It is clear that all the federal and provincial governments have never been concerned with the fundamental issue of judicious and evenhanded distribution of taxation rights between Centre and federating units that can help empowerment of 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 creating ghettos.
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% 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 unjust distribution of taxes. It got a lion’s share of 53% (for 2017-18 over Rs. 1.2 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 to 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 Rs. 2.5 trillion for the fiscal year ending on June 30, 2018.
Read more: NFC Award: Challenges & Solutions-III
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 Rs. 2 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 would help FBR to collect income tax of Rs. 5 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.
According to a Press report, the IMF has asked the PTI Government to reduce the share of provinces under the NFC Award as a condition for new bailout package. In terms of Article 160(3A), inserted by the 18th Amendment in 2010, “the share of the Provinces, in each Award of National Finance Commission shall not be less than the share given to the Provinces in the previous Award”. It means that share of provinces of 57.5%, under the 7th NFC Award cannot be reduced.
The IMF even before giving us fresh bailout is behaving like a Neo East India Company. But the fault lies with our parliamentarians and men in power. They have policies of appeasement towards the tax evaders. They get tax amnesties and immunity for the tainted money under obnoxious laws like Protection of Economic Reforms Act, 1992 (still not repealed even after empirical data that it helped in flight of money from Pakistan to the extent of US$ 250 billion in the last 25 years).
We keep on cursing the IMF and others but never try to put our own house in order. The beggars cannot be the choosers. IMF did not invite us for another bailout. During the Decade of Democracy (2008-18), both Pakistan People Party and Pakistan Muslim League (Nawaz) helped the rich industrialists to avoid paying enhanced contributions to Workers’ Welfare Fund by making amendments in the law through Money Bill rather than taking the proposed legislation to both the Houses. Even after the verdict of Supreme Court of Pakistan on this issue, no corrective measure has been taken. In 2013, Income Support Levy was imposed on net moveable assets exceeding Rs. 10 million at the rate of just 0.5% but 99.9% parliamentarians, including the incumbent Prime Minister and his predecessor, did not pay it. The rulers do not pay due taxes and then beg for IMF’s bailouts—obviously the conditions of IMF hit the poor and not them.
The parliamentarians, instead of making Pakistan self-reliant, are keener to increase their salaries, perks and perquisites. On the other hand, the minimum wages notified for the poor workers were a mockery of Article 3 of the Constitution. For such rulers and those who vote for them, subjugation at the hands of foreign investors/lenders is a fait accompli. The stalwarts of Pakistan Tehreek-i-Insaf while sitting in Opposition or now in power never prepared a plan how to avoid this subjugation, though boisterous sloganeering to this effect was their hallmark.
The reconstituted 9th NFC, in its maiden meeting, chaired by than Finance Minister Asad Umar, held in Islamabad on February 6, 2019, discussed besides other issues recommendations for improving the distribution of resources among provinces and smooth communication between the centre and provincial administrations. Prior to the meeting, Asad Umar in response to a question whether the Federal Government planned to ask the provinces to give up 7% of their share responded: “We are not starting discussions from a fixed position”. “We will explain to the provinces the economic and financial issues confronting the country and try to reach a consensus on the points that need to be addressed,” he added.
Under the previous government of Pakistan Muslim League (Nawaz), the 9th NFC was constituted on April 24, 2015. In its first meeting of April 28, 2015, four working groups were constituted to undertake thematic studies and put forth their recommendations. What happened thereafter is history—a sad reflection on fulfilling the constitutional obligations by entire political leadership. It went largely unnoticed as the so-called vibrant media (sic) remained busy in Baghdadi-like manazaras (debates) to ignite conflicts among the already highly divided and disturbed nation.
The star Finance Minister of PMLN in 2017 was shamelessly following the NFC Award of 2009 and that too without fresh census required under the supreme law of the land! Yet, he claimed “ours is the best government Pakistan has ever had!” The provinces were also guilty of not agitating the matter—happy to get more money!!
The issue was and still is 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 with law and order situation besides creating pressure on available civic amenities. 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 matter is, thus, not that of vertical or horizontal distributions of taxes and resources, for which six new working groups have been constituted, but giving the provinces complete autonomy that includes exclusive right of levying harmonised sales tax on goods and services emanating in their respective areas.
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.
Balochistan should have exclusive right to levy indirect taxes on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This can make them rich. 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.
The Centre 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 and Federal Excise Duty (FED) 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 overcome the burgeoning fiscal deficit. Had provinces been allowed to generate their own resources by levying sales tax etc on goods produced by them, the present chaotic situation on fiscal front could have been averted.
(To be continued)