Dr. Ikramul Haq & Abdul Rauf Shakoori
The fiscal management in the last fifteen years in the wake of Constitution (Eighteenth Amendment) Act, 2010 [“18th Amendment”], became effective on April 19, 2010, has been posing serious challenges for all stakeholders. The problems diagnosed by experts are ambiguity over taxation rights between federation and its units, weak administrative structures, lack of political will and apparatuses to enforce devolved subjects/laws, issues of capacity, efficiency, rent-seeking and competitiveness, violation of the rule of law, non-acceptance of the norms of fair play in economic matters coupled with ‘reckless’ borrowing and ‘ruthless’ spending, amidst dismal tax-to-GDP ratio.
Structural reforms and concrete actions are needed for tapping the real tax potential of the country, which is not less than Rs. 34 trillion at national and provincial levels [‘Towards Broad, Flat, Low-rate, and Predictable Taxes’, Third Edition, PRIME, 2024]. Unfortunately, the present tax collection by federal and provincial governments is highly unsatisfactory. The real potential at federal level is not less than Rs. 30 trillion, whereas Federal Board of Revenue (FBR) is not collecting even half of it.
The same is the position of provincial tax authorities that have failed to realize the real tax potential of Rs. 4 trillion. At present, all broad-based and buoyant sources of revenue are with the federal government while contribution of provinces in total tax revenues in fiscal year (FY) 2023-24 was only 7.67 percent—in overall national revenue base (tax and non-tax revenue) it was just 7.51 percent. This has made them overwhelmingly dependent on the federal government for transfers from divisible pool and/or direct grants.
Pakistan, as mentioned in ‘PTI and tax reforms’, Business Recorder, August 17, 2018, needed to increase collection at all levels of governments to bridge monstrous fiscal deficit that reached the level of 6.2% of GDP (Rs. 2.3 trillion) for the FY 2017-18. All the governments since then have failed to optimize tax collection and reduce wasteful expenditure. Resultantly, the budget deficit reached Rs. 7.2 trillion in FY 2023-24.
It was stressed in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018 that all the tax collection agencies in Pakistan should be dismantled and merged into single National Tax Authority (NTA), which should effectively enforce tax laws at federal, provincial and local levels, besides providing single window facility to taxpayers.
There is still time to materialize the idea of NTA, after consultation and reaching a consensus with all the four provinces for establishing an All Pakistan Unified Tax Service (APUTS). It was suggested and elaborated in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018, and ‘Doing business under scattered taxation’, Business Recorder, September 7, 2018.
One major hindrance towards optimizing revenue collection is the scattered and haphazard tax collection through multiple authorities at the federal and provincial levels. The trend was further strengthened consequent to the 18th Amendment after which the provinces established their own tax collection agencies at the provincial level.
It is fact that the provincial tax authorities still lack skilled work force, tax collection expertise and necessary infrastructure, human capital and paraphernalia to collect taxes. To meet these objectives, the services of officers of Federal Board of Revenue (FBR) were/are requisitioned by the provincial authorities for their posting at provincial tax collection agencies on deputation basis. Resultantly, many of the FBR officers are still working with provincial tax agencies, namely, Sindh Revenue Board (SRB), Punjab Revenue Authority (PRA), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Baluchistan Revenue Authority (BRA).
Although the 18th Amendment was widely appreciated by the provinces, it created fissures in the revenue collection authority of FBR resulting in further decline in tax collection because tax on services fell in the provincial domains. On one side, the provinces hailed the move but, on the other, the taxpayers immediately started raising their eyebrows because they had to face both federal and provincial tax authorities.
All major Chambers of Commerce expressed their concerns and showed reservations on the scattered tax collection in the aftermath of the 18th Amendment. It is important to mention that Excise and Taxation (E&T) departments are already working as a separate entity under the provincial governments. The E&T departments have no formal administration connection with SRB, PRA, KPRA, BRA, and other provincial tax collection agencies. Unless, all federal and provincial tax agencies are unified and harmonized, the dream of optimum tax collection cannot be materialized.
Through consensus and democratic process, all the parliaments of Pakistan can enact laws for establishing an autonomous federalized revenue agency that can facilitate people to deal with a single entity rather than multiple agencies at national, provincial and local levels. The mode and working of this agency can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
It is strange that with the devolution of a large number of subjects to the provinces in 2010, Planning Commission is still working as arm of Federal Government without taking into account the command of Article 156(2) of the Constitution of Islamic Republic of Pakistan [“the Constitution”] which says:
“The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set-out in Chapter 2 of Part II”.
The deletion of the subject of national planning from the exclusive domain of the Federal Government, and the placing of the National Economic Council (NEC) in the list of subjects mandated to be the joint responsibility of the Federal Government and the Provincial Governments remains unnoticed by our parliamentarians and independent experts. Strangely, the provinces have not raised this issue till today.
Centralised planning was an important factor in the dismemberment of the country in 1971. The planning, in the post-18th Amendment period should have to be federalised rather than centralised. However, nobody has raised this issue at any forum. 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 18th Amendment, Article 156 related to the NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the Eighteenth Amendment. The pre-amendment clause (1) read as follows:
“The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:
Provided that the President shall nominate one member from each Province on the recommendation of the Government of that Province.”
While the apex planning body, the NEC, has been federalised, Planning Commission continues to be centralised. The spirit of the Constitution can be satisfied by (1) making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and (2) by reducing the number of its members to five, one each from the Provinces and the Federal Government. Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.
There is an urgent need for restructuring the planning mechanisms in the provinces. At present, the provincial planning and development boards/departments are not working in harmony with NEC. An important reason why the centralised role of planning and the Planning Commission continues is the weak capacity of the provincial planning mechanisms.
After the 18th Amendment, the Planning Commission could no more be a centralised body. Federal Legislative List, Part I, contains subjects, which lie in the exclusive jurisdiction of the Federal Government. Before the18th Amendment, its item 32 related to planning—“National planning and national economic coordination including planning and coordination of scientific and technological research”. After the Amendment, the subject was included in the Federal Legislative List, Part II. The last-mentioned list of subjects is neither exclusively federal nor provincial; it is an area of joint responsibility. In the Constitution, post-18th Amendment, the CCI, as a special institution, has been empowered to supervise the affairs of the Federation listed in Part II of the Federal Legislative List, Fourth Schedule to the Constitution.
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, Sindh and 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 25%, 9% and 14% respectively.
The three provinces, Balochistan, Sindh and Khyber Pakhtunkhwa, have rich natural resources and wealth of oil, gas and electricity but due to low population get a small share for goods they produce. Punjab is the only beneficiary of the existing distribution of taxes under Article 160—it gets a lion’s share of 53% (for FY 2023-24 it was Rs. 2.572 trillion).
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 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 stabilization in Pakistan without disturbing the 18th Amendment.
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Dr. Ikramul Haq, Advocate Supreme Court, specializes in constitutional, corporate, media, ML/CFT related laws, IT, intellectual property, arbitration and international tax laws. He holds LLD in tax laws with specialization in transfer pricing.
He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He served Civil Services of Pakistan from 1984 to 1996. He established Huzaima & Ikram in 1996 and is presently its chief partner. He studied journalism, English literature and law. He is Chief Editor of Taxation. He is country editor and correspondent of International Bureau of Fiscal Documentation (IBFD) and member of International Fiscal Association (IFA). He is Visiting Faculty at Lahore University of Management Sciences (LUMS) and member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE).
He has coauthored with Huzaima Bukhari many books that include Tax Reforms in Pakistan: Historic & Critical Review, Towards Flat, Low-rate, Broad and Predictable Taxes (revised & Expanded Edition, Pakistan: Enigma of Taxation, Towards Flat, Low-rate, Broad and Predictable Taxes (revised/enlarged edition of December 2020), Law & Practice of Income Tax, Law , Practice of Sales Tax, Law and Practice of Corporate Law, Law & Practice of Federal Excise, Law & Practice of Sales Tax on Services, Federal Tax Laws of Pakistan, Provincial Tax Laws, Practical Handbook of Income Tax, Tax Laws of Pakistan, Principles of Income Tax with Glossary and Master Tax Guide, Income Tax Digest 1886-2011 (with judicial analysis).
He is author of Commentary on Avoidance of Double Taxation Agreements, Pakistan: From Hash to Heroin, its sequel Pakistan: Drug-trap to Debt-trap and Practical Handbook of Income Tax. Two books of poetry are Phull Kikkaran De (Punjabi 2023) and Nai Ufaq (Urdu 1979 with Siraj Munir and Shahid Jamal).
He regularly writes columns/article/papers for many Pakistani newspapers and international journals and has contributed over 2500 articles on a variety of issues of public interest, printed in various journals, magazines and newspapers at home and abroad.
X (formerly Twitter): DrIkramulHaq
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Abdul Rauf Shakoori, Advocate High Court, is a subject-matter expert on AML-CFT, Compliance, Cyber Crime and Risk Management. He has been providing AML-CFT advisory and training services to financial institutions (banks, DNFBPs, Investment companies, Money Service Businesses, insurance companies and securities), government institutions including law enforcement agencies located in North America (USA & CANADA), Middle East and Pakistan. His areas of expertise include legal, strategic planning, cross border transactions including but not limited to joint ventures (JVs), mergers & acquisitions (M&A), takeovers, privatizations, overseas expansions, USA Patriot Act, Banking Secrecy Act, Office of Foreign Assets Control (OFAC).
Over his career he has demonstrated excellent leadership, communication, analytical, and problem-solving skills and have also developed and delivered training courses in the areas of AML/CFT, Compliance, Fraud & Financial Crime Risk Management, Bank Secrecy, Cyber Crimes & Internet Threats against Banks, E–Channels Fraud Prevention, Security and Investigation of Financial Crimes. The courses have been delivered as practical workshops with case study driven scenarios and exams to insure knowledge transfer.
His notable publications are: Rauf’s Compilation of Corporate Laws of Pakistan, Rauf’s Company Law and Practice of Pakistan and Rauf’s Research on Labour Laws and Income Tax and others.
His articles include: Revenue collection: Contemporary targets vs. orthodox approach, It is time to say goodbye to our past, US double standards, Was Due Process Flouted While Convicting Nawaz Sharif?, FATF and unjustly grey listed Pakistan, Corruption is no excuse for Incompetence, Next step for Pakistan, Pakistan’s compliance with FATF mandates, a work in progress, Pakistan’s strategy to address FATF Mandates was Inadequate, Pakistan’s Evolving FATF Compliance, Transparency Curtails Corruption, Pakistan’s Long Road towards FATF Compliance, Pakistan’s Archaic Approach to Addressing FATF Mandates, FATF: Challenges for June deadline, Pakistan: Combating the illicit flow of money, Regulating Crypto: An uphill task for Pakistan. Pakistan’s economy – Chicanery of numbers. Pakistan: Reclaiming its space on FATF whitelist. Sacred Games: Kulbhushan Jadhav Case. National FATF secretariat and Financial Monitoring Unit. The FATF challenge. Pakistan: Crucial FATF hearing. Pakistan: Dissecting FATF Failure, Environmental crimes: An emerging challenge, Countering corrupt practices .
X (formerly Twitter): Adbul Rauf Shakoori
The recent publication, coauthored by these writes is
Pakistan Tackling FATF: Challenges & Solutions, available at:
https://aacp.com.pk/book-detail/pakistan-tackling-fatf-challenges-and-solutions-35
https://www.amazon.com/dp/B08RXH8W46