Punjab government focuses on sustainable tax growth

LAHORE: Punjab government in 2015-16 introduced tax reforms which increased the provincial revenues by 45 percent and generated an additional Rs47 billion, while accelerating the utilisation of development funds by 31 percent in the first year of the reforms.

Most of the provincial government became complacent after receiving substantial funds from the federal divisible pool. The provincial funds are distributed according to set formula from the federally collected taxes that have increased in four years by Rs1,000 billion.

According to tax experts, most of the potential avenues of taxes are with the provinces. Punjab government embarked on an ambitious development programme that could not be executed from federal transfers only. It decided to exploit the provincial tax potential. The reforms provided a framework to pursue areas of improvements in a structured and organised fashion, where all relevant stakeholders from government [finance minister, finance department, planning and development department, Punjab Revenue Authority (PRA), Board of Revenue (BOR), Excise and Taxation (E&T) Department] collaborated to implement the strategy. In addition, Punjab government has taken a collaborative approach to implement these reforms, whereby it effectively engaged with the external stakeholders/ institutions such as World Bank, DFID funded Sub-National Governance Program, GiZ, etc. The financial and governance reforms being implemented in Punjab are driving up provincial tax revenue collection, increasing budget utilisation and transparency and helping link development allocations to improvements in the service delivery.

The government of Punjab – in pursuit of its ambition to grow economy and develop the province – is highly pressured to generate more and more financial resources to deliver upon its commitment, especially the unfinished agenda before the 2018 elections. The execution of this agenda is contingent upon strengthening of core functions of the government around institutional and governance structure along with an appropriate policy, planning and budgeting.

The public-sector approach to transforming public sector resources into economic resources involves government policy and mechanisms to generate its revenues, and then use of these resources to produce public sector infrastructure, which yields social and economic benefits for the citizens. These benefits however are not an outcome of public sector investments in social and economic infrastructure; rather it requires a prudent policy and regulation along with effective governance and administrative structure by the governments.

The reforms, amid many other reasons, involved plans and initiatives to improve government capability and capacity to increase revenue mobilisation and fiscal space; allocate resources to strategic priorities, and strengthen mechanisms for budget transparency and accountability, as measures to build trust and confidence of citizens on the state.

For sustainable tax growth, Punjab government identified over 20,000 new potential taxpayers from 22 districts of the province, which has started to yield an additional GST on services that has very high tax potential.

For effective management of resources, the finance department’s capacity has been strengthened through creation of three specialised units – Debt Management Unit, Corporate Finance Unit and Tax Policy Unit – to fill capacity gaps in the areas of taxation policy, debt management and financial management of public sector enterprises. The Annual Development Programme (ADP) has been re-strategised by aligning development allocations with the Punjab Growth Strategy and to Sustainable Development Goals (SDGs). The emphasis pushed development financing for health by one percent to 7.8 percent and education by 2.2 percent to 12.4 percent during the last fiscal year.

In addition, the challenge of financing to local governments – established under PLGA 2013, mainly responsible for service delivery to the citizens in districts – has been addressed by designing of a formula-based transfer of funds, through provincial finance commission award.

The award has brought transparency and equity in resource transfer to the local governments and boosted budget allocations for education by 19 percent, for health by 37 percent and for local councils by 164 percent from the previous year. There is still a long way to go because as a result of these reforms Punjab’s Open Budget Index (OBI) score has improved by 24.6 percent from 55 in 2014 to 68 in 2017. OBI ideally should be 100 percent.

The province is still short of resources it needs to generate more revenues by further deepening governance, planning and financial reforms. The donors’ continued support for implementation of reforms for increased fiscal space, evidence-based development planning, and efficient public spending would also be crucial.