NFC Award: Challenges & Solutions-III

PML-N showed increasing appetite for foreign credit and local borrowings. There was no will to reduce wasteful expenses and revise fancy projects or bring down defence expenses by cultivating friendly relations with neighbours through effective diplomacy. The 7th NFC Award authorised the provinces to raise taxes from agriculture, property and services. It granted 57.5 percent of revenues to the provinces. Expectations that the provincial governments would use the resources efficiently to improve the living standards of their people were never fulfilled. Till today, the provincial Another disturbing area has been non-existence of local governments and lack of fiscal decentralisation. Major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies provinces the right to levy sales tax on goods within their respective territories—a right available to the provinces before the independence. The provinces also have shown apathy to devolve administrative and fiscal powers to local governments.

Also Read: NFC Award: Challenges & Solutions-II

The fundamental issue of judicious and evenhanded distribution of taxation rights amongst Centre and provinces was not touched by any party in the NFC’s parleys held in Islamabad on August 27-28, 2009 or during the parleys on 18th Constitutional Amendment. The representatives of provinces and Federal Finance Minister showed “satisfaction” over deliberations. There was a mood of jubilation in official quarters over “consensus award.” This exposed the hollowness of our ruling classes which could not comprehend the real issue involved that was how to empower the provinces so that they could enjoy full autonomy in fiscal matters. Resultantly, the provincial governments continue to depend heavily on receivables from the Divisible Pool. Political exigencies stop them from raising provincial taxes. In this scenario, both the federal and provincial governments have failed to reduce their budget deficits, let alone make them prosper.

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Table: Position under 7^th NFC Award

There is something fundamentally wrong with Pakistan’s constitutional structure of distribution of taxing powers between the federation and the federating units. In all major federations—USA, Canada and India—the federating units have the exclusive right to levy tax on goods and services transacted within their geographical boundaries. In Pakistan, the Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948—none of the provinces has ever raised a voice to take it back.

The taxation rights under the prevalent constitutional scheme needs reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the Centre. For example, Balochistan should get “net proceeds” on natural gas and Khyber Pakhtunkhwa on electricity, as envisaged in Article 161(1)(a) & (b) of the Constitution. Their present share in sales tax from divisible pool is as low as 9% and 14% 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 distribution of taxes under Article 160—it gets a lion’s share of 53% (for 2017-18 it was Rs. 1.2 trillion).

The Federal Government has been shamelessly 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 and excise duty on a number of services. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to reduce the burgeoning fiscal deficit. Had the provinces been allowed to generate their own resources, the present chaotic situation could have been averted.

On the one hand, the provinces have not been allowed to levy taxes on goods generated within their boundaries and on the other, the federal government has utterly failed to tap the real revenue potential, which is not less than Rs. 8 trillion. The failure of FBR on this account adversely and directly affects the provinces as they are wholly 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 while itself collecting too little, and in turn the provinces are unable to generate sufficient resources for the welfare of their poor people, who are the real sufferers in the prevalent Centre-Provincial conflict.

FBR’s track record shows remote possibility of collecting even Rs. 8 trillion in the next three years to give fiscal space both to the Centre and the provinces to come out of the present economic mess, thus extending some relief to the poor, trade and industry. Under the given scenario, federation-provinces taxing tangle will continue. Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, there is an urgent need to reconsider equitable distribution of taxing powers between federation and the provinces. Provincial autonomy without taxation rights and equitable distribution of income and wealth amongst all the federating units is meaningless. We cannot come out of perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenues and exclusive right to utilise them for the welfare of their inhabitants.

Article 160 of the Constitution, dealing with the NFC Award, does not prescribe any particular formula for distributing the net tax proceeds among provinces. It, in fact, requires equitable sharing and distribution of resources among federation and provinces. The issue is thus not that of vertical or horizontal distributions of taxes and resources, for which two committees have been constituted, but giving the provinces complete autonomy that includes exclusive right of levying taxes on goods and services emanating in their respective areas. The Centre, at present, is transgressing on this constitutional right of provinces 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 people of that province is the real issue that our parliament must address on emergent basis before it is too late.

In the recent months, many noted economists and reputed analysts have showed with facts and figures that the 18th Amendment and 7th NFC Award are harming fiscal stability. In a write-up, Federation’s fiscal dismemberment, it is insinuated that “the imbalances triggered by the 7th 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 of 2018 and in interactions 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 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 proved 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 a new NFC Award after fresh census. Even the apex court remained oblivious of this constitutional lapse. The 8th NFC 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. Now the PTI Government has reconstituted it and wants to finalise it by December 31, 2019 meaning by the budget 2019-20 will again on the basis of 7th NFC Award.

Since 2009, our economic managers have been following the 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 were 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 Rs. 2384 billion during 2017-18, which decreased to Rs. 2316 billion in revised estimates. For 2016-17, it was Rs. 2136 billion showing an increase of 15.3% over revised estimates of fiscal year 2015-16. The provinces were jubilant to know that the provincial share in federal revenue receipts, estimated at Rs 1849 billion in 2015-16, was increased to Rs 1852 billion in revised estimates of fiscal year 2015-16! They failed to notice decline in straight transfers to provinces, from estimated Rs. 102,379 million in 2015-16 to Rs. 100,361 million and further reduction to Rs. 91,738 million in 2016-17!

(To be continued)