ASSIGNMENT OF ISSUES OF PAKISTAN

ECONOMY
SUBMITTED BY AMMAR KHAN
ROLL NO. 48
SUBMITTED TO DR KHIZER HAYAT
Provincial Tax System:

A provincial tax system refers to the taxes levied and collected by individual provinces
within a country. The specific taxes a province can impose, and the rates charged, may
differ from those of other provinces. This division of taxing power is often enshrined in a
country's constitution.
Here in Pakistan, for instance, the federal government collects sales tax on goods while
the provinces collect sales tax on services. This means the rate you pay on services like
restaurant meals or haircuts can vary depending on where you are in the country.
Provincial governments may also levy other taxes, such as:
• Property tax
• Motor vehicle tax
• Entertainment tax
• Professional tax
The revenue collected from these provincial taxes helps to fund provincial government
programs and services.

The level of and trend in Provincial tax revenues is given in Table 10.1. Following
the 7th NFC Award which granted the Provinces the right to levy the sales tax on
services there is a visible enhancement in the growth rate. In 2018-19, the
Provincial tax-to-GDP ratio crossed 1 percent of the GDP. However, there still exists
considerable potential for making Provincial taxes yield more revenues in a
progressive manner.
Table 10.1 also reveals that the two bigger Provinces, Punjab, and Sindh, with
higher per capita income, collect the bulk of Provincial tax revenues. Further,
according to Table 10.2, the largest Provincial tax is the sales tax on services with a
share of 52 percent and bulk of the revenue is from indirect taxes. Taxes like the
agricultural income tax and the urban immoveable property tax currently yield
only minor revenues. The focus in the Provincial tax reforms is primarily on these
three taxes
Agenda of Provincial Tax Reforms:
The development of the agricultural income tax is first focused on.

Agricultural Income Tax:

The agricultural income tax has the potential of being a very progressive income
tax given the extremely skewed distribution of farms by size in Pakistan, as shown
in Table 10.3. However, development of this tax has been limited by the potential
influence of landlords in the Provincial Legislatures.

The extremely high level of inequality in farm incomes is amply demonstrated by

the fact that the top 1 percent of farm owners have as much as 22 percent of the
farm area and the top 4 percent own 34 percent of the farm area.
However, the agricultural income tax currently yields a paltry Rs 3 billion in the
whole of Pakistan. The estimated net crop income in farms of 25 acres or more is
Rs 670 billion in 2020-21. As such the incidence of the tax is currently only 0.4
percent of net income of farmers, who should be in the tax net with large farms of
25 or more acres.
The reform of the tax should be a significant enhancement in the flat tax rates,
given that the average net income per acre is at least Rs 30,000 in Punjab.
However, the income per irrigated acre is approximately two times the income in
barani areas. Also, the flat rates should be made more progressive.
Currently, the agricultural income tax in Punjab is land based, despite the
presence of an income-based alternative. The tax structure is given below:

Urban Immovable Property Tax:

The property tax currently yields Rs 14 billion in Punjab and under Rs 6 billion in
Sindh. The tax is not only progressive in nature but also the major source of
revenue to local governments, although collection continues to be by the
Provincial Excise and Taxation Departments.
The low property tax revenue is primarily due to the rates which were assessed in
many cities decades ago.

Exemptions to properties are as follows:

• Annual rental value less than Rs 864.
• Plot size less than 120 sq. yds.
• Flat with covered area less than 600 sq. ft.
• Property owned by a widow or orphan

An exercise is undertaken stepwise to assess the revenue potential of the property

tax in the urban areas of Pakistan as follows:
• Based on the PBS Household Integrated Survey of 2018-19 the total annual
rent of households in Pakistan is Rs 1846 billion.
• The share of urban areas is 60 percent, equivalent to Rs 1107 billion.
• The distribution in urban areas is as follows:
Assessment of the revenue-potential is based on the following tax rates and tax
bases:

Therefore, the property tax could yield over Rs 115 billion, equivalent to 0.3
percent of the GDP. This is in comparison to the actual revenue of Rs 20 billion in
the country.