PROVINCIAL TAXES AND USER CHARGES IN NWFP

1. Type of Tax and Non-Tax Instruments

Taxes on physical and financial assets constitute primary sources of revenue.

These taxes include: agriculture income tax, land tax, registration fee (tax on transfer of
property), stamp duties, local rates, urban immovable property tax, excise duties, motor
vehicle tax and motor vehicle registration fee, several minor taxes like entertainment tax,
betting tax, betterment tax, tax on hotels, professions, trade and callings tax, electricity
duty, cess all types including tobacco development cess. Board of Revenue, and Excise
and Taxation Department administer these taxes.

User charges are collected on several economic and social services. Five important
branches of economic services, namely: agriculture, animal husbandry, forestry, irrigation
and works generate bulk of receipts for this sector. Social services generating revenues
include: public health, health, education, and others. Education services encompass
university/college, professional/technical colleges, and others. Secondary and primary
schools are not covered.

2. Description of Major Taxes, Non-Taxes and Services 2.1 Tax

Revenues

Land Revenues include land tax, agriculture income tax and local rates. Land tax and agricultural
income tax are levied on the owners of agricultural land under NWFP Ordinance, 2000. Local rate is levied
@ Rs 1 per acre for irrigated and Rs 0.50 per acre for non-irrigated land. The land tax is charged for each
assessment year in respect of cultivated land at flat rate varying between Rs.50 to 300 per acre. There is no
exemption from land tax. Agriculture income tax in respect of net amount of agriculture income is payable
by persons owning 50 acres of irrigated land (including matured orchards) or 100 acres of non-irrigated
land, or 25 acres of matured orchards at progressive rates ranging between 5 to 15 percent. The first
Rs.80,000 is tax exempt. In case of mixed holding, the RIM total of irrigated and non-irrigated land should
be equivalent to 50 acres of irrigated land. Owners of land include: a mortgagee or lessee and tenants of
government land. Agricultural income includes: rent or revenue derived from land used for agricultural
purposes, income derived from such land by agriculture or processing for rendering agricultural produce for
marketing, and income derived from buildings adjacent to the agricultural. Barren or uncultivated land and
small land holding (50 acres of land) is tax exempt. The tax base has been significantly eroded as in practice
tax is charged only on crop income.
Stamp duty is levied on most civil, judicial and commercial documents. The biggest
share of revenue is generated from property transactions. Specific or ad valorem rates of
duty are charged generally on affidavits, mortgage deeds, rent agreements, bills of lading
securities, bonds, bills of exchange, promissory notes, debentures, etc. The rates of duty
are generally low and have mostly remained unchanged.

PROVINCIAL TAX ADMINISTRATION

 This chapter examines broad features of the organization of Board of Revenue
(`BOR'), Excise and Taxation Department (`E&T Dept.') and administration of 'Abyana'
(water charges) and broad complexion of the tax administration, identifies the key
administrative issues/constraints in tax assessment and collection, and highlights major
issues/areas of reform. This broad analysis leads us to develop the strategic direction for
reform of organization, personnel, systems and processes, survey of tax bases,
computerization and data base development, and intra/inter department interfacing for
improved communication.

1. Institutional Structure

The Finance Department (FD): This has the overall responsibility for fiscal policy
and financial management. It is responsible for preparation of annual budgets of the
provincial government and its administration. In this connection, it also has the function
of preparation of taxation proposals to be incorporated in the Annual Budget. As such, it
is the Finance Department that is essentially involved in the formulation of tax policy.

Board of Revenue (BOR): The BOR is responsible for a multitude of functions

including land registration, collection of land revenues, maintenance of cad-astral
registers and land records, the interface of these with shelter related schemes, and
functions with respect to collection of land tax, agriculture income tax. stamp duties,
registration/mutation fees and local rate. It is also the settlement and rehabilitation
organization and the Court of Wards. Functions of the department also include its role as
land commission, colonies department and consolidation of holdings department. In its
functions of relief and settlement, the department is primarily concerned with the rural
areas. Given the diverse nature of the functions performed by the BOR in the rural areas
of the province, it has a vast outreach capability extending to individual settlements.
BOR comprises: Senior Member assisted by a Member, two Secretaries, and Director Land Record.
The Secretaries are assisted by officials dealing with establishment, budget, revenues, relief, settlement and
other works. The Senior Member ('SMBOR') heads the BOR. He is also Chief Land/Relief Commissioner, the
final appellate authority, and the administrative head of the district organizations dealing with matters
relating to land including revenue assessment and collection. A BS-17 officer designated as Deputy
Secretary serves as staff officer to SMBOR.

The other Member BOR assists the SMBOR in several areas of revenue functions.
He performs functions of Settlement Commissioner (responsible for settlement work),
Administrator Evacuee Property, and Commissioner Relief work. He also performs specific
judicial functions as assigned by the SMBOR.

Secretary-1 BOR deals with matters concerning administration, budget and

expenditure, revenues, and processing of cases pertaining to BOR and field organization.
He acts as intermediary between SMBOR and field officials. In his functions as Secretary

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BOR, he is assisted by a deputy secretary, 4 assistant secretaries and five superintendents.

Secretary-2 BOR acts as Secretary Land Commission and is responsible for

implementation of land reforms.

Director Land Records is responsible for maintenance of land record and carry out
settlement functions in his capacity as Inspector General of Registration. These functions
involve extensive interaction with the district registrars (District Revenue Officers).

The Revenue Appellate Courts (three in number) perform judicial functions against
the orders of District Officers Judicial.

BOR functions through an extensive field organization in each of the 24 districts in

NWFP. There are several levels in the hierarchy of the field (rural) organization of BOR. At
the intermediate levels of district and sub-division, revenue collection responsibilities rest
with the District Revenue Officers and Deputy Revenue Officers respectively. These act as
intermediary between BOR and field officials. These functionaries, although generally
appointed from within the District Management Group (MG) or the Provincial Civil
Service, also include officials promoted from thesildars/naib thesildars. Deputy District
Officers Judicial, Head Clerks Revenue, District Kanungos, District Revenue Accountants
and Head Vernacular Clerks assist the District Revenue Officers in performance of their
functions.

The Deputy District Officer Revenue functions through Tehsildars/Naib Tehsildars,

Kanungos, Girdawars and Patwaries. Tehsil Revenue Accountants maintain the revenue
accounts. The specialized staff of the sub-division performs the functions of lord
registration, revenue assessment and collection. The Tehsildargslaib Tehsildar heads lie
tehsil and has a number of qanungoh halqas (QH) headed by a Qanungoh. He Ilreersees a
number of Patwar circles (PC). At the PC level, there is a Patwari who controls two or
three mouzas.

Patwari is the pivotal institution in the revenue administration. He is responsible

maintenance of accurate and up-to-date land record, conduct crop estimation,
assessment and collection of land revenues and adduce evidence in various courts in

matters of litigation. He maintains the register haqdaran-e-zamin (i.e.record of

rights/ownership) for each village of his circle, incorporates necessary changes occurring
in the land ownership in the relevant record (i.e. mutation register, Roznamcha waqiati,
khasra girdawari, etc.), and prepares charsala (periodical record of rights). In matters of
crop inspection, he makes necessary entries concerning crops sown, area matured,
names of owners and tenants, rates of rent received and source of irrigation in khasra
girdawari. He makes changes in the shajra kishtwar (map of land) as observed during
girdawari.

Excise and Taxation Department: The Excise and Taxation Department is responsible for collection
of several taxes including: urban immovable property tax, motor vehicle tax, motor vehicle registration fee,
tax on trade, calling and profession, provincial excises, tax on motor vehicle dealers and real estate agents,
entertainment duty, hotel tax, cess all types including tobacco development cess, and registration fees for
videos cassette shops. BOR collected these taxes prior to the creation of a separate Excise and Taxation
Department in year 2000.

Excise and Taxation Department is headed by a Secretary assisted by two Deputy Secretaries and
three Section Officers. At the operational level, the Director General Excise and Taxation, assisted by two
Deputy Directors, heads the tax collection machinery. Each district, depending upon the level of work, has
one or two Excise and Taxation Officers. Work force essentially comprise inspectors and constables.

* Abyana Administration: Irrigation Department administers collection of abyana. At

fie id level, assessment and collection of abyana is carried out by irrigation patwaries.
Assessment is based on the land acrage under cultivation through the water supplied by
canal system at the prescribed flat rate.collections are made bi-annually on
harvesting of kharif and rabi crops. Until January 2003, assessment was made by the
irrigation department and collections by the BOR. Presently, both assessment and
collection functions are vested with the irrigation department.

Broad Complexion of Tax Administration

Provincial tax administration is weak and suffers from variety of problems. In the it has not received
much attention for several reasons. These reasons, although V mentioned in the context of tax policy
perspective, also apply to tax administration. First, given the high and growing reliance on federal transfers
(from the divisible pool and grants) provincial governments have concentrated on increasing their
respective shares in these flows with less emphasis on improving collection from own revenue sources.
Second, there has been little incentive for and flexibility in changing the provincial tax structure. For
example, the property tax remains underdeveloped because provincial Government has to hand over 85%
of the revenue collected to local governments. Similarly, changes in motor vehicle tax are severely
constrained by the mobile nature of the tax base. Third, provincial governments have been reluctant to
make innovations in their tax systems for political and institutional reasons. Lack of fully exploiting the
potential of agricultural income tax and outputs from service sectors are examples of absence of such an
effort. The overall consequence is lack of development of provincial tax administrations in NWFP - similar
to the other provinces.

It has been observed that, notwithstanding some serious efforts on the part
of provincial government in recent years, the tax collection system remains
fragmented, tax departments have a multiplicity of functions which divert
energies from the task of revenue generation, quality of available human
resources is poor and personnel lack specialization and opportunities for
training and upward mobility. The logistics and infrastructure is insufficient
in most cases completely missing. Training institutions for revenue do
not exist (except for the recently established Revenue Training Academy,
Kirk). Comprehensive tax assessment and collection procedures are either
not there or do not adequately meet the changing requirements. The
record on tax bases is mostly incomplete. Computerization, wherever
introduced, has not led to developing required databases. Inter-agency
interface on matters concerning common tax bases is absent. Institutional
policy review and analysis units are not provided in any of the revenue
collecting department. This has resulted in preparation/formulation of most
tax policy measures without much empirical analyses. This has also
deprived the Government of the institutional capacity to determine true
revenue potential and recovery of various policy/revenue instruments
administered by the provincial departments. There is no incentive
mechanism available to reward better performance by tax officials or the
collecting departments. Personnel policies concerning recruitment,
promotion, posting and transfer are mostly based on criteria other than
merit. The revenue administrations, therefore, require a paradigm shift in
all areas of concern.

With the support of international donors, GoNWFP has recently

taken cognizance of the administrative constraints and taken several
initiatives towards system improvement. Government has also
commissioned studies towards determination of revenue potential of
provincial revenues and improvement of agricultural income tax. She the
results of these studies may provide some basic framework, it is realized
both by the Government and donors that a comprehensive analysis of policy instruments
and administration of tax and non-tax revenues is imperative to bring the desired system
improvements. The present study is first phase of the proposed reform effort.