVATION

2. Temporary Filling Nil Rs. 20/-

3. Permanent Filling,

i. Almalgam Rs.30/- Rs. 40/-

ii. Glassinomor Nil Rs. 50/-

iii. Composite Rs.60/- Rs. 70/-

4. Root Canal Treatment (Single root) Rs.60/- Rs.100/-

5. Root Canat Treatment (Multi roots) Rs.75/- Rs.200/-

DEPARTMENT OF PERIODONTOLOGY

6. Scaling/sitting Rs.38/- Rs. 50/-

7. Flap surgery/Quadrant Nil Rs.200/-

8. Gingivectomy/Quadrant Rs.38/- Rs.100/-

9. Splinting Nil Rs.200/-

10. Root Planning/Sitting Nil Rs.100/-

11. Root Resection Nil Rs.200/-

12. Soft Tissue Grafting Nil Rs.200/-

13. Treatment of hypersensitive teeth/ Nil Rs.100/-

visit.

14. Polishing Nil Rs.100/-

DEPARTMENT OF ORAL MEDICINE

15. Alcohol injection for treatment Nil Rs.100/-

of T. Neuralgia

DEPARTMENT OF RADIOLOGY

16. Periapical X-Ray Rs.35/- Rs.50/-

17 OPG Rs.80/- Rs.150/-

18. Occlusal View X-Ray Rs.80/- Rs.150/-


DEPARTMENT OF PEADODONTICS

19. Minor Surgical procedures Nil Rs.200/-

20. Composite repair of fractured teeth Nil Rs.300/-

21. Appexification Nil Rs.300/-

22. Pulpotomy (primary teeth) Nil Rs.100/-

23. Slicing (primary Teeth) Nil Rs.50/-

DEPARTMENT OF ORTHODONTICS

24. Fixed Appliances/Case Rs.2250/- Rs.3000/-

(Without Materials)

25. Removable Appliances/Case Rs. 525/- Rs.1500/-

26. E.O.T/Case Nil Rs.1500/-

27. Space Maintainer Nil Rs.500/-

28. Functional Appliance Nil Rs.500/-

29. Exp. Appliances Fixed Nil Rs.1500/-

DEPARTMENT OF ORAL SURGERY

30. Extraction Rs.8/- Extraction Rs.20/-

Extraction

31. Impaction Rs.225/- Rs.250/-

32. Alveolectomy RS.225/- Rs.250/-

33. Apisectomy Rs.180/- Rs.200/-

34. Abscess drain Nil Rs.300/-

35. Epulis Excision Nil Rs.250/-

36. Incisional Biopsy Nil Rs.100/-

37. TMJ Relocation Nil Rs.100/-

38. Oro Antral Fistula Repair Nil Rs.300/-

39. Soft Tissue Repair Nil Rs.300– 500/-

40. Foreign Body-Soft Tissue Nil Rs.300/-

41. Foreign Body – Bone Nil Rs.400/-

42. Splinting of Sublux Teeth Nil Rs.200/-

43. Fracture Mandible-Close Reduction Nil Rs.300/-

44. Fracture Mandible-Open Reduction Nil Rs.500/-

45. Fracture Maxilla – Close Reduction Nil Rs.300/-

46. Fracture Maxilla – Open Reduction Nil Rs.500/-

47. Fracture Zygomatic Complex -- Nil Rs.300/-

Elevation

48. Fracture Zygomatic Complex -- Nil Rs.500/-

Open Reduction

49. Cyst Enucleation RS.135/- Rs.500/-

50. Cyst Marsupilization Nil Rs.700/-

51. Sequestrectomy Nil Rs.300-500/-

52. TMJ Ankylosis – Unilateral Nil Rs.1500/-

53. TMJ Ankylosis – Bilateral Nil Rs.2500/-

54. Marginal Resection Nil Rs.1000/-

55. Total Resection without Reconstruction Nil Rs.1500/-

56. Total Resection with Reconstruction Nil Rs.4000/-

57. Total Mouth Clearance Nil Rs.1000/-

58. Submandibular Duct Stone Nil Rs.1000/-


59. Salivery gland Stone Nil Rs.1000/-

60. Cleft Lip Nil Rs.500/-

61. Cleft Palate Nil Rs.1000/-

62. Cleft Alveolus Nil Rs.1000/-

63. Neurectomies

i. Mental Nerve Nil Rs.500/-

ii. Inferior Dental Nerve Nil Rs.1500/-

iii. Infra Orbital Nerve Nil Rs.500/-

iv. Supra Orbital Nerve Nil Rs.1000/-

64. Partial Maxillectomy Nil Rs.500/-

65. Total Maxillectomy Nil Rs.1500/-

66. Antral Scraping Nil Rs.500/-

67. Tooth Transplant Nil Rs.500/-

68. Orthognathic Surgery

i. Segmental Nil Rs.3000/-

ii. Sagittal Split Nil Rs.5000/-

iii. Le Fort I Nil Rs.5000/-

69. Dental Implant Nil Rs.2000/-

Implant

70. Excisional Biopsy Nil Rs.200/-

71. Admission Fee in the Ward Nil Rs.20/-

72. Private Room Charges Nil Rs.400/-

P.Night

DEPARTMENT OF PROSTHODONTICS

73. Removable Partial Denture

i. One tooth Nil Rs. 50/-

ii. Additional Teeth Nil Rs.20/- tooth

74. Full Denture (Both upper and lower) Nil Rs. 450 to

Rs 1050/-

75. Full Denture (only upper or lower) Nil Rs. 250/-

76. Fixed Prosthesis Nil Rs.750/unit

77. Obturator Nil Rs.250/-

78. Splint Nil Rs.100/-

79. Repair of Denture Nil Rs.2000/plate

80. Crown or Bridge Cementation Nil Rs. 100/-


Annex 8

Report of

Farm Household Survey for

Determining Potential of AIT in NWFP

A survey of farm households was conducted in six selected districts of NWFP to assess the

potential of agricultural income tax in the province. These districts were selected by GoNWFP

and include Peshawar, Bannu, D. I. Khan, Sawabi, Haripur and Kohistan. The survey covers a

sample of 600 households drawn on strategic random sampling basis (see more details below).

These districts house nearly 22 percent of total farm households in NWFP and own 25 percent of

NWFP. Most of these districts have irrigation facilities and irrigated areas accounts for 66

percent of the cultivated area. However Haripur district has a little irrigation; the un-irrigated

areas accounts 92 percent of the cultivated area in the district. The distribution of cultivated,

irrigated and un-irrigated areas across these districts indicate that 10 percent of the total NWFP’s

cultivated area and 14 percent of irrigated area lies in D.I. Khan [see table 1]. However other

sample district accounts for 2 to 5 percent each of total farm households in NWFP. So that the

sample seems fairly representative.

Table 1: Distribution of cultivated, irrigated and un-irrigated area in NWFP

Cultivated

area as %

of NWFP’s

cultivated

area

Irrigated area

as % of

NWFP’s

irrigated area

Un-irrigated

area as % of

NWFP’s un-

irrigated area

Irrigated area

as % of

cultivated area

Un-irrigated

as % of

cultivated area

Peshawar 2.89 5.77 3.04 93.07 6.86

Bannu 2.76 3.91 2.20 66.14 31.11

D I Khan 10.19 14.36 13.71 65.72 27.13

Swabi 4.20 7.77 4.06 86.16 13.57

Haripur 3.20 0.56 14.57 8.15 91.69

Kohistan 1.71 3.24 0.66 88.19 11.62

Total 6 districts 24.96 35.61 38.23 66.54 30.15

Total NWFP 4,093,619 1,909,462 2,127,570 46.64 51.97

Source: Agriculture Census, NWFP (2000)

Sampling Framework and Field Survey

Selection of districts was purposive. A total of 616 households were selected randomly on the

basis of farm area of these districts. This gives 59 households in Peshawar, 43 in Bannu, 270 in

D I Khan, 81 in Swabi, 81 in Haripur and 82 in Kohistan. Within each district, the sample

selection is based on the distribution of farm size. According to the Agricultural Census 2000,

the average cultivated area per household is nearly 3 acres in four districts of Peshawar, Bannu,

Swabi and Haripur. Therefore mostly small farm households under 25 acres were selected for the

sample in these districts. The sample average farm size is quite different in the other two

districts. The sample average cultivated land per household in D.I. Khan is 19 acres and the

district accounts for nearly 52 percent of total farm area of the six sample districts. Therefore the

sample contains higher number of households in this district and covers mostly large land

cultivators (mostly more than 12.5 acres).


Efforts were made to capture the variation within district by surveying different union councils

within a district. For example, in district Peshawar eight union councils were selected: two

barani; two partially barani; and four irrigated. In Bannu district two union councils were visited

for household survey. Because of some administrative problem, barani area could not be covered

in this district. In both union councils all the cultivated land was reported to be irrigated by

canals. In D I Khan district, nine union councils were surveyed: seven were irrigated and two

were barani. In district Sawabi, the sample covers nine union councils: five were irrigated; two

were partially barani; and two union councils were entirely depended on rain water. Eleven

union councils were selected in Haripur, of which four irrigated, four partially irrigated and three

were barani. In Kohistan eight union councils were surveyed, three un-irrigated, four irrigated

and one partially irrigated [see Annexure I].

In order to examine the tax potential, information on these sample households was filled in a

structured questionnaire. The questionnaire is divided into three modules. In first module several

questions were asked about the cultivated land, type of tenure, type of cultivated land, etc.

Second module covers the production and cost of production of different crops during last year.

A question related to the value of production that is given to landlord to help draw the true

picture of tax potential. Third module is about livestock and covers the income and cost of

production of different livestock products during last year.

The survey team consisted of two filed teams with three enumerators each and a supervisor. The

team went out in the field for the survey in the second week of February 2004 and completed the

survey task in three weeks. Coding of the questionnaires and data entry started simultaneously

took another two weeks.

Result of the Sample Survey

Computation of land tax potential

Results of this survey are based on the weighted sample [see Annexure II for details]. The survey

data finds that total average cultivated land in these districts is 7.7 acres of which 6.5 acres are

irrigated [see table 2]. In D I Khan average cultivated land is highest (14.4 acres) that is five

times higher than that in Bannu. Similar dispersion can be seen for irrigated land. The proportion

of un-irrigated land is highest in Haripur (2.13) followed by Kohistan (1.57 acres).

Table 2: Average owned, cultivated and irrigated area (in acres) by districts

Cultivated land Irrigated land Un-irrigated land

Districts Mean SD Mean SD Mean SD

Peshawar 5.82 7.29 4.24 5.15 1.11 2.57

Bannu 3.81 3.82 3.57 3.55 0.00 0.00

D I Khan 14.40 20.26 13.80 20.12 0.36 2.96

Swabi 6.27 12.12 4.82 5.56 0.48 2.17

Haripur 4.00 3.91 1.99 3.35 2.13 3.80

Kohistan 7.20 8.83 5.64 6.62 1.57 7.15

Total 7.67 13.05 6.45 12.24 0.98 3.70

The distribution of cultivated land indicates that over three-fourth of the operated land is

cultivated by owners, 13 percent is under sharecropping, 8 percent is on lease and 3 percent is

under other operating arrangements. The share of owner operated land is highest in Kohistan

where almost all the land is operated by owners. In Haripur and D I Khan this proportion is 88


and 82 percent respectively. Incidence of sharecropping is highest in Bannu (35%) followed by

Swabi (24%) [see Annexure II, Table 2].

Looking at the distribution of owner-operated area by size of farms, it has been observed that in

Peshawar, Bannu and Haripur, operating farm size is not higher than 25 acres. In D I Khan on

the other hand, 50 percent of farm area is found to be higher than 25 acres [see Table 3]. This

proportion is 46 percent in Swabi. These findings are consistent with the figures reported in

Agriculture Census NWFP 2000. According to this Census, there are few large farms in

Peshawar, Bannu and Haripur. For example, in Peshawar 4 percent and in Bannu 6 percent farm

area can be classified into large farms, whereas in D I Khan and Kohistan, 65 percent and 36

percent of total farm area comes under the definition of large farms.

Table 3: Distribution of owner operated area by farm size and district

Farm size (acres) Peshawar Bannu D I Khan Swabi Haripur Kohistan Total

Under 5 acres 32.67 53.37 5.96 26.69 39.22 20.71 17.69

5 to 12.5 acres 24.54 25.91 27.72 18.66 40.45 41.18 30.58

12.5 to 25 acres 28.53 20.73 13.99 8.80 20.33 17.57 16.04

25 to 50 acres 14.27 0.00 26.68 9.17 0.00 9.95 17.44

More than 50 acres 0.00 0.00 25.65 36.68 0.00 10.59 18.26

Total 100 100 100 100 100 100 100

The distribution of irrigated and un-irrigated area as proportion of total cultivated area indicates

that the proportion of irrigated area is substantially higher than the un-irrigated area in selected

districts except in Haripur (see Table 4).

Table 4: Distribution of irrigated and un-irrigated farm area by farm size and districts

Districts

Irrigated farm area (acres) Un-irrigated farm area (acres)

Total farms

area

< 5

acres

5 to

12.5

acres

12.5

acres or

more

Total

irrigated

farm area

< 5

acres

5 to

12.5

acres

12.5

acres or

more

Total

un-

irrigated

farm

area

Peshawar 13,463 10,481 21,685 45,629 6,325 5,421 11,746 57,375

Bannu 27,963 6,335 10,859 45,157 45,157

D I Khan 48,762 188,492 446,426 683,680 3,967 7,878 9,848 21,694 705,373

Swabi 23,763 15,075 21,374 60,211 2,911 4,344 7,255 67,466

Haripur 41,928 30,438 17,148 89,515 43,128 39,870 28,209 111,207 200,722

Kohistan 30,320 56,850 48,782 135,952 9,381 10,507 18,762 38,650 174,602

Total 186,198 307,670 566,275 1,060,143 65,712 62,600 62,241 190,552 1,250,695

Table 4 provides a basis for the calculation of land tax potential in selected districts. Using the

rates applicable on irrigated and un-irrigated land by farm size, it has been found that the district

D I Khan has the highest potential of land tax, Rs 58 million. Similarly calculations indicate a

land tax potential of Rs 11 million in Kohistan, Rs 9 million in Haripur, Rs 4 million in Swabi

and Rs 3 million each in Peshawar and Bannu [see table 5].

Total irrigated area and un-irrigated area of NWFP is 2.8 times and 6.9 times of these six

districts. Using these multipliers on the sample results gives Rs 274 million as the estimate of the

total potential of land tax in NWFP. This abstracts from the taxation of orchards, which

accounted for only 1.9 percent of the total area covered in survey.


Table 5: Potential of land tax

District Tax on irrigated land

Tax on un-irrigated

land Total land tax

Peshawar 2,461,418 411,110 2,872,528

Bannu 2,788,149 -- 2,788,149

D I Khan 57,255,370 826,814 58,082,184

Swabi 4,112,010 210,045 4,322,054

Haripur 5,481,480 3,553,573 9,035,053

Kohistan 9,517,756 1,486,352 11,004,108

Total (6 districts) 81,616,182 6,487,893 88,104,075

Total NWFP 229,217,621 44,798,352 274,015,973

Computation of AIT potential

Total agricultural income can be derived from crops, livestock, and rent of agricultural land and

sale of by products. The information collected in the questionnaire relates to production and cost

of production of crops and livestock products. In addition, information was also sought on the

rent income received on the rented out land and value of sales of by-products. These pieces of

information enable us to estimate total agricultural incomes.

Before calculating agricultural income tax, it would be useful to examine the distribution of net

income from crops in selected districts. Table 6 shows that wheat is the primary crop in all

districts. However, in Haripur this is the main income earning crop. Sugarcane appeared the most

important crop in Bannu and D I Khan, tobacco in Swabi, plum in Peshawar and maize in

Kohistan.

Table 6: Distribution of crop income by crops and districts

District/Crop Peshawar Bannu D I Khan Swabi Haripur Kohistan Total

Wheat 10.75 17.92 17.39 28.33 40.86 14.98 18.46

Cotton 0.00 0.00 0.06 0.00 0.00 0.00 0.04

Sugarcane 3.94 33.98 39.96 13.29 0.69 0.00 29.74

Rice 0.00 3.98 8.67 7.89 0.00 0.00 6.60

Maize 3.99 3.16 1.54 4.91 21.31 83.46 9.05

Potatoes 0.00 0.00 0.02 0.03 0.00 0.13 0.03

Tobacco 3.21 0.11 0.00 37.07 0.00 0.00 3.37

Gram 0.00 0.00 12.27 0.00 0.68 0.00 8.12

Onion 0.31 5.07 0.16 0.30 0.00 0.00 0.44

Tomatoes 3.98 0.00 4.84 0.00 0.67 0.00 3.57

Orange 0.00 6.22 0.14 1.93 1.19 0.00 0.64

Plum 33.63 0.00 0.00 0.00 0.00 0.00 2.96

Guava 3.68 13.60 2.82 0.00 2.18 0.10 3.02

Fodder 6.04 1.52 4.58 2.24 12.83 0.00 4.41

Others 30.46 14.44 7.56 4.01 19.59 1.33 9.55

Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00


The survey data shows that crop income is the major source of agricultural income four out of

six districts other than Haripur and Kohistan, where people are mainly dependent on livestock

(see Table 7). In these later two districts, most of the land is owner operated, therefore the

income from land rent is found negligible. On the other hand in D.I. Khan, the proportion of

income from rent is substantially high as compared to other districts. In this district, 11 percent

respondents rented out their land which is nearly 3 percent of the total farm area covered in this

survey. The average rented land is 3.8 acres that is giving average income of Rs 18,246 per year.

Table 7: Sources of agricultural income

District

Total net crop

income

Net livestock

income Rent income Other

Total

agricultural

income

Peshawar 67.40 22.27 3.29 7.05 100

Bannu 83.49 12.30 0.00 4.20 100

D I Khan 68.15 13.48 16.66 1.71 100

Swabi 70.12 20.74 3.11 6.03 100

Haripur 39.49 54.41 0.00 6.10 100

Kohistan 47.31 50.34 0.00 2.35 100

Total 64.05 23.98 8.44 3.53 100

In addition to agriculture, many households report other sources of income, such as, wages and

salaries, non-farm income, business income and/or remittance income. Among these sources,

wages and salaries appeared as the important source of non-agricultural income. However,

agricultural income contributes more than 82 percent in total household income in these districts

while the remaining 18 percent comes from non-agricultural sources. The share of agricultural

income is smallest in Haripur (66%) followed by Peshawar (74%). In these districts, remittances

and other sources of non-agricultural income such as Zakat, donations, income from bank

deposits, saving certificates appeared as important [see Annexure Table 3].

According to the Agricultural Income Tax Act, agricultural income is defined as the sum of crop

income and rent of agricultural land. Our calculations reported in table 8 are based on three

definitions of agricultural income: one includes net income from crops only; second includes net

crop income and income from the sale of byproducts and income from the rent of agricultural

land; and third definition includes net livestock income as well. This table shows an enormous

potential of agricultural income tax in NWFP, especially in D I Khan where the farms are large

and owner operated. In addition, the proportion of income from agricultural land rent is also high

in this district.

Table 8 reports the potential of Agricultural Income Tax under three definitions of agricultural

income. This table shows that D I Khan alone has the tax potential of Rs 235 million if only crop

income is considered. Including rent, this potential increased to Rs 268 million and becomes Rs

318 million if net livestock income is included in the computation of agricultural income. This

table indicates that 74 percent of the total agricultural income tax from six selected district can be

derived from D I Khan alone.


Table 8: Potential of agricultural income tax in NWFP

District

Agricultural income defined as

Net crop income only

Net crop income + rent

received on

agricultural land

Net crop income + net

income from livestock

+ rent

Peshawar 15,645,934 20,340,627 34,725,891

Bannu 13,984,905 16,152,856 16,496,736

D I Khan 235,368,585 268,589,365 317,965,857

Swabi 29,212,149 30,657,917 31,204,320

Haripur 39,441 8,807,579

Kohistan 23,910,905 24,406,231 47,124,685

Total 318,122,478 360,186,437 456,325,068

Under the NWFP Land Tax and Agricultural Income Tax Ordinance 2000, owners of

landholding of 50 acres or more in the irrigated area and 100 acres or more in un-irrigated area

are required to file about their agricultural income. According to the Agricultural Census (2000),

47 percent of NWFP’s irrigated farm area that can be classified into farms greater than 50 acres

is in D I Khan. This proportion is 2 percent in Swabi, 1 percent n Kohistan, 0.8 percent in

Peshawar and 0.7 percent in Bannu. 30 percent of NWFP’s un-irrigated farm area that can be

classified into more than 100 acres is in D I Khan and 1 percent in Kohistan. None of the other

districts has un-irrigated farm area that can come under the classification of more than 100 acres.

In our sample, D I Khan is the only district that has large farms and more irrigated land. This

district alone gives a tax potential of Rs 151 million on the irrigated farms of more than 50 acres.

The proportion of tax that can be collected from the owners of large farmers (50 acres or more) is

64 percent of that can be collected if there is no limit of farm size. In other districts, no case of

farms with 50 or more acres of irrigated and 100 acres or more of un-irrigated land were found.

The policy for filing tax return from only those landholders possessing 50 acres or more needs to

be reviewed. Table 9 below shows a considerable potential of agricultural income tax from the

farms less than 50 acres as well. In Peshawar, for example, Rs 11 million can be collected from

the farms between 5 to 25 acres. In Bannu, 61 percent of total tax potential can be derived from

the farms of size 5 to 12.5 acres. Swabi shows highest tax potential on the farms of size 25 to 50

acres [see annex table 4]. In these calculations only net crop income is considered to calculate

the agricultural income. The actual AIT will be higher if income from rent and livestock is

included.

Table 9: Potential of AIT by size of farm

Districts

Under 5

acres

5 to 12.5

acres

12.5 to 25

acres

25 to 50

acres

More than

50 acres Total

Peshawar 249,919 5,482,397 5,818,784 4,094,834 -- 15,645,934

Bannu 30,587 8,518,305 5,436,012 -- 13,984,905

D I Khan 539,223 16,293,376 11,737,798 55,224,854 151,573,333 235,368,585

Swabi -- 315,393 5,432,054 22,763,192 -- 29,212,149

Kohistan -- 3,351,140 -- -- 20,559,765 23,910,905

Total 1,521,239 33,960,612 28,424,649 59,319,688 194,896,290 318,122,478


In our sample, there were only 15 such cases where land tax is found higher than the AIT; 14 in

D I Khan and 1 in Bannu.

Some Policy Observations

i. Kohistan has a natural cost advantage although the district does not pay much in taxes.

The cost of production is extremely low in districts like Kohistan. This is mainly because

of the high use of traditional methods of sowing and harvesting. The district is able to use

snow/ice for irrigation without paying water charges. Such situations can be best be

handled only by full implementation of AIT. However there is a need to pay attention to

improve the socio-economic, social, demographic and infrastructural indicators before

taxing the people of this district.

ii. There is a need to capture the income from livestock and poultry under AIT statutes.

Therefore, agricultural income needs to be redefined.

iii. Presently filing of tax returns under AIT by landowners with irrigated land more than 50

acres and un-irrigated more than 100 acres is mandatory. A more forceful

implementation would require revising these limits downward.

iv. Variation in soil/climate is another consideration in calculating the tax liability, which

can only be accounted for by a more forceful implementation of AIT.


ANNEXURE I: Sampling Frame

Name of districts and union councils surveyed Name of District Name of Union Councils Type of area

1. Peshawar

Landay Arbab Barani

Peshtakhara Payan Barani

Safaid Dhairi Irrigated

Shaikh Muhammadi Irrigated

Mera Kichori Irrigated

Urmur Payan Irrigated

Deh Bahadar Partially Barani

Sarband Partially Barani

2. Bannu

Amandi Irrigated

Daud Shah Irrigated

3. D. I. Khan

Kaich Irrigated

Shorkot Irrigated

Mandhra Irrigated

Murali Irrigated

Kotla Saidan Irrigated

Malana Irrigated

Balote Sharif Irrigated

Dhap Partially Barani

Lar Partially Barani

4. SWABI

Jhanda Barani

Yaqoobi Barani

Maneri Bala Irrigated

Shewa Irrigated

Gandaf Irrigated

Maneri Payan Irrigated

Asota Irrigated

Ismaila Partially Barani

Shaikh Jana Partially Barani

5. HARIPUR

Serai Saleh Partially irrigated

Darvish Partially irrigated

Pind Kamal Khan Partially irrigated

Najafpur Partially irrigated

Barela Barani

Shah Maqsood Barani

Makari Barani

Nara Amanzai Irrigated

Sikandarpur Irrigated

Khan pur Irrigated

Tenda Irrigated

6. KOHISTAN

Thoti Irrigated

Kareen Irrigated

Goshali Irrigated

Baryar Irrigated

Pattan Partial irrigated

Sagayon Barani

Chowk Dara Barani

Jijal Barani


ANNEXURE II: Tables

Table 1: Calculation of sample weights

Farm area

(2)

Total area surveyed

(3)

Sample weights

(4=2÷3)

Peshawar 119,949 304 393.44

Bannu 115,924 150 772.18

D I Khan 874,985 3,522 248.42

Swabi 174,248 501.375 347.54

Haripur 222,243 324 685.94

Kohistan 177,229 590.375 300.20

Total 1,684,578 5794.875 290.70

Total NWFP 5,589,079

Source: Agriculture Census and Farm Household Survey (2004)

Table 2: Distribution of operated land by owned, sharecropped and rented land

District Owned Rented Sharecropped Any other Total

Peshawar 52.81 24.22 21.92 1.05 100

Bannu 45.20 0.62 35.05 19.13 100

D I Khan 82.13 4.88 12.67 0.32 100

Swabi 54.38 21.96 23.66 0.00 100

Haripur 88.23 10.38 1.39 0.00 100

Kohistan 100.00 0.00 0.00 0.00 100

Total 77.32 7.94 13.18 1.56 100

Table 3: Sources of income and their share in total household income

Wages

and

salaries

Non-

farm

income

Foreign

remitt

Domes

remitt Pension Other Crop Livestock Rent Other Total

Peshawar 5.86 0.14 7.22 3.49 0.81 8.15 50.10 16.55 2.44 5.24 100

Bannu 15.47 1.90 0.00 0.00 0.32 2.77 66.40 9.78 0.00 3.34 100

D I Khan 4.08 0.32 2.64 0.00 1.21 3.17 60.36 11.94 14.76 1.51 100

Swabi 1.00 0.89 0.00 0.00 0.00 15.34 58.04 17.17 2.57 4.99 100

Haripur 0.10 0.63 0.00 0.00 0.00 32.67 26.30 36.23 0.00 4.06 100

Kohistan 0.00 0.00 0.00 0.00 0.65 10.23 42.17 44.86 0.00 2.10 100

Total 4.23 0.54 1.94 0.39 0.72 10.09 52.58 19.69 6.93 2.90 100

Table 4: Potential of agricultural income tax across farm size within district

Districts

Under 5

acres

5 to 12.5

acres

12.5 to 25

acres

25 to 50

acres

More than

50 acres Total

Peshawar 1.60 35.04 37.19 26.17 0.00 100

Bannu 0.20 60.91 38.87 0.00 0.00 100

D I Khan 3.45 6.92 4.99 23.46 64.40 100

Swabi 0.00 1.08 18.60 77.92 0.00 100

Kohistan 0.00 14.02 0.00 0.00 85.98 100

Total 9.72 10.68 8.94 18.65 61.26 100


Table 5: Potential of agricultural income tax across districts for a given farm size

Districts

Under 5

acres

5 to 12.5

acres

12.5 to 25

acres

25 to 50

acres

More than

50 acres Total

Peshawar 16.43 16.14 20.47 6.90 0.00 4.92

Bannu 2.01 25.08 19.12 0.00 0.00 4.40

D I Khan 35.45 47.98 41.29 93.10 77.77 73.99

Swabi 0.00 0.93 19.11 38.37 0.00 9.18

Kohistan 0.00 9.87 0.00 0.00 10.55 7.52

Total 100 100 100 100 100 100

Tax Potential in NWFP

Economy & Finance

tax potential of nwfp

tax structure

tax administration

resources of nwfp

tax regimeissues

government of nwfp

nontax revenue resources

agriculture income tax