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 5
th
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 6
th
NFC Award compared
with 37.5% in the 5
th
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 taxpayers 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
governments 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 Pakistans 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 countrys 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 NWFPs 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
provinces 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
DI Khan 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 Balochist an
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 NWFPs
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
NWFPs 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, GoNWFPs 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 revenue
6
, 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
NWFPs 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 provinces 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 GoNWFPs 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 GoNWFPs 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 provinces 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. GoNWFPs 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 governments 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. GoNWFPs 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
GoNWFPs 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 Patwaris 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
disputes
7
.

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 provinces 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 I ncome 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 2003-04
8
, 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 (UI PT)

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
U
I
P
T

C
o
l
l
e
c
t
i
o
n
-
M
i
l
l

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 NWFPs 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 NWFPs 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 departments 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 numbers
10
. 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 registered
11
.
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 Attorney
12
.

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 NWFPs 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 Department
14
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.

charges
15
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 groups
16
. 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--
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.
GoNWFPs 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 unfunded
17
, pension/gratuity formulae are lavish, and the pension
payments have been growing sharply. Other contingent liabilities are debt
guaranties and workers compensation obligations of GoNWFPs 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
I nstitutions 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 NWFPs
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 NWFPs
cultivated
area
Irrigated area
as % of
NWFPs
irrigated area
Un-irrigated
area as % of
NWFPs 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 NWFPs 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 NWFPs 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=23)
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

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Tax Potential in NWFP

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Tax Potential in NWFP

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