Public Finance in Khyber Pakhtunkhwa

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The Khyber Pakhtunkhwa is one of the most legendary places on earth. The Khyber Pakhtunkhwa, as it is and was popularly known, of all Pakistan’s Provinces, is arguably the most diverse ethnically; the most varied in terrain and sports a vigorous cultural spectrum.

An Overview

Khyber Pakhtunkhwa
Capital Peshawar
Largest City Peshawar
Government Type Province
Body Provincial Assembly
Governor Engineer Shaukatullah
Chief Minister Pervez Khattak
Area 74,521 sq km
Population 17 Million
Main Language Pushto
Assembly Seats 124
Departments 33
Districts 25
Directorates / Attached Department 2
Geography

The Khyber Pakhtunkhwa is largely located on the Iranian plateau and Eurasian land plate, while peripheral eastern regions are located near the Indian subcontinent and this has led to seismic activity in the past. It covers an area of 74,521 km² (28,773 sq mi). According to the 1998 census, the total population of Khyber Pakhtunkhwa was approximately 17 million out of whom 52% are males and 48% females.

The density of population is 187 per km² and the intercensal change of population is of about 30%. Geographically the province could be divided into two zones: the northern one extending from the ranges of the Hindu Kush to the borders of Peshawar basin; and the southern one extending from Peshawar to the Derajat basin.

The northern zone is cold and snowy in winters with heavy rainfall and pleasant summers with the exception of Peshawar basin, which is hot in summer and cold in winter. It has moderate rainfall. The southern zone is arid with hot summers and relatively cold winters and scantly rainfall. Its climate varies from very cold (Chitral in the north) to very hot in places like D.I. Khan.

The major rivers that cross the province are Kabul River, Swat River, Chitral River, Panjgora River, Bara River, Karam River, Gomal River and Zob River. Its snow-capped peaks and lush green valleys of unusual beauty attract tourists from far and wide while its art and architecture no less known than the historic Khyber Pass.

Once the cradle of Gandhara civilization, the area is now known for its devout Muslims who zealously guard their religion and culture and the way of life that they have been following for centuries. The capital and largest city of the province is Peshawar and other main cities include Nowshera, Mardan, Mansehra, Charsadda, Ayubia, Nathia Gali and Abbottabad. The province’s main districts include Dera Ismail Khan, Kohat, Bannu, Peshawar, and Hazara Division.

The region varies in topography from dry rocky areas in the south to forests and green plains in the north. The climate can be extreme with intensely hot summers to freezing cold winters. Despite these extremes in weather, agriculture remains important and viable in the area. The hilly terrain of Swat, Kalam,Upper Dir, Naran and Kaghan is renowned for its beauty and attracts a great many tourists from neighbouring regions and from around the world. Swat-Kalam is also termed ‘a piece of Switzerland’ as there are many landscape similarities between it and the mountainous terrain of Switzerland.

The chai-khanas of Peshawar’s Old City allow visitors to witness the multicultural inhabitants in a relaxed setting. Qissa Kahani Bazaar and other parts of Peshawar can remind visitors of an Arabian Nights tale. The Takht-i-Bahi is perhaps the most impressive Buddhist ruin in the province and dates back to the 1st century BCE.

Economy

The economy of Khyber Pakhtunkhwa, a province of Pakistan, is the 3rd largest in the country. Khyber Pakhtunkhwa share of Pakistan’s total GDP has historically comprised 10.5%, although the province accounts for 11.9% of Pakistan’s total population, rendering it the second-poorest province after neighboring Balochistan.

The part of the economy that Khyber Pakhtunkhwa dominates is forestry, where its share has historically ranged from a low of 34.9% to a high of 81%, giving an average of 61.56%. Currently, Khyber Pakhtunkhwa accounts for 10% of Pakistan’s GDP, 20% of Pakistan are mining output and since 1972, it has seen its economy grow in size by 3.6 times.

After suffering for decades due to the fallout of the Soviet invasion of Afghanistan, today they are again are being targeted for totally a different situation of terrorism. Agriculture remains important and the main cash crops include wheat, maize, Tobacco (in Swabi), rice, sugar beets, as well as various fruits are grown in the province. Some manufacturing and high tech investments in Peshawar has helped improve job prospects for many locals, while trade in the province involves nearly every product.

The bazaars in the province are renowned throughout Pakistan. Unemployment has been reduced due to establishment of industrial zones. Numerous workshops throughout the province support the manufacture of small arms and weapons of various types. The province accounts for at least 78% of the marble production in Pakistan.

Government

The Government of the Khyber Pakhtunkhwa functions under the provisions of the Constitution of Pakistan (1973). The Province has a Provincial Assembly with 124 elected members, constituent of 99 Regular seats, 22 seats reserved for Women and 3 seats for Non-Muslims.

The Provincial Assembly elects the Chief Minister of the Province who forms a Cabinet of Ministers to look after various Departments. The Chief Minister is the Chief Executive of the Province. The Federal Government appoints a Governor as head of the Provincial Government.

The bureaucratic machinery of the province is headed by a Chief Secretary who coordinates and supervises functions of various Departments headed by Departmental Secretaries. In Khyber Pakhtunkhwa for the Planning & Development Department the in charge is the Additional Chief Secretary who reports to the Chief Secretary.

All the Secretaries are assisted by Additional Secretaries, Deputy Secretaries, Section Officers and other staff. The Departments may have attached Departments and autonomous or semi-autonomous bodies to look after various functions. The Province is divided into 25 districts.

Financial Management System

The Government budgeting is based on the principle of equitable distribution of resources among its citizens through the tools of various fiscal measures. Government first outlines its expenditure programmes and then follows planning for revenue generation. It is a well set rule in Public Finance that an increase in expenditure at a constant tax rate or a decrease in the tax rate at no change in expenditures will always lead to budget deficits. In case of a reverse scenario, a surplus  budget  will  appear,  while,  balance  budget  is  an  equilibrium  between receipts  and  expenditures.  The need for any one of these three options depends upon the overall economy of the country or on the will of the government.

In the context of fiscal federalism, provincial budget is largely a function of Federal Divisible Pool receipts. In this arrangement, all major and robust taxes are  classified  under  Federal  Divisible  Pool  taxes  since  provinces  are  largely dependent on Federal Divisible Pool receipts.

The most important component of provincial budgetary receipts is transfers from the Federal Government every year. These represent the share of the provinces in direct and indirect taxes and duties levied and collected by the Federal Government. Taxes and duties which are subject to distribution between the Federal Government and the Provinces include:

  • Tax on Income
  • Wealth Tax
  • Capita Value Tax
  • Tax on the Sale or Purchase of the Goods
  • Export Duty on Cotton
  • Customs Duty
  • Federal Excise Duty (Excluding excise duty on Gas Charged at Well head)
  • Any other tax which may be levied by the Federal Government

The revenue distribution between the Federation and Provinces is made under the National Finance Commission Awards. National Finance Commission consisting of the Minister of Finance of the Federal Government and Ministers of Finance of the various Provincial Governments. This commission allocates a share for each Province from the divisible pool of taxes collected. In addition, the Provincial Governments receive grants from the Federal Government. The basis of distribution currently enforced is governed by 7th NFC.

Under the 7th National Finance Commission Award, the percentage share of the provinces in the Divisible Pool is 57.5% w.e.f. FY 2011-12. Under the 7th NFC Award, the Divisible Pool now comprises Taxes on Income, Customs Duties, Sales Tax, Federal Excise excluding Excise Duty on Gas charged at well head, and any other tax levied by the Federal Government. With the exception of Federal Excise Duty on gas, the taxes listed above are distributed between the provinces and the Federal Government in the ratios given below:

Vertical Distribution of Resources
Provincial Share Federal Share
57.50% 42.50%
The provincial share is divided amongst the provinces in the ratios given below.  This share was decided on the basis of a multiple criteria based on population, inverse population density, revenue and poverty.
Horizontal Distribution of Resources
Punjab Sindh Khyber Pakhtunkhwa Balochistan
51.74% 24.55% 14.62% 9.09%
As regards expenditure, each Provincial Government incurs outlays according to the commitments made in individual budget estimates. Because of commonality in the financial provisions of the Federal and Provincial Governments, procedures and practice in budgeting and accounting are similar and vary only in detail.

Accordingly  the  Provincial  Government  of  Khyber  Pakhtunkhwa  has  taken  the  following initiatives/measures to increase Provincial Own Revenue and Tax to GDP ratio in line with clause-02 of Article-09 of the 7th National Finance Commission Award.

A-TAX RECEIPT:
  • Revision of rates of various Taxes i.e. UIP, Motor Vehicles, Tax    on Profession Trade and Calling, Tobacco, sugarcane Development Cess, Court Fee etc.
  • Provincialization and rationalization of Rates of Capital Value Tax (CVT).
  • Expansion of Tax net in respect of UIP and Tax on Profession Trade and Callings.
  • Categorization of property situated at different locations for the purpose of Tax and extension of rating area.
B- NON-TAX RECEIPT:
  • Revision of fee under electricity Rules, Timber Duty rates, Water Charges, Contractor Registration and Tender Form fee.
C- OTHER REFORMS:
  • Persons who have declared Agriculture Income in their Tax Returns received from FBR are brought under Agriculture Income Tax net.
  • Comprehensive instructions have been issued for activities from crop inspection, assessment of Agriculture Income, filling of return and issuance of tax demand.
  • Following reforms are also under consideration towards harmonization of Agriculture
  • Income Tax
    • Introduction of uniform rates of Agriculture Income Tax in all the provinces.
    • Withholding Tax on Marketable surpluses of Agriculture Sector which is purchased through formal mechanism.
    • Reduction in the Exemption ceiling of 05 Acre under Land Tax.

Make it mandatory for owners and cultivators of 12 ½   acres or more of cultivated irrigated land, 25 acres of cultivated un-irrigated land or mature orchard having net income  more  than 100,000/-  to  self  assess  their  Agriculture  Income  and  file Agriculture Income Tax Returns. As a result of which cultivators have been brought into the tax net and the number of tax payers increased from 112 to 4799.

An Overview of Budget 2012-13

During budget for the FY 2012-13, ample funds were allocated to avenues of economic growth in the province, like, Hydel power generation, oil and gas exploration, tourism, mineral development and agriculture. For the social uplift of the province, resources were generously committed to Social sectors, like Education, Health and Population welfare.

In the FY 2012-13, the governance enacted the Local Government Act 2012, which changes the optics of governance at districts. In pursuance of the LGA 2012, Budget 2013-14 (salary and non salary) has been remodeled on the Pre-2001 format and necessary adjustments in relevant grants have been made. This is a vital deviation from the budget formats of the past 12 years and must be kept in mind while reviewing Budget 2013-14.