The federal government’s failure to meet its revenue targets has been a serious concern for the provincial governments that mainly rely on their share from the Federal Divisible Pool for their expenditures. The recent verdict by the Supreme Court of Pakistan reinstating the local governments has added to the importance of self-reliance and revenue generation at the local government level.

How can local governments generate their own revenues besides ensuring transfers from the Provincial Finance Commission (PFC)? As of now, the PFC transfers are dependent on the National Finance Commission (NFC) transfers. The provinces have received less funds than budgeted due the failure of the Federal Board of Revenue to meet the revenue collection targets. The only choice for the local governments then is to generate their own funds.

Faisal Rashid, a senior public finance management consultant at Oxford Policy Management, who has previously served in the Punjab government as a deputy secretary in charge of resources, says the local governments have two options. First, they can impose a tax on assets e.g. property tax. Second, they can charge user fees for the services they provide. As for property tax, Rashid points out that it contributes only about 0.05 percent of the GDP. (By comparison, it contributes 0.65 percent of the GDP in Turkey). The Indian city of Bangalore alone collects more under the head than the entire Punjab.

If property tax is made a local government subject a sharp increase in collection is possible. Currently, the Punjab is paying 20 percent of the property tax collection as collection charges.

User fees could also serve as a big revenue stream. Faisal Rashid suggests that the services to be covered could include waste collection, water supply, sewer management and parking in congested areas.

After the 18th Amendment to the Constitution, provinces were allowed to collect the sales tax on services. Provincial revenue authorities were established for this purpose. The Punjab had been getting Rs 7-8 billion from the federal government under this head before the creation of Punjab Revenue Authority (PRA). However the PRA, whose service structure is yet to be completed, has fixed itself a collection target of Rs 150 billion a year. So far, it has collected over Rs 100 billion during the ongoing fiscal year.

Rashid says levying and collection of local taxes can follow a similar pattern. Further, he says, this will reduce the provincial government’s subsidy burden in the developed districts and allow it to focus on less-developed ones. The Lahore Metropolitan Corporation, for example, could be allowed to collect property tax, charge a cattle market fee and charge parking and waste collection fees. This could enable it to pay subsidies from its own revenue. The model is not new.

Punjab Finance Minister Hashim Jawan Bakhat agrees that there is a need for third tier taxation through local governments. “People are more inclined towards paying taxes against which they get visible utilisation. For example, if the government is charging for the sewer lines, supplying safe drinking water and sanitation services the people do not question the charges. But they do question the taxes levied on petroleum products,” he says.

The minister says the government is waiting for the detailed judgment of the Supreme Court on the local bodies’ status. In the long term, he says, some taxes will have to be devolved to the local governments for better service delivery. The current system, he says, will continue until the new PFC award.

The writer works for The News, and has reported extensively on Indo-Pak trade ties for over a decade and a half. He tweets @Jawwadrizvi. He can be reached at: jawwadar@gmail.com