Public Finance in Sindh

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Sindh is one of the four provinces of Pakistan and historically home to the Sindhi people. It is also locally known as the “Mehran” and has been given the title of Bab-ul-Islam (The gateway of Islam).The name of Sindh is derived from the Indus River that separates it from Balochistan and the greater Iranian Plateau. The capital of the province is Karachi, Pakistan’s largest city and financial hub.

An Overview

Sindh
Capital Karachi
Largest City Karachi
Government Type Province
Body Provincial Assembly
Governor Dr Ishrat ul Ebad Khan
Chief Minister Qaim Ali Shah
Area 140915 Sq Km
Population 42,400,000
Main Languages Sindhi, Urdu
Assembly Seats 168
Departments 33
Districts 24
Tehsils /Town 119
Union Council 1108
Geography

Geographically it is the third largest province of Pakistan, stretching about 579 km from north to south and 442 km (extreme) or 281 km (average) from east to west, with an area of 140,915 square kilometers (54,408 sq mi) of Pakistani territory. Generally known as the lower valley of Indus, Sindh is cut by the river for 360 miles. The province of Balochistan lies to its west while Punjab lies on the north. On the east, Sindh shares a border with the Indian state of Gujarat.

There are three well defined parts of Sindh: the Siro(سِرو)or the Head, the vicholo(وچولو)or the Middle, and the Lar (لاڙ)or the Descent, as they are often poetically defined. The other two outlying regions that constitute Sindh are Kohistan a hilly tract of Kirther on the west, and the Rajasthan or the Thar Desert in the east.

Economy

The economy of Sindh is the 2nd largest of all the provinces in Pakistan. Much of Sindh’s economy is influenced by the economy of Karachi, the capital of the province and also the largest city and economic capital of the country. Sindh remark ably has a high GDP per capita was $1,400 in 2010 which is three times that of the rest of the nation or 1.33 times the national average. Historically, Sindh’s contribution to Pakistan’s GDP has been between 30% to 32.7%. Its share in the service sector has ranged from 21% to 27.8% and in the agriculture sector from 21.4% to 27.7%. Performance wise, its best sector is the manufacturing sector, where its share has ranged from 36.7% to 46.5%. Since 1972, Sindh’s GDP has expanded by 3.6 times.

Endowed with coastal access, Sindh is a major centre of economic activity in Pakistan and has a highly diversified economy ranging from heavy industry and finance centered in and around Karachi to a substantial agricultural base along the Indus. Manufacturing includes machine products, cement, plastics, and various other goods.

Sindh is Pakistan’s most natural gas producing province. Agriculture is very important in Sindh with cotton, rice, wheat, sugar cane, bananas, and mangoes as the most important crops. Sindh is the richest province in natural resources of gas, petrol, and coal.

Government

The Government of the Sindh functions under the provisions of the Constitution of Pakistan (1973). The Province has a Provincial Assembly with 168 seats, of which 5% are reserved for non-Muslims and 17% for women.

The Provincial Assembly of the Sindh is a unicameral legislature of elected representatives of the province of Punjab, which is located in Karachi, Pakistan. 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.

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 24 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.

A landmark achievement of the 7th NFC Award for Sindh was the right for collection of sales tax on services. The Provincial Government also managed to get the right to receive service taxes, which were till then being collected by the Federal Government erroneously in the Excise mode, thus depriving the provinces of their due shares of this tax. The Government of Sindh established a separate department namely “Sindh Revenue Board” (SRB) for the collection of Sales Tax on Services during 2011-12.

Initially, the collections of service tax were made by FBR and distribution of shares was done on the basis of formula set through a “Record Note” signed by the Federal and Provincial governments. Sindh received Rs. 18.3 billion under this head from the Federal Government in 2010-11 (1st year of 7th NFC) as compared to Rs. 7.1 billion in 2009-10, indicating an increase of 158%. However, once the SRB became fully functional with the commencement of the financial year 2011-12, it was able to collect a sizeable amount of Rs. 23.9 billion (30.7% increase against 2010-11) in its very first year (2nd year of 7th NFC).

During 2012-13, the SRB reported a collection of Rs. 33.2 billion (39 % increase against 2011-12) and Rs. 42.0 billion (26.35% increase against actual of 2012-13) has been fixed as target for 2013-14. It is expected that collections under this head would even go above the target by 30th June, 2014.