In Khyber Pakhtunkhwa federal transfers have amounted to around 90% of the total revenues (including general purpose grants and earmarked grants) – which have been highly erratic as they are subject to actual revenue collection by the federal agencies. This created risks and ambiguities for provincial budget execution and fiscal discipline and often resulted in significant budget cuts on investments and funding of a quarter of development budget from foreign assistance. These risks have also been highlighted by the PEFA Assessment 2017. The low revenue base of the province is attributed to weak tax administration, low taxable capacity within government, a substantial informal sector, and political unwillingness to exploit revenue potential due to pressures from interest groups.
To decrease the Government of KP’s reliance on federal transfers and donor assistance it established the KP Revenue Authority (KPRA) with the support of SNG to administer, levy and collect sales tax on services through the KP Finance Act, 2013.
Key revenue mobilisation interventions during SNG lifespan are listed below:
- SNG supported the KPRA carry out a pilot sales tax survey in three target districts, i.e. Abbottabad, Mardan and Peshawar. The survey focused on: i) determining current exemptions and estimating the tax potential of registered service providers; and, ii) identifying new service providers to expand the tax net in the province. The survey was conducted without any serious protest or law and order situation, and was successful in identifying an additional tax potential of PKR 2.26 billion per annum (£17 million). The survey also identified problems in the current tax administration and gave practical recommendations for policy reforms related to governing laws, citizen awareness, incentivizing voluntary compliance, tax audits, capacity building, etc.
- With the support of SNG, KPRA initiated tendering process for a full scale tax survey worth PKR 25 million to replicate the sales tax survey methodology across all districts of KP.
- SNG developed a proposal for inflation based adjustment approach for periodic revision of tax rates. The methodology was used to identify additional revenue potential of PKR 3.08 billion (over three years) from royalty rates on minerals.
- A rationalization exercise was undertaken during budget preparation for 2014-15 and 2015-16 in view of the ballooning salary budgets. Discrepancies worth PKR 6.578 billion were identified in the salary component of previous year’s budget. This helped government in allocating this amount for other deserving investment areas.
- An IT based payroll audit of the Education Department was undertaken in collaboration with the DFID-funded education support programme (KESP) which identified potential overpayments of approximately PKR 143 million.