It is regrettable that the provinces have been denied even pre-partition available right of levying sales tax on goods. They have been purposefully made dependent on the federal government—this is a considered policy of control for maintaining hegemony over federating units. 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 roadmap to realise it is available in ‘Towards Flat, Low-rate, Broad & Predictable Taxes’ (PRIME, 2016). Collection to this extent will make the entire Pakistan prosper and not only a few urban areas.
The FBR has reportedly informed Asad Umar that it would be able to collect only Rs. 4.1 trillion this year. It means less than promised share for the provinces. In the Budget 2019, the revenue target of FBR was fixed at Rs. 4435, which was reduced to Rs. 4398 billion by the PTI Government and now FBR wants further reduction of 335 billion vis-à-vis original target slashing substantially the share of provinces promised for 2018-19!
The pathetic performance of FBR affects the provinces as they are heavily dependent on share/transfers from the Divisible Pool. Pakistan is, thus, caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and has at its own collects too little to meet the national overall demand. Since the size of cake (Divisible Pool) 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 needs reconsideration to empower provinces to raise adequate resources which will also help in overcoming overall fiscal deficit faced by the country.
For reforming the outdated and outmoded tax machinery, we need comprehensive structural reforms. The FBR needs to be run by a competent Board as a short-term reform measure before it is finally merged into National Tax Authority [NTA]. In the long-term, Pakistan must have single tax agency that collects taxes as well as disburses benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitization) will be a great step towards e-government model for the country that is presently non-existent. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council (NEC)[Article 156].
In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. In this perspective, we should also discuss the idea of NTA. FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential. In fact, FBR has become a tool in the hands of businessmen-turned-politicians in getting enormous tax benefits through the infamous Statutory Regulatory Orders (SRO) system.
The planning, in the post-Eighteenth Amendment period should be federalised rather than centralised. But nobody has raised this issue. The 18th Amendment has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of the Chapter 3 of the Constitution entitled ‘Special Provisions’. Before the Eighteenth Amendment, Article 156 related to the NEC had two clauses.
The 18th Amendment gives provinces equal rights over their natural resources. Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. The subject was earlier held by the federal government. There still exist legal and administrative bottlenecks for implementing this provision.
Federal injustice in tax matters has denied the provinces their constitutional rights besides crippling them financially. The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries—VAT should not be a federal subject at all. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. 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. Adding insult to the injury, the federal government tax officials have the audacity to claim that provinces lack infrastructure to efficiently collect taxes—an attitude that is reflective of colonial legacy. This issue should be left to sovereign parliaments of provinces.
Presently, many economists and politicians are arguing that 7th NFC Award is harming fiscal stability of federation. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically. 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—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 will help FBR to collect income tax of Rs. 5 trillion as per actual potential and the provinces by levying sales tax on goods in addition to services will generate sufficient funds for their needs. It will also reduce fiscal deficit of the Centre. This is the only way to achieve fiscal stabilisation in Pakistan without disturbing the 18th Constitutional Amendment.