In a self-congratulatory budget speech earlier yesterday, Sindh Finance Minister Syed Murad Ali Shah set the target for local tax collection at Rs154 billion for 2016-17, up 24% from the budget estimate for the current fiscal year.
Heaping praise on the three major provincial tax-collecting agencies for their “exceptional” performance, Shah said the growth rate of Sindh’s tax collection over the last three years is higher than those achieved by federal and other provincial governments.
However, he conveniently ignored one fact: the share of direct taxes in local tax receipts is less than 7%. As a result, direct taxes amounted to just Rs7.7 billion from the revised estimate of the provincial tax receipts of Rs125.2 billion for 2015-16.
Simply put, the Sindh government has grown its much-touted tax receipts mainly by collecting indirect taxes, which are regressive and imposed on goods and services rather than income or profits.
Breakdown
There are four main contributors to Sindh’s total general revenue receipts: tax receipts, non-tax revenue, federal/straight transfers and “other grants from the federal government.”
Budget documents show that tax and non-tax receipts are estimated to contribute only 22.8% of the total general revenue receipts amounting to Rs727.1 billion for 2016-17. This means the Sindh government largely depends on federal transfers and grants, constituting more than 77% of the total general revenue receipts for the next fiscal year.
Non-tax revenues are expected to be Rs12 billion in 2016-17 as opposed to tax receipts amounting to Rs154 billion, budget documents show.
The failure of the provincial government to expand the scope of direct taxes in Sindh directly connects with its unwillingness to tax agricultural income. A mainstay of the provincial economy, the agriculture sector is expected to generate only Rs 650 million in taxes in 2016-17. This amount is only 6% of Sindh’s total direct taxes expected to generate in the next fiscal year. As a result, the tax on agriculture income will be just 0.4% of the total direct and indirect provincial tax collection in 2016-17.
According to the revised budget estimate, the tax on agriculture income will equal just Rs350 million in 2015-16. This is considerably lower than the non-tax receipts of Rs559 million that the Sindh government expects to receive in the same year through fees drawn by the government’s educational institutes, including secondary and intermediate schools, technical colleges and universities.
Furthermore, the estimates of expenditures reveal that the government is expected to give agriculture subsidies, which exclude administration expenses, amounting to a staggering Rs8.7 billion in 2015-16, up 106% from 2014-15.
With heavy subsidies and near absence of taxation on the agriculture income, no wonder the provincial government is going to rely on indirect taxation using sales tax on services (Rs78 billion), provincial excise tax (Rs4.8 billion), stamps duty (Rs9.5 billion) and motor vehicle taxes (Rs6 billion) in 2016-17.
New tax measures
Shah said the standard rate of the Sindh sales tax would be reduced from 14% to 13% for 2016-17. He also announced the imposition of sales tax on chartered flight services, consultancy services, public relations services, visa processing services, debt collection services and supply chain management services. Businesses with an annual turnover of up to Rs3.6 million are exempted from sales tax on certain services.
Shah proposed a 10% increase in this exemption threshold, which means enterprises with an annual turnover of Rs 4 million will be exempted from the sales tax levy.
The finance minister also proposed increasing the scope of exemption on internet and broadband services used by households, students and researchers. He said the exemption threshold on internet services would be enlarged from two mbps speed and Rs1,500 per month per user to four Mbps and Rs2,500 per month per user.
