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Budget 2020 amid Covid-19 crisis—III

Fiscal challenges & 18th Amendment

Huzaima Bukhari & Dr. Ikramul Haq

The failure to tap the actual tax potential by the federal and provincial governments is the real issue and not the Constitution (Eighteenth Amendment) Act, 2010 [hereinafter “18th Amendment”] vis-à-vis the National Finance Commission (NFC) Award. Dismal performance [Annexure ‘A’ & ‘AA’, some differences in figures by FBR and State Bank of Pakistan (SBP) need to be reconciled by Ministry of Finance] of Federal Board of Revenue (FBR) of not collecting even Rs. 4 trillion adversely affects the provinces as they are overwhelmingly dependent on the Divisible Pool—presently as per formula decided in 7th NFC Award, prior to 18th Amendment. Provinces are also not ready to collect taxes wherever due e.g. agricultural income tax from the rich absentee landlords and property tax from owners of palatial houses/bungalows/farm houses etc. Since the passage of 18th Amendment on April 19, 2010, they have miserably failed to devolve political, administrative and most importantly, fiscal powers, to local governments as envisaged under Article 140A of the Constitution of Islamic Republic of Pakistan [“the Constitution”].

FBR Year Book 2018-19 concedes that withholding taxes constitute 67% of the total collection of income tax (it was 65% last year). Out of total collection of Rs. 1445.5 billion [it was Rs. 1536.6 billion in 2017-18], Rs. 39.2 billion [2.7%] received with returns and Rs. 344.2 billion [23.8%] as advance tax. FBR’s own efforts (collection of demand created) yielded only Rs. 84 billion (5.8%, it was 7% last year) and from arrears Rs. 18.6 billion (1.3%, it was 1.2% last year). It confirms negligible share [7.3%] on the part of FBR. The same trend continues in the first nine months of the current fiscal year and after Covid-19 crisis, the situation has further worsened.

In these columns, it has been repeatedly pleaded that Pakistan needs to review the existing taxation rights under the Constitution between the centre and provinces. Presently, all broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is hardly 8%—in overall national revenue base (tax and non-tax revenue) it is around 10%.

In 2020, our economic managers are relying on 7th NFC Award, signed on December 30, 2009, before the 18th Amendment. Article 160(3A) of the Constitution, inserted by 18th Amendment, categorically says: “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”. However, outside the ambit of Article 160 of the Constitution, the Centre can impose taxes to meet budgetary gap as it did in 2013 by enacting Income Support levy Act, 2013, but repealed it the very next year [A tax for the poor that the rich never paid, Daily Times, October 21, 2018]. When the federal government can impose any tax/levy/cess to meet its needs without sharing proceeds with the provinces then what is the motive behind starting a controversial debate over the 18th Amendment?

The issue is not that of 18th Amendment, but poor collection of taxes by the federal government that hurts the provinces as well, which also do not collect taxes from the rich and mighty. This real dilemma of Pakistan is discussed in detail in Revisiting NFC Award, Daily Times, February 10, 2019, IMF, NFC Award and PTI, Daily Times, October 14, 2018,  Wither new NFC award?, Business Recorder, July 1, 2016 and The NFC award, Business Recorder, February 26, 2016.  The official document [Budget in Brief] of budget 2016-17 says: “The 8th NFC was constituted on July 21, 2010, but it did not give any Award”. Subsequently, the 9th NFC was constituted on April 24, 2015 followed by its demise on April 24, 2020. This is a sad reflection on meeting the constitutional obligations on the part of the federal and provincial governments.

A special feature of the 7th NFC Award was recognition that for Balochistan, share from the divisible pool was guaranteed at Rs.83 billion in financial year 2010-11 which was more than double from the actual divisible pool share of financial year 2009-10. It was also ensured that Balochistan province would receive provincial share in the divisible pool based on the budgetary projections instead of actual collection by Federal Board of Revenue (FBR) through Distribution of Revenues and Grants-in-Aid (Amendment) Order, 2015. Shortfall, if any, based on the actual collection reported by FBR would be made up by the Federal Government itself. Initially, this arrangement was for five years of the 7th NFC Award but later on in order to cater for the financial needs of Balochistan, an amendment was introduced in the Presidential Order No.5 of 2010 [containing text of 7th NFC Award] providing that this arrangement “shall remain protected throughout the Award period based on annual budgetary projections”.

After 10 years of 18th Amendment and 11 years of 7th NFC Award, during Decade of Democracy [2008-18] neither PPP nor PMLN made efforts to ensure adequate collection of revenues by FBR so that distribution of their net proceeds—commonly known as divisible pool—could bring fiscal consolidation for the federation [2019: review of PTI govt’s fiscal measures, Business Recorder, December 31, 2019 & January 2, 2020]. The provinces also failed to devolve “political, administrative and financial responsibility and authority to the elected representatives of the local governments” as per command of Article 140A of the Constitution.

On assumption of power in August 2018, the coalition governments of Pakistan Tehreek-i-Insaf (PTI) in the centre, Punjab and Balochistan and having two-third majority in Khyber Pakhtunkhwa also miserably failed in improving tax collection and devolution under Article 140A of the Constitution. It exposes the behaviours of entire political elite—their utter disrespect for Constitution and complete apathy towards well-being of people and transferring powers at grass root level to empower local self-governments.

The culprit is not the 18th Amendment but the vested interests of elites. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely for decades, now more miserably after the Covid-19 outbreak and lockdown. On May 12, 2020, the President notified 10th NFC, but, besides unlawfully constituted, it would change nothing unless oppressive, exploitative and elitist structures are dismantled and proposals as narrated below are implemented! 

The 10th NFC Award was immediately rejected by the Government of Sindh as “unconstitutional”. The terms of the reference include new clauses about allocation of resources to meet security expenditures, loss-making enterprises, subsidies mechanisms and debt repayments. These four new areas are contentious issues. The President of Pakistan has also included “assessment and allocation of resources to meet expenditures” related to the government of Azad Kashmir, the government of Gilgit Baltistan and the newly-merged districts of Khyber Pakhtunkhwa. The federal government is demanding that the provinces should contribute 3% of their shares to fund these areas. The provinces have rejected this demand.

Dr Kaiser Bengali, economist and former member of the NFC, in an interview said: “Under the Constitution, there is no place for finance adviser on the NFC and his appointment is unconstitutional”. He further added that “the job of the NFC is only limited to distribution of resources and it in no way can support to find ways to finance the federal government’s expenditures”. According to a report: “Under the Constitution, the provincial share cannot be reduced from 57.5% and the federal government is now exploring various options to bypass this constitutional limit but the provinces have so far resisted it”.

The federal government after imposing all kinds of oppressive taxes has miserably failed to reduce the burgeoning fiscal deficit. The reason being that FBR has been persistently failing to achieve the assigned targets, what to speak of tapping the actual tax potential that at federal level is not less than Rs. 8 trillion at federal level and Rs. 2 billion at provincial levels—Optimizing tax collection, Business Recorder, March 15, 2019.

The Centre is unwilling to grant provinces their legitimate taxation right of sales tax on goods, while it collects too little to meet overall needs of the federation and federating units. Sales tax on goods at time of independence was a provincial subject. The subject of sales tax was on the Provincial Legislative List at Serial No.48 in the Government of India Act, 1935 and was described as “Taxes on sales of goods and on advertising”. In the Constitution, 1956, “tax on sales and purchases” was mentioned at Serial No.26 of the Federal Legislative List, and therefore, for the first time it became a Federal subject. The position was maintained in 1962 Constitution, which mentioned “tax on sales and purchases” on the Federal Legislative List as clause (j) at Serial No.43 in the Third-Schedule. In 1973 Constitution as originally adopted ‘tax on sales and purchases’ was kept on Federal Legislative List at Serial No.49 of Part I of the Federal Legislative List given in the Fourth Schedule. The item was, however, completely substituted by Constitution 5th Amendment Act, 1976 with effect from September 13, 1976 to read “Taxes on sales and purchases of goods imported, exported, produced, manufactured or consumed”. The second half of the amended entry appears to have been taken from the amendment made in Sales Tax Act, 1951 by Finance Ordinance, 1960. Through that amendment the words “consumption of goods” in the preamble were substituted by “importation, exportation, production, manufacture or consumption” [see details in WAPDA v. Collector of Central Excise and Sales Tax (2002 PTD 2077 and also in Pakistan through Chairman FBR and others v Hazrat Hussain and others (2018) 118 Tax 260 (S.C. Pak)].

The size of the cake (total divisible collection) is so small that it cannot help the country to come out of debt trap and spend adequately for the welfare of the masses, no matter which part of the country they belong to. The relief/stimulus package announced on March 24, 2020 by Prime Minister exposed our economic and fiscal vulnerabilities during testing times [Covid19-pandemic, leadership & apathy, Business Recorder, April 3, 2020]. Under the given scenario, Pakistan will remain in debt prison, and more and more people will be pushed below the poverty line, especially due to corona crisis. If we want to overcome it, the Parliament will have to reconsider the prevailing social contract between federation and the provinces.

The way forward is that provinces should have the exclusive right to levy sales tax not just on services but also on goods as was the situation in 1947. It is also imperative that further amendments should be made in the Constitution after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government and it can tax the rich and mighty to improve infrastructure, retire debts and bridge fiscal deficit without sharing proceeds with provinces. This alone can eliminate/reduce fiscal deficit at the federal level and achieve fiscal stabilisation in Pakistan [Fiscal challenges before Hafeez Shaikh, Business Recorder, April 26, 2019].

The target of Rs. 5 trillion at federal and Rs. 2 trillion at provincial levels even in these adverse circumstances is achievable provided collection is fully automated, tax machinery is overhauled and single national tax agency is established as discussed in part two of this series, leakages are plugged and all exemptions/concessions to the privileged classes are withdrawn. Banks, Pakistan Water and Power Development Authority (WAPDA) and all power distribution companies in Pakistan (DISCOs) that prepare and collect electricity bills, Pakistan Telecommunication Company Limited (PTCL) and mobile companies that collect advance taxes on behalf of FBR are fully computerised. By using their database and that of credit bureaus established under Credit Bureaus Act, 2015 working under the regulatory control of (SBP), the Federal Government can easily determine fair tax base. FBR can make provisional assessments in respect of persons who are not filing tax returns and recoveries can be made for the remaining days of the current fiscal year and during the next fiscal year 2020-21.


The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)

Annexure A: FBR’s performance (1996-97 to 2018-19)

(Rs. in billions)

YearTargetsCollectionGrowth in Collection (%)Target Achieved (%)Tax to GDP ratioRatio in total taxes (%)
Indirect taxesDirect taxes
2018.-1944353828.5(-) 0.3586.38.462.237.8

Source: Economic Annual Surveys & FBR Year Books

Annexure AA: Tax-wise performance of FBR (1996-97 to 2018-19)

 (million rupees)
Fiscal YearDirect TaxesSalesExciseCustomsTotal of Indirect TaxesTotal Tax CollectionIndirect tax ratioDirect tax ratio

Source: http://www.sbp.org.pk/ecodata/tax.pdf

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