Punjab budget and conventional wisdom

WHAT will be new about Punjab budget for the financial year 2010/11? “Apart from huge increase in the total federal transfers to the province from the divisible pool under the new National Finance Commission award and other sources, it will be a conventional budget,” Tanvir Ashraf Kaira, the provincial finance minister, told Dawn last week.

Thanks to the increased provincial share under the new NFC award finalised earlier this year, the provincial government is expecting federal transfers to surge to Rs450 billion 2010/11 from the budgetary estimates of Rs337 billion – including the share from the divisible pool, federal grants, and straight transfers – for the outgoing year.

“Initially we expected the total federal transfers to shoot up to Rs470 billion. But the estimates have been revised down recently,” an official of the provincial finance department said. “The exact numbers will be available only after the announcement of the federal budget,” he said.

In answer to a question about the cost of devolution of different departments and responsibilities to the provinces from the federation after the passage of the landmark 18th amendment to the constitution, the minister said the devolution of responsibilities as result of abolition of concurrent lists would be transferred to the provinces from 2011/12.

“Since the concurrent list has been abolished post-NFC award, the federal government would also transfer additional funds to the provinces for their responsibilities,” he said. The federal government had given a verbal commitment to the provinces to this effect during the process of negotiations on the new NFC award. “We had an idea at that time about the abolition of the concurrent list and were able to get the pledge from the federal government,’ Kaira said. But, Islamabad had not given this commitment in writing. Therefore, it was not binding on the federation and could require fresh negotiations on the issue, he admitted.

Tax rationalisation: The provincial budget, likely to be presented before the Punjab assembly towards the end of this week, will also propose “rationalisation” of some major provincial taxes. “Frustrated by its inability to increase provincial tax revenue, the Punjab government is considering rationalising some major provincial taxes in the budget for the next financial year to improve provincial tax revenues,” a senior provincial official, who refused to give his name, said.

“The rates of some taxes like stamp duty and property taxes may go up in order to generate more revenue for the province’s development,” he said and pointed out that rationalisation of stamp duty in 2007 had resulted in an increase of more than 13 per cent or Rs1 billion in its collection from Rs7.5 billion in 2006.

“A little bit of change in tax rates according to the economic conditions and requirements of the province always results in increased revenue collection,” the official said. But, he said, the decision on the proposal as to which taxes were to be rationalised and to what extent was yet to be approved by the chief minister.

Punjab has been trying to reform its tax administration to increase provincial revenues for the last several years under the governance reforms programme financed by the Asian Development Bank, but its efforts have so far not produced the desired results due to bureaucratic resistance and lethargy as well as rapid growth in the size of the federal transfers to the province.

Like in other provinces, Punjab’s bureaucracy has never been able to achieve the budgetary tax collection targets. But that has not deterred it from increasing the targets every year. In 2008/09 the province could collect only Rs28 billion at the end of the year against the target of Rs40 billion. This year too, it had set a tax collection target of Rs49.5 billion, but has revised down it to just Rs35 billion, or 25 per cent higher than last year’s collection.

The officials, however, are still not sure if the government will be able to achieve it. The budgetary target for the next financial year 2010/11 is now being increased to above Rs59 billion or more than double the actually tax revenue collection in 2008/09. “You bet the government will never even get close to the proposed tax collection target for the next financial year let alone achieve it,” another provincial official said.

“Since the federal government has taken the major task of collecting tax revenue on behalf of the provinces upon itself, they do not find it much important to reform their own tax administration systems and increase provincial tax collection,” said a former senior provincial finance department official.

“That is precisely why provincial tax revenues constitute only a fraction – may be 10 per cent or even much less than that – of the income of any of the four provinces. The federal money, on the other hand, constitutes more than 80 per cent of their total revenues. Why work when some one else is working for you?,” he asked.

That may be largely true, but other factors – primitive tax administration, rampant corruption in provincial tax departments, tax exemptions allowed to powerful lobbies like landholders and industrialists, etc – are also responsible for the poor provincial tax effort performance in Punjab. Although finance minister Tanvir Ashraf Kaira had promised to initiate tax reforms in the province in his budget speech for the outgoing year 2009/10, nothing has been done so far. Nor do officials see happening the next fiscal year.

Some officials blame narrow base of provincial taxes for low provincial tax revenues. But others don’t subscribe to this view. “Property tax, stamp duty and agriculture tax are considered to be major revenue generating taxes,” a senior official of the planning & development department said on the condition of anonymity.

Some analysts say, Punjab can generate several billion rupees in tax revenues in one year provided it withdraws agriculture and property tax exemptions and reform its tax collecting departments on modern lines as suggested by the ADB. But will it?

Development budget: Apart from enhancing tax collection target, the Punjab government is also mulling over raising budgetary allocations for development next year to around Rs190 billion from Rs175 billion for the outgoing year. Few believe that the province has the capacity to spend that kind of money.

The government has already quietly slashed its development spending for the outgoing year. “We have released Rs140 billion for development so far and I hope that this amount will be spent by the end of the year,” says minister Kaira.

But many officials reject his assertion, saying the utilisation of development funds is more likely to remain below Rs130 billion.

The minister says the thrust of development spending next year will on social sector and economic infrastructure building. The development funding for social sector is being enhanced to Rs72 billion from Rs59 billion during the outgoing year. “In addition to social sector, we also plan to make allocations for pro-poor subsidies under subsidised flour and sasti roti scheme in the current budget,” Kaira added.

The enormous subsidy of Rs30 billion or more given on controversial wheat flour and sasti roti schemes during the outgoing year is often blamed to have played havoc with the provincial finances. Many analysts term the schemes as “nothing more than giving charity to the poor”. It would have been much better if the government had put the money in productive sectors for creating sustainable jobs,” an economic expert said. He was of the view that a large part of the subsidy had ended up in the pockets of those who did not deserve it or was lost in corruption. Sources say, the budgetary allocations for maintenance of law and order could also see a quantum jump from Rs43 billion set aside in the budget for the outgoing fiscal year, necessitated by the rising incidence of terrorist attacks in the province.—Nasir Jamal

Source: http://www.dawn.com/wps/wcm/connect/dawn-content-library/dawn/in-paper-magazine/economic-and-business/punjab-budget-and-conventional-wisdom-760