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A comparison of fiscal effort by provincial governments in Pakistan.

This paper uses the representative tax system approach to develop indices for fiscal effort, and also develops cost recovery indices of provincial governments in Pakistan which enable us to make inter-provincial comparisons of fiscal effort. The results indicate substantial variation in the level of fiscal effort among the provinces. Based on utilisation of variable taxable capacity, the paper suggests the appropriate resource mobilisation strategy for each province and for the country as a whole.

JEL classification: H2

Keywords: Representative Tax System Approach, Relative Fiscal Effort, Potential Tax Revenue

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Considerable variation exists among Provinces of Pakistan with respect to their abilities to raise revenues. This is due to underlying varied provincial characteristics like area, resources, population, nature of economic activities and provincial GDPs. The main focus of this paper is to make inter-provincial comparison of their fiscal efforts after allowing for difference in taxable capacity. Therefore, objective of such inter-provincial comparisons of fiscal effort is to identify whether provincial revenue collection is limited by capacity (revenue base) or if a province is unwilling to exploit the available capacity to generate revenues. (1) This will enable development of the appropriate resource mobilisation strategy for each province and help in enhancing the overall provincial tax revenue to GDP ratio which is currently below 1 percent of the GDP. This analysis will also help policy-makers in designing fiscal equalisation formulae for assisting those provinces which have demonstrated lesser capacity to raise revenues from their own sources.

The paper is organised as follows: Section II identifies trend in revenue receipts of provinces. Section III reviews the literature on measurement of fiscal effort. Section IV describes the methodology used in this paper. Section V presents data and the derived estimates of fiscal efforts. Section VI draws conclusions and gives policy recommendations.

II. TREND IN PROVINCIAL REVENUE RECEIPTS

We observe a low to moderate growth in both provincial tax and non-tax revenues of all provinces (Table 1). Overall, the provincial tax revenue to GDP has declined from 0.55 percent in 2009-01 to 0.46 percent in 2009-10. This is one of the factors contributing to the overall lack of improvement in the tax to GDP ratio of Pakistan. Summary of provincial revenue receipts (Table 1) reveals that share of provincial own tax revenues in total revenue receipts is very low and appears to have shown no significant improvement over time. Smaller provinces appear to rely more on non-tax revenues as compared to tax revenue receipts. Surprisingly, share of non-tax revenue of Khyber Pakhtunkhwa has been the largest among all provinces since 2000. Sindh has shown substantial growth in the share of non-tax revenues followed by Punjab in last decade. Growth in the share of non-tax revenues both in Khyber Pakhtunkhwa and Balochistan has remained negative in last decade probably due to war on terror.

III. LITERATURE REVIEW

Bahl, et al. (2008) point out that economic, political and administrative constraints like low taxable capacity, much of informal sector, weak tax administration, narrow tax base and strong political pressure from interest groups as source of inhibiting revenue growth, at both national and sub-national level, in developing countries, including Pakistan. There are three main approaches in literature to measure tax effort:

(i) Regression or Econometric Modelling.

(ii) Representative Tax System.

(iii) Cost Recovery Index (CRI).

The first two approaches are conceptually similar. In the regression or econometric modelling approach tax revenues or tax to GDP ratios are regressed on variables likely to serve as revenue bases for a sample of tax units (like states, countries or provinces). Estimated parameters or coefficients of explanatory variables are considered as average tax rates which are then applied to each revenue base to calculate potential revenues. Ratio of actual to potential revenue is used as an index of fiscal effort [Lotz and Morss (1997); Bahl (1971); Tanzi (1987); Tanzi (1992); Chelliah (1971); Tait and Echingreen (1978); Ghaus and Khan (1995)].

On the other hand, in the Representative Tax Approach, tax revenues and tax bases are selected for a set of sample tax units (states, countries or provinces). Sum of tax base of all tax units is divided on sum of revenue of all tax units for each selected source to represent national average tax rate which then is applied to tax base to calculate potential tax revenue. Ratio of actual to potential tax revenue serves as an index for fiscal effort [Bahl (1971); Tait and Echingreen (1978); Tanzi (1981)]. Representative Revenue System is, more or less, similar to the Representative Tax System Approach. Representative Revenue System in addition to tax revenues also includes non-tax revenues [State Fiscal Capacity and Effort: An Information Repot (1986)].

Cost Recovery Index measures fiscal effort in terms of recovery of current expenditure from non-tax revenue receipts. It is a ratio between revenue receipts and current expenditure on a particular service or group of services.

Ghaus and Khan (1995) used Representative Tax System Approach to measure fiscal effort of the provinces of Pakistan from 1990 to 1995. This work excludes non-tax revenues from analysis. Our paper contributes to the literature in two ways. Firstly, this paper measures provincial fiscal effort for both tax and non-tax revenues. Secondly, this paper extends previous analysis of provincial fiscal effort from year 2000 to 2010.

IV. METHODOLOGY

In first part of paper, following Ghaus and Khan (1995), this study uses Representative Tax System Approach [Bahl (1972)] to calculate Indices for Fiscal Effort for individual tax revenue receipts of all provinces and Overall Indices for Fiscal Effort for all provinces. In addition to this, in second part of the paper, we also construct Cost Recovery Indices for individual non-tax revenue receipts and Overall Cost Recovery Indices for each province.

As a first step, we identify the major provincial tax revenue sources and respective tax bases. Based on provincial tax revenue statistics, available in Annual Budget Statements of the provinces, we select following major provincial tax revenue receipts and respective tax bases for our analysis as shown in Table 2. Revenue sources with similar tax bases are grouped together.

In second step, we estimate average tax rate:

tjy = [[summation].sup.4.sub.i=1] [T.sub.ijy]/ [[summation].sup.4.sub.i=1] [TB.sub.ijy]

Where tjy measures national average tax rate for tax source j (j=l to n) in year y

[4.summation over (i=1)][T.sub.ijy] = Sum of tax revenue of all provinces from source j in year y and

[4.summation over (i=1)][TB.sub.ijy] = Sum of tax base of all provinces for revenue source j in year y

In third step, we apply average tax rate on respective tax base to calculate provincial potential tax revenue from each source j:

[PTR.sub.ijy] = [t.sub.jy] X [TB.sub.ijy]

Where [PTR.sub.ijy] = Potential Tax Revenue of province i from resource j in year y.

[TB.sub.ijy] = Tax Base of province i for source j in year y.

In fourth step, we construct an Index for Fiscal Effort ([IFE.sub.ijy)] for tax revenue of province i from source j in year y:

[IFE.sub.ijy] = [T.sub.ijy]/[PTR.sub.ijy]

In fourth step, we construct Overall Index for Fiscal Effort ([OIFE.sub.iy)] for province i in year y:

[OIFE.sub.iy] = [[summation]].sup.n.sub.j=1 [T.sub.ijy]/[[summation].sup.n.sub.j=1] [PTR.sub.ijy]

Where [n.summation over (j=1)] [T.sub.ijy] = Sum of tax revenues of a province i from all sources (j=l to n) in year y.

[n.summation over (j=1)] [PTR.sub.ijy] = Sum of potential revenues of province i from sources year y.

For second part of our paper, we select following major significant non-tax revenue sources and revenue expenditures.

(1) Law and Order

(2) Community Services

(3) Social Services

(i) Education

(ii) Health

(4) Economic Services

(i) Agriculture

(ii) Irrigation

We construct Cost Recovery Index ([CRI.sub.ijy)] of province i for non-tax revenue from source j in year y as follows:

[CRI.sub.ijy] = [NTR.sub.ijy]/[CE.sub.ijy]

Where [NTR.sub.ijy] is non-tax revenue of province i from source j in year y and [CE.sub.ijy] is current expenditure of province i from source j in year y

We construct Overall Cost Recovery Index ([OCRI.sub.iy)] for province i in year y as follows:

[OCRI.sub.iy] = [[summation].sup.n.sub.j] [NTR.sub.ijy]/[[summation].sup.n.sub.j] [CE.sub.ijy]

[n.summation over (j=1)] [NTR.sub.ijy] = Sum of non-tax revenues of province i from all sources 1 to n in year y.

[n.summation over (j=1)] [NTR.sub.ijy] = Sum of current expenditure province i from all sources 1 to n in year y.

V. DATA ANALYSIS AND CONSTRUCTION OF INDICES FOR FISCAL EFFORT

This paper uses Annual Budget Statements of provinces, their White Papers on Budgets for various years and Regional Accounts of Pakistan: Methodology and Estimates-1973-2000 by Kaiser Bengali and Mahpara Sadaqat as main data sources. This study reveals that provincial shares of value added by sector have remained quite stable over the time span of twenty seven years. Therefore, we estimate provincial value added by sector in Table 2-A (2) by using average annual growth rate of provincial shares from 1973 to 2000 based on Regional Accounts of Pakistan: Methodology and Estimates1973-2000 by Bengali (2005-06). By using methodology described in previous section, we construct following Indices:

(i) Indices for fiscal effort by province for individual taxes,

(ii) Overall indices for fiscal effort for all provinces,

(iii) Cost recovery indices by province for individual non-tax revenues, and

(iv) Overall cost recovery indices for all provinces.

VI. CONCLUSIONS AND POLICY RECOMMENDATIONS

Punjab has the highest fiscal effort which has gradually improved over time since 2000, while the position of Sindh has remained variable in the last decade. Despite this, Sindh has been managing its fiscal effort through imposition of sizable Sindh development fee for infrastructure maintenance (Rs 13 Billion in 2010-11) that it charges from the users of Karachi Port. This implies a very high degree of 'tax exporting' to other provinces. There is also some degree of tax exporting among all provinces in motor vehicle tax because motor vehicles may be used in some other province other than of their registration where tax is collected. But the degree of tax exporting in motor vehicle tax is far less as compared to that in Sindh development fee for infrastructure maintenance. Overall index for fiscal effort of Sindh has dropped to 0.76 in 2010. Fiscal effort of Khyber Pakhtunkhwa has also tended to decline from a high level probably due to military operations on account of insurgency and war on terrorism. Balochistan has shown no improvement in its fiscal effort.

Our estimates show that if Sindh, Khyber Pakhtunkhwa and Balochistan improve their fiscal effort indices to 1, there exists potential for raising Rs 6 billion (3) additional tax revenue i.e., Rs 3 billion from Sindh, Rs 2 billion from Khyber Pakhtunkhwa and almost one billion Balochistan.

Indices for all tax revenues and overall index for fiscal effort for Punjab (greater than or almost equal to one) indicate its firm determination to realise its available taxable capacity (Table 3). For Sindh, on the other hand, low indices (less than one) for all taxes are indicative of scope for improvement in its fiscal effort (Table 3). Our conclusion is consistent with the results of previous study by Ghaus and Khan (1995). There is the potential for higher revenues in Sindh from land revenue and agriculture income tax, and electricity duty. Khyber Pakhtunkhwa needs to focus especially on stamp duties and property tax, land revenue, agriculture income tax and electricity duty to improve resource mobilisation. Baiochistan has scope for substantial improvement in its fiscal effort for all taxes except for motor vehicle tax.

All provinces need to raise their cost recovery ratios, especially in economic services. Subsidies on social services may be also, the justified on redistributive grounds. Also, the low national average tax rates for all taxes revenues (Table 3-A) (4) and poor cost recovery levels highlight the roots of fiscal problems faced by the governments. Therefore, we also suggest raising tax rates and user cost recovery for resource mobilisation at province level across the board.

The overall conclusions are, first, the low and generally declining effective tax rates of provincial taxes which have led to a fall in the provincial tax to GDP ratio to below 0.5 percent of the GDP. All provinces need to enhance these rates as the part of their resource mobilisation strategy. Second, fiscal effort varies considerably among the provinces and the smaller provinces in particular have potential for higher revenues which they are currently not exploiting. Third, user charges need to be developed, especially on economic services.

Statistical Appendix
Table 1-A

Tax Revenue Receipts by Province and Source

(Rs Billions)
 Punjab Sindh

Source 2000 2005 2010 2000 2005 2010

Stamp Duties and
Property Tax 4.85 11.33 15.39 2.17 4.84 5.85

Motor Vehicle Tax 1.17 3.36 5.91 0.64 1.60 3.30

Land Revenue 1.91 3.14 5.75 0.15 0.36 0.45

Electricity Duty 0.97 1.50 3.28 0.20 0.36 0.40

Tax on Professions,
Trade and Callings 0.21 0.27 0.43 0.14 0.18 0.25

Total 9.11 19.60 30.76 3.30 7.08 10.05

 Khyber Pakhtunkhwa Balochistan

Source 2000 2005 2010 2000 2005 2010

Stamp Duties and
Property Tax 0.23 0.35 0.94 0.06 0.20 0.21

Motor Vehicle Tax 0.50 0.60 1.11 0.12 0.19 0.38

Land Revenue 0.35 0.37 0.59 0.03 0.05 0.06

Electricity Duty 0.26 0.18 0.42 0.02 -- --

Tax on Professions,
Trade and Callings 0.04 0.08 0.11 0.00 0.00 0.00

Total 1.20 1.51 3.34 0.23 0.44 0.69

 Total

Source 2000 2005 2010

Stamp Duties and
Property Tax 7.31 16.72 22.39

Motor Vehicle Tax 2.43 5.75 10.69

Land Revenue 2.43 3.91 6.85

Electricity Duty 1.44 2.05 4.10

Tax on Professions,
Trade and Callings 0.39 0.52 0.80

Total 13.83 28.62 44.84

Source: Annual Budget Statements, (various years), Finance Department,
Government of Punjab.

Annual Budget Statements, (various years), Finance Department
Government of Sindh.

Annual Budget Statements, (various years), Finance Department,
Government of Khyber Pakhtunkhwa.

Annual Budget Statements, (various years), Finance Department,
Government of Balochistan.

Table 2-A

Tax Bases

 Punjab Sindh

Value-added 2000 2005 2010 2000 2005 2010

Ownership of
 Dwellings +
 Finance and
 Insurance 134.8 221.7 553.5 78.1 131.2 340.8
Transport,
 Storage and
 Communication 210.5 399.0 994.6 137.5 260.3 649.4
Agriculture 525.5 747.7 1716.3 254.9 363.0 832.9
Electricity
 and Gas 82.0 109.9 144.5 33.6 45.1 59.3
Wholesale and
 Retail Trade
 and Other
 Services 514.4 896.5 2122.0 265.9 464.3 1070.0
Total 1467.2 2374.9 5530.9 770.1 1264.0 2952.4

 Khyber Pakhtunkhwa Balochistan

Value-added 2000 2005 2010 2000 2005 2010

Ownership of
 Dwellings +
 Finance and
 Insurance 20.7 33.9 84.0 9.2 14.7 34.8
Transport,
 Storage and
 Communication 38.9 73.9 184.0 14.0 26.6 66.3
Agriculture 98.8 140.5 322.6 45.3 64.4 147.8
Electricity
 and Gas 18.6 24.9 32.7 5.4 7.3 9.6
Wholesale and
 Retail Trade
 and Other
 Services 136.9 238.5 554.1 26.2 45.3 109.4
Total 313.8 511.6 1177.4 100.2 158.3 367.9

 Total

Value-added 2000 2005 2010

Ownership of
 Dwellings +
 Finance and
 Insurance 242.8 401.6 1013.0
Transport,
 Storage and
 Communication 401.0 759.8 1894.3
Agriculture 924.5 1315.6 3019.6
Electricity
 and Gas 139.6 187.3 246.1
Wholesale and
 Retail Trade
 and Other
 Services 943.4 1644.6 3855.6
Total 2651.3 4308.8 10028.6

Source: Calculated by authors by using cumulative growth rate of
provincial shares of value added by sector from 1973 to 2000 based
on Regional Income accounts by Bengali (2005-06).

Table 3-A
National Average Tax Rate (%)
 [t.sub.jy] =
 [[summation].sup.4.sub.i=1]
 [T.sub.ijy]/[[summation].
 sup.4.sub.i=1]
 [TB.sub.ijy]/

Tax Source (j) 2000 2005 2010

Stamp Duties and Property Tax 3.01 4.16 2.21
Motor Vehicle 0.61 0.76 0.56
Land Revenue and Agriculture Income Tax 0.26 0.30 0.23
Electricity Duty 1.03 1.09 1.67
Tax on Professions, Trade and Callings 0.04 0.03 0.02

Source: Calculated by authors based on statistics in Table 1-A and 2-A.

Table 4-A

Potential Tax Revenues

(Rs Billions)

 Punjab Sindh

Source 2000 2005 2010 2000 2005 2010

Stamp Duties and
 Property Tax 4.06 9.23 12.23 2.35 5.46 7.53
Motor Vehicle 1.27 3.02 5.61 0.83 1.97 3.67
Land Revenue and
 Agriculture
 Income Tax 1.38 2.22 3.89 0.67 1.08 1.89
Electricity
 Duty 0.85 1.20 2.41 0.35 0.49 0.99
Tax on
 Professions,
 Trade and
 Callings 0.21 0.28 0.44 0.11 0.15 0.22
Total 7.65 15.78 24.73 4.02 8.40 13.20

 Khyber Pakhtunkhwa Balochistan

Source 2000 2005 2010 2000 2005 2010

Stamp Duties and
 Property Tax 0.62 1.41 1.86 0.28 0.61 0.77
Motor Vehicle 0.24 0.56 1.04 0.08 0.20 0.37
Land Revenue and
 Agriculture
 Income Tax 0.26 0.42 0.73 0.12 0.19 0.34
Electricity
 Duty 0.19 0.27 0.55 0.06 0.08 0.16
Tax on
 Professions,
 Trade and
 Callings 0.06 0.07 0.11 0.01 0.01 0.02
Total 1.64 3.40 5.26 0.52 1.05 1.64

 Total

Source 2000 2005 2010

Stamp Duties and
 Property Tax 7.31 16.72 22.39
Motor Vehicle 2.43 5.75 10.69
Land Revenue and
 Agriculture
 Income Tax 2.43 3.91 6.85
Electricity
 Duty 1.44 2.05 4.10
Tax on
 Professions,
 Trade and
 Callings 0.39 0.52 0.80
Total 13.83 28.62 44.84

Source: Calculated by authors based on statistics in Table 2-A & 2-A.

Table 5-A

Non-Tax Revenue Receipts of the Provincial Governments

(Rs Billions)
 Punjab Sindh

 2000 2005 2010 2000 2005 2010

General 0.23 0.18 0.20 0.08 0.06 0.19
 Administration
Law and Order 0.71 1.28 2.61 0.45 0.74 1.38
Community 0.47 0.95 0.90 0.07 0.17 0.21
 Services
Social Services 0.99 0.85 1.18 0.38 0.30 0.39
 (i) Education 0.60 0.47 0.75 0.28 0.24 0.30
 (ii) Health 0.17 0.18 0.43 0.10 0.06 0.07
Economic Service 3.25 5.71 5.20 0.95 0.57 1.02
 (i) Agriculture 0.37 0.60 0.45 0.08 0.04 0.09
 (ii) Irrigation 2.10 3.84 2.70 0.75 0.49 0.60
Total 8.90 14.05 14.41 3.13 2.65 4.24

 Khyber Pakhtunkhwa Balochistan

 2000 2005 2010 2000 2005 2010

General 0.10 0.05 0.10 0.00 0.00 0.01
 Administration
Law and Order 0.19 0.23 0.48 0.05 0.06 0.16
Community 0.24 0.19 0.34 0.03 0.06 0.05
 Services
Social Services 0.53 0.24 0.28 0.03 0.05 0.08
 (i) Education 0.36 0.10 0.09 0.01 0.01 0.01
 (ii) Health 0.17 0.14 0.18 0.02 0.03 0.05
Economic Service 0.76 0.01 1.57 0.21 0.36 1.35
 (i) Agriculture 0.14 0.10 0.07 0.10 0.15 0.12
 (ii) Irrigation 0.22 0.37 0.28 0.05 0.13 0.08
Total 2.69 1.41 3.38 0.49 0.85 1.90

 Total

 2000 2005 2010

General 0.40 0.29 0.50
 Administration
Law and Order 1.40 2.31 4.63
Community 0.79 1.36 1.49
 Services
Social Services 1.93 1.44 1.92
 (i) Education 1.25 0.82 1.15
 (ii) Health 0.45 0.40 0.73
Economic Service 5.17 6.65 9.13
 (i) Agriculture 0.69 0.88 0.72
 (ii) Irrigation 3.12 4.82 3.65
Total 15.20 18.97 23.93

Source: Annual Budget Statements, (various years),
Finance Department, Government of Punjab.

Annual Budget Statements, (various years), Finance Department
Government of Sindh.

Annual Budget Statements, (various years), Finance Department,
Government of Khyber Pakhtunkhwa.

Annual Budget Statements, (various years), Finance Department,
Government of Balochistan.

Table 6-A
Current Expenditure of Provincial Governments

(Rs Billions)

 Punjab Sindh

 2000 2005 2010 2000 2005 2010

General 11.81 14.69 44.91 5.82 14.44 38.65
 Administration
Law and Order 8.65 19.23 59.52 6.34 12.91 32.84
Community Services 3.22 2.29 1.64 1.87 2.19 1.92
Social Services 33.91 10.85 46.67 18.18 13.28 22.81
 (i) Education 26.34 4.61 21.50 13.50 2.97 11.97
 (ii) Health 6.45 5.50 22.25 4.05 3.19 9.04
Economic Service 9.63 9.67 39.67 4.25 15.54 18.41
 (i) Agriculture 3.65 3.25 5.80 1.33 5.66 5.12
 (ii) Irrigation 4.44 4.18 6.73 1.52 3.26 5.51
Total 108.08 74.28 248.70 56.87 73.43 146.26

 Khyber Pakhtunkhwa Balochistan

 2000 2005 2010 2000 2005 2010

General 3.17 12.90. 28.35 2.30 2.12 7.23
 Administration
Law and Order 2.36 4.20 20.93 1.77 3.15 5.83
Community Services 1.74 0.57 0.07 1.46 1.14 2.48
Social Services 13.09 17.14 4.43 5.39 2.16 5.05
 (i) Education 10.29 13.89 4.43 3.73 0.78 2.70
 (ii) Health 2.65 2.99 3.67 1.21 0.82 1.61
Economic Service 3.42 6.94 7.13 1.54 1.94 5.95
 (i) Agriculture 1.04 1.03 0.63 0.57 0.84 1.75
 (ii) Irrigation 0.98 0.93 1.44 0.28 0.46 2.80
Total 38.74 60.58 71.07 18.26 13.39 35.39

 Total

 2000 2005 2010

General 23.10 44.14 119.14
 Administration
Law and Order 19.12 39.48 119.11
Community Services 8.29 6.19 6.12
Social Services 70.56 43.42 78.96
 (i) Education 53.86 22.24 40.60
 (ii) Health 14.37 12.50 36.57
Economic Service 18.84 34.09 71.16
 (i) Agriculture 6.58 10.78 13.30
 (ii) Irrigation 7.22 8.83 16.47
Total 221.94 221.68 501.42

Source: Annual Budget Statements, (various years),
Finance Department, Government of Punjab.

Annual Budget Statements, (various years), Finance Department
Government of Sindh.

Annual Budget Statements, (various years), Finance Department,
Government of Khyber Pakhtunkhwa.

Annual Budget Statements, (various years), Finance Department,
Government of Balochistan.


REFERENCES

Bahl, Roy W. (1971) A Regression Approach to Tax Effort and Tax Ratio Analysis. Staff Papers IMF 18, 570-612.

Bahl, Roy W. (1972) A Regression Approach to Tax Effort and Tax Ratio Analysis. Staff Papers IMF 19, 87-124.

Bahl, Roy, Wallace and Cyan Musharraf Sally (2008) The Challenge of Intergovernmental Fiscal Relations in Pakistan: The Property Tax Dimension. International Studies Programme. Andrew Young School of Policy Studies. Georgia State University, Atlanta Gorgia. (Working Paper 08-25).

Balochistan, Government of (Various Issues) Annual Budget Statements. Finance Department, Pakistan.

Balochistan, Government of (Various Issues) White Paper on Budget. Finance Department, Pakistan.

Bengali, Kaiser and Mahpara Sadaqat (n.d.) Regional Accounts of Pakistan: Methodology and Estimates-1973-2000. Karachi: Social Policy and Development Centre.

Chelliah, Raja J. (1971) Trends in Taxation in Developing Countries. Staff Papers IMF 18, 254-331.

Ghaus, Rafia and A. Rauf Khan (1995) Relative Fiscal Effort by Provincial Governments in Pakistan. Pakistan Economic and Social Review 34:1, 55-75.

Khyber Pakhtunkhwa, Government of (Various Issues) Annual Budget Statements. Finance Department, Pakistan.

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Lotz, Jorgen R. and Elliot R. Morss (1997) Measuring Tax Effort in Developing Countries. Staff Papers IMF 14, 99-478.

Punjab, Government of (Various Issues) Annual Budget Statements. Finance Department, Pakistan.

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Sindh, Government of (Various Issues), Annual Budget Statements. Finance Department, Pakistan.

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Stotsky and Wolde Mariam (1997) Tax Effort in Sub-Saharan Africa. IMF, Fiscal Affairs Department. (WP/97/107).

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Comments

Given that Pakistan is a federal state and there is a mechanism of intergovernmental transfers in the form of NFC Awards, the efficiency of provincial governments in raising revenues has been debated at many forums including various meetings of National Finance Commissions. In spite of this, there is a dearth of empirical research that systematically analyses this issue with reference to Pakistan. In fact, there are two main caveats to hinder the research on such an important issue: (1) unavailability of provincial GDPs/GRPs and (2) a narrow tax base of provincial taxes that offered limited scope to raise provincial tax revenues.

Despite these challenges, Ghaus and Khan (1995) is one of the few attempts that analysed fiscal efforts by provincial governments. This paper is based on their methodological framework but uses different set of assumptions, which are somewhat concerning. First, computation of provincial GDP is based on the assumption that provincial shares of value added by sector are quite stable. Considering this, provincial share are extrapolated for the years 2005 and 2010 by using average annual growth rate of provincial shares for the period 1973 to 2000. Given that Pakistan's GDP was rebased at 1999-2000, which not only changed sectoral shares but also caused an increase in GDP at least by 20 percent compared to that at base 1980-81 methodology [see SPDC (2004)], (1a) this assumption seems implausible for computing provincial GDPs/GRPs. Recent attempts that were made by the World Bank to provide updated provincial GDPs can be used in this regard.

Second concern is related to the choices for tax bases for some sectors reported in Table 2. For instance, value added in transport, storage and communication is used as a tax base for motor vehicle tax, which needs to be revisited. This is because motor vehicle tax is levied on the engine capacity of the stock of registered vehicles in a province and not on the value added.

In addition, Table 1 provides the growth rates of total revenue receipts, provincial own tax revenue, provincial own non-tax revenue, which present a misleading picture. For instance, annual average growth in total revenue receipts is higher in Punjab compared to rest of the provinces. However, the growth rate in both provincial own tax revenue and provincial own non-tax revenue is much higher in Sindh compared rest of the provinces. The reason for higher growth in total revenue receipts in Punjab is due to comparatively higher federal transfers and grants to the province, which is not presented in Table 1 and needs to be added.

Finally, a valuable attempt is made by computing cost recovery index. While this index provides a comparative picture about efficiency in cost recovery among provinces, it needs to be further disintegrated for social services. For instance, cost recovery in social services depends on the investment choices made by any provincial government. If they invest heavily in primary education then their cost recovery may be zero. But if they invest heavily in tertiary education their cost recovery would be very high. Given that Pakistan is still far behind in achieving the goal of universal primary education, the former is a better choice but it would be less efficient in terms of cost recovery.

Muhammad Sabir

SPDC, Karachi.

(1a) SPDC (2004) "A Shift towards Growth" Annual Review of State of the Economy, Social Policy and Development Centre, Karachi.

(1) Stotsky and Mariam (1997) identify this objective for international comparisons.

(2) See statistical appendix.

(3) Difference between potential and actual tax revenues.

(4) See statistical appendix.

Ijaz Hussain <ljazhussain786@yahoo.com> is Assistant Professor at School of Social Sciences, Beaconhouse National University, Lahore. Sumbal Rana <sumbalrana@gmail.com> is Lecturer at School of Social Sciences, Beaconhouse National University, Lahore.

Authors' Note: We are particularly grateful to Dr Hafiz A. Pasha, Dean, School of Social Sciences and Dr Aisha G. Pasha, Director, Institute of Public Policy at Beaconhouse National University, Lahore for their advice and guidance.
Table 1

Summary of Provincial Own Revenue Receipts

 Punjab

 2000 2005 2010 Average
 Annual
 Growth
 %
Total Revenue

 Receipts 98.6 181.3 436.5 16.0
(a). Provincial
 Own Tax
 Revenue 12.1 19.1 36.8 11.8
Share (%) 12.3 10.6 8.4 -3.7

(b). Provincial

 Own Non
 Tax Revenue 13.1 37.6 76.2 19.3
Share (%) 13.3 20.7 17.5 2.8

 Sindh

 2000 2005 2010 Average
 Annual
 Growth
 (%)
Total Revenue

 Receipts 55.9 102.6 240.5 15.7
(a). Provincial
 Own Tax
 Revenue 5.3 10.6 22.1 15.3
Share (%) 9.6 10.3 9.2 -0.4

(b). Provincial

 Own Non
 Tax Revenue 10.8 16.2 93.2 24.0
Share (%) 19.4 15.8 38.8 7.2

 Khyber Pakhtunkhwa

 2000 2005 2010 Average
 Annual
 Growth
 (%)
Total Revenue

 Receipts 36.2 45.3 133.4 13.9
(a). Provincial
 Own Tax
 Revenue 1.6 2.3 3.5 8.2
Share (%) 4.4 5.2 2.6 -5.0

(b). Provincial

 Own Non
 Tax Revenue 18.0 12.7 53.7 11.5
Share (%) 49.7 28.1 40.3 -2.1

 Balochistan

 2000 2005 2010 Average
 Annual
 Growth
 (%)
Total Revenue

 Receipts 19.7 29.0 44.8 8.6
(a). Provincial
 Own Tax
 Revenue 0.4 0.8 1.1 9.4
Share (%) 2.3 2.6 2.5 0.8

(b). Provincial

 Own Non
 Tax Revenue 5.7 7.7 1.3 -13.8
Share (%) 29.1 26.5 2.9 20.6

 Total

 2000 2005 2010 Average
 Annual
 Growth
 (%)
Total Revenue

 Receipts 210.4 358.2 855.2 15.1
(a). Provincial
 Own Tax
 Revenue 19.5 32.8 63.5 12.6
Share (%) 9.3 9.2 7.4 -2.2

(b). Provincial

 Own Non
 Tax Revenue 47.7 74.2 224.4 16.8
Share (%) 22.7 20.7 26.2 1.5

Source: Annual Budget Statements, (various years), Finance Department,
Government of Punjab.

Annual Budget Statements, (various years), Finance Department Government
of Sindh.

Annual Budget Statements, (various years), Finance Department,
Government of Khyber Pakhtunkhwa.

Annual Budget Statements, (various years), Finance Department,
Government of Balochistan.

Table 2

Selected Provincial Tax Revenue Sources and Tax Bases

Tax Revenue Tax Bases

(i) Stamp Duties and Value added in ownership of
 Property Tax Dwellings + Finance and Insurance

(ii) Motor Vehicle Tax Value added in Transport,
 Storage and Communication
(iii) Land Revenue and
 Agriculture Income Tax Value added in Agriculture

(iv) Electricity Duty Value added in Electricity
 and Gas

(v) Tax on Professions, Value added in Wholesale and
 Trade and Callings Retail Trade and Other Services

Table 3

Index for Fiscal Effort (IFE)

 Punjab Sindh

Source 2000 2005 2010 2000 2005 2010

Stamp Duties and 1.20 1.23 1.26 0.92 0.89 0.78
Property Tax

Motor Vehicle 0.92 1.11 1.05 0.76 0.81 0.90

Land Revenue and 1.38 1.41 1.48 0.22 0.34 0.24
Agriculture Income Tax

Electricity Duty 1.14 1.25 1.36 0.58 0.73 0.41

Tax on Professions, 0.99 0.94 0.99 1.29 1.20 1.13
Trade and Callings

Overall Index for 1.19 1.24 1.24 0.82 0.84 0.76
Fiscal Effort

 Khyber Pakhtunkhwa Balochistan

Source 2000 2005 2010 2000 2005 2010

Stamp Duties and 0.37 0.25 0.51 0.23 0.32 0.27
Property Tax

Motor Vehicle 2.11 1.07 1.06 1.45 0.95 1.02

Land Revenue and 1.34 0.87 0.81 0.23 0.24 0.17
Agriculture Income Tax

Electricity Duty 1.34 0.67 0.77 0.30 -- --

Tax on Professions, 0.65 1.00 0.99 0.00 0.07 0.04
Trade and Callings

Overall Index for 0.73 0.44 0.63 0.44 0.41 0.42
Fiscal Effort

Source: Calculated by authors.

Table 4

Cost Recovery Index *

 Punjab Sindh

 2000 2005 2010 2000 2005 2010

General Administration 0.020 0.013 0.004 0.013 0.004 0.005
Law and Order 0.082 0.067 0.044 0.072 0.057 0.042
Community Services 0.145 0.414 0.549 0.036 0.075 0.107
Social Services 0.029 0.078 0.025 0.021 0.022 0.017
 (i) Education 0.023 0.102 0.035 0.020 0.081 0.025
 (ii) Health 0.026 0.032 0.019 0.024 0.017 0.008
Economic Service 0.338 0.590 0.131 0.223 0.037 0.055
 (i) Agriculture 0.102 0.185 0.077 0.062 0.006 0.018
 (ii) Irrigation 0.474 0.918 0.401 0.490 0.149 0.109
Overall 0.082 0.189 0.058 0.055 0.036 0.029

 Khyber Pakhtunkhwa Balochistan

 2000 2005 2010 2000 2005 2010

General Administration 0.030 0.003 0.003 0.001 0.001 0.001
Law and Order 0.079 0.055 0.023 0.025 0.020 0.028
Community Services 0.135 0.323 4.603 0.017 0.051 0.019
Social Services 0.040 0.014 0.063 0.005 0.022 0.016
 (i) Education 0.035 0.007 0.021 0.003 0.015 0.003
 (ii) Health 0.063 0.047 0.050 0.013 0.034 0.028
Economic Service 0.223 0.001 0.220 0.133 0.187 0.227
 (i) Agriculture 0.130 0.093 0.108 0.184 0.177 0.067
 (ii) Irrigation 0.225 0.398 0.192 0.170 0.273 0.028
Overall 0.069 0.023 0.048 0.027 0.064 0.054

 Total

 2000 2005 2010

General Administration 0.017 0.007 0.004
Law and Order 0.073 0.059 0.039
Community Services 0.096 0.219 0.244
Social Services 0.027 0.033 0.024
 (i) Education 0.023 0.037 0.028
 (ii) Health 0.031 0.032 0.020
Economic Service 0.274 0.195 0.128
 (i) Agriculture 0.105 0.082 0.054
 (ii) Irrigation 0.432 0.546 0.222
Overall 0.068 0.086 0.048

Source: Calculated by authors.

* Non-Tax Revenue Receipts/Current Expenditure.

Fig. 1. Overall Index for Fiscal Effort

Overall Index for Fiscal Effort (IFE)

 2000 2005 2010

PUNJAB 1.19 1.24 1.24
SINDH .82 .84 .76
KHYBER PAKHTUNKHWA .73 .44 .63
BALOCHISTAN .44 .41 .42

Source: Calculated by authors.

Note: Table made from bar graph.

Fig. 2. Overall Cost Recovery Index

 2000 2005 2010

PUNJAB 0.08 0.19 0.06
SINDH 0.05 0.04 0.03
KHYBER PAKHTUNKHWA 0.07 0.02 0.05
BALOCHISTAN 0.03 0.06 0.05

Source: Calculated by authors.

Note: Table made from bar graph.
COPYRIGHT 2010 Reproduced with permission of the Publications Division, Pakistan Institute of Development Economies, Islamabad, Pakistan.
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Article Details
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Title Annotation:FISCAL EQUALISATION, FISCAL EFFORT AND PROVINCIAL BUDGETS
Author:Hussain, Ijaz; Rana, Sumbal
Publication:Pakistan Development Review
Article Type:Report
Geographic Code:9PAKI
Date:Dec 22, 2010
Words:6190
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