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NFC Award, taxes and new government

NFC Award, taxes and new government

The taxation rights under the prevalent constitutional scheme need reconsideration allowing provinces to raise adequate resources

In the recent months, many noted economists and reputed analysts have showed with facts and figures that the 18th Constitutional Amendment and 7th National Finance Commission (NFC) Award are harming fiscal stability. In a recent write-up, it is insinuated that “the imbalances triggered by the seventh NFC Award directly and indirectly contributed to a range of macroeconomic problems and turned out to be an unmitigated disaster for the federation”. These concerns, bona fide or otherwise, have been totally ignored by all political parties in their election manifestos and in interactions with people at jalsas (congregations) and with media in talk-shows/interviews.

It is a fact, as highlighted by Ali Salman in his op-ed, Economic stability put on back burner by major political parties, “Pakistan’s economic progress notwithstanding still faces uphill challenges on its path of development, including sustained economic growth, while creating more jobs through the expansion of private sector. The energy sector does require deeper policy engagement to improve governance. Tax environment remains on the weakest front”.

The issue of NFC Award vis-à-vis provisions of 18th Constitutional Amendment relating to decentralisation of fiscal powers cannot be examined in isolation. The economic wizard of last government, now a fugitive, in Budget in Brief for 2016-17, stated that 7th NFC Award would remain in practice for the said year. It also adopted for the budget for the current fiscal year 2018-19. This shows the apathy of Parliament towards its constitutional obligations.

The last National Assembly during its tenure (2013-18) and Senate as permanent body till today paid no attention to address the issue of fresh NFC Award after fresh census. Even the apex court is oblivious of this constitutional lapse. The 8thNFC Award was constituted on July 21, 2010, but failed to deliver. The 9th NFC, constituted on April 24, 2015, held its 1st meeting on April 28, 2015, and what happened thereafter was just an exercise in futility.

In the last three budgets, our economic managers followed 7th NFC Award. In 2018, it was followed without taking into account results of the latest census in utter violation of supreme law of the land! The provinces are equally apathetic — in fact happy that in accordance with the framework of the 7th NFC Award, their share in federal taxes and straight transfers is increasing every year. The provincial share in federal revenue receipts was estimated at Rs2384 billion during 2017-18, which decreased to Rs2316 billion in revised estimates. For 2016-17, it was Rs2136 billion showing an increase of 15.3 per cent over revised estimates of fiscal year 2015-16. The provinces were jubilant to know that the provincial share in federal revenue receipts, estimated at Rs1849 billion in 2015-16, was increased to Rs1852 billion in revised estimates of fiscal year 2015-16! They failed to notice decline in straight transfers to provinces, from estimated Rs102,379 million in 2015-16 to Rs100,361 million and further reduction to Rs91,738 million in 2016-17!

Depriving provinces of the right to levy sales tax on goods is the fundamental flaw of our Constitution. It was available to them before independence. The Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948 with the promise to give it back as soon as financial position of Centre improved—a promise that remains unfulfilled.

It is clear that the federal and provincial governments are not concerned with the fundamental issue of judicious and evenhanded distribution of taxation rights between the Centre and federating units that can help empower masses and ensure prosperity for all. In 2009, the representatives of provinces and federal government showed “satisfaction” over the 7th NFC Award. In fact, there was a mood of jubilation that a consensus had been reached.

This confirms the hollowness of our ruling classes as they failed to comprehend the real issue faced by the federation that was how to empower the provinces so that they have full autonomy in fiscal and administrative matters. The issue was not only devising a just and fair formula for distribution of the net proceeds of the taxes—commonly known as divisible pool—but the revisiting of Article 142, 160 of the Constitution vis-à-vis bringing the less-privileged and under-developed areas at par with big sprawling cities where mass influx of people is playing havoc and creating ghettos.

The Centre, at present, is transgressing on this constitutional right of provinces by levying income tax on gross value of some services and then out of so-called divisible pool—comprising unlawfully collected taxes belonging to provinces—gives them peanuts as charity. This is a lamentable act that should be stopped immediately. The ownership of all the resources of a province and its exploitation for the benefit of the people of that province with further allocation from the divisible pool is the real issue that the new government must address if we want to satisfy the needs of less-privileged people living in remote and underdeveloped areas of all provinces.

Depriving provinces of the right to levy sales tax on goods is the fundamental flaw of our Constitution. It was available to them before independence. The Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948 with the promise to give it back as soon as financial position of Centre improved—a promise that remains unfulfilled with none of the provinces ever raising its voice to seek fulfilment. In all major federations—USA, Canada and Switzerland—the federating units have the exclusive right to levy tax on goods and services transacted within their geographical boundaries. In Pakistan, as regards sales tax on goods it is with the Federal Board of Revenue (FBR) which is collecting far less than its actual potential.

Balochistan should have exclusive right to levy sales tax on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This levy can make them rich. Their present share in sales tax from divisible pool is as low as 9 per cent and 14 per cent respectively. They have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. The same is the case for Sindh. Punjab is the only beneficiary of the existing unjust distribution of taxes. It gets a lion’s share of 53 per cent (for 2017-18 over Rs1.2 trillion). This perpetual imbalance has created disharmony and animosity between the Centre and the provinces.

The federal government has been brazenly encroaching upon the rights of the provinces by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services etc. Way back in 2009, the Sindh Assembly in a unanimous resolution took a strong exception of this malpractice and demanded the federal government stop collecting sales tax/federal excise on services as this right is exclusively vested with the provinces. This malpractice on the part of federal government continues even till today. Sadly, even after this highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the federal government has miserably failed to reduce the burgeoning fiscal deficit—it has increased to a monstrous level of Rs2.5 trillion for the fiscal year ending on June 30, 2018.

The performance of provinces in collecting agricultural income tax is extremely appalling. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich and mighty—the meagre collection of agricultural income tax—less than Rs2 billion by all provinces and Centre in fiscal year 2017-18—is lamentable. It is imperative that right to levy tax on income, including agricultural income, should be given to the Centre. In return, the Centre should hand over sales tax on goods to the provinces. This will help FBR to collect income tax of Rs5 trillion as per actual potential and provinces, by levying sales tax on goods and services, generate sufficient funds for their needs. This is the only way to achieve fiscal stabilisation in Pakistan.

Tragically, the provinces have been denied even pre-partition right of levying sales tax on goods. The federal government even after usurping this right has utterly failed to tap the real revenue potential, which is not less than Rs8 trillion. The failure of FBR on this account adversely and directly affects the provinces as they are dependent on what the Centre collects and transfers to them from the divisible pool.

Pakistan is, thus, caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and at its own collects too little to overcome fiscal deficit. Since the size of cake is small, the provinces lack sufficient resources for the welfare of their people. In this scenario, the real sufferers are the masses. The taxation rights under the prevalent constitutional scheme need reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the country.

By: Dr Ikramul Haq, Huzaima Bukhari
Source: http://tns.thenews.com.pk

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