Challenge
In 2018, Pakistan’s National Assembly enacted the 25th Amendment to the Constitution, merging the Federally Administered Tribal Areas (FATA) with the province of Khyber Pakhtunkhwa (KP). FATA at the time was characterized by a lack of a formal governance system, low levels of human capital and limited access to services and was of the poorest regions of Pakistan. FATA had tax-exempt status, meaning that the merger had the potential to significantly affect KP’s fiscal situation. The Khyber Pakhtunkhwa Tribal Decade Strategy (TDS) was developed to address the region’s unique and multifaceted challenges, and the related “Accelerated Implementation Plan” estimated the cost of supporting development and stability in the former tribal districts at $1.38 billion over three years (2018-2020). The plan had a funding gap of $726 million. While some of this gap was reduced by transfers from Pakistan’s federal government, KPRMP was instrumental in mobilizing resources to finance service delivery.
Approach
Launched in 2019, KPRMP aimed to increase KP’s capacity for revenue collection and management of public finances to provide better services. The project supported improvements in the administration of taxes, including services sales tax, urban immoveable property tax, stamp duty, and motor vehicle tax. The project is also helping to create data linkages between three tax authorities of the province and with third party withholding agents to support tax intelligence. The project also worked to improve filing compliance and digital payments. It supported the update and digitalization of property tax records and linked them to geographic information system (GIS) maps to enable improved collection. The project included a technical assistance (TA) component to strengthen e-government. This was informed by global experience on the use of ICT to streamline and digitize selected business processes of different government departments to support effective and efficient monitoring and decision making.
The project’s design was premised on a “whole of country” approach and complements federal and provincial projects such as the Pakistan Raises Revenue Project and the KP Spending Effectively for Enhanced Development Program, which helped ensure resource allocation to priority areas for development, including in the priority areas of education, health, water supply and sanitation.
Results
KPRMP has helped the government of Khyber Pakhtunkhwa to significantly increase tax revenue, allowing an expansion of public services to former FATA. It has increased transparency of public financial management, which has contributed to rebuilding the social contract in an area previously impacted by fragility and conflict.
During implementation, tax revenue collection increased from a baseline $99.4 million in FY19 to $216 million in FY22—a difference of more than the initial International Development Association (IDA) investment and surpassing the project’s target. Underpinning this achievement, the filing compliance of Services Sales Tax has improved from the 51 percent baseline to 77 percent in FY22. Urban Immoveable Property Tax records of six cities have been updated, digitized, and linked with the GIS map, resulting in expansion of the tax base by 54 percent.
This increase in revenue created the fiscal space for the GoKP to increase spending in priority areas like health. The health allocation in the provincial budget increased from $320 million in FY19 to $597 million, including a budget of 10 percent for the newly merged districts in FY23. This has supported the provision of universal health insurance through the Sehat Card Plus program. Together with other projects, including the KP Spending Effectively for Enhanced Development Program, the KP Human Capital Investment Project, and the Asian Development Bank’s KP Health System Strengthening Program, the project has supported health outcomes in the KP province through increased revenue collection. The increased amount of own-source revenue mobilized (the provincial taxes) also meant that the GoKP was able to sustain its operations as well as finance an emergency response during the COVID-19 pandemic and the flood crises of 2022.
The project has also helped strengthen public financial management by substantially reducing the allocation of resources to unapproved projects from 49 percent in FY18 to 22 percent in FY23. Furthermore, 90 out of a total 113 Tehsil Municipal Authorities (local government division authorities) are using the new Financial Management Information System to record revenue and expenditures, thereby significantly boosting transparency in the stewardship of public finances.
