Dr. Ikramul Haq
Evidently, the 18th Amendment and seventh NFC award have considerably assuaged anti-centre/ anti-Punjab sentiments, at least in the financial context. It is, therefore, imperative to further entrench the democratic process of decentralisation and redistribution of resources…..Sadly, efforts are afoot to roll back the benefits of the seventh award….Instead of expanding its revenue base, the federal government is impoverishing the provinces for its own inefficiencies and failures evident in its misplaced fiscal and foreign policies—It’s not the NFC Award, Shahab Usto, Dawn, April 6, 2024
It is heartening to know that in the wake of notification of 11th National Finance Commission (NFC) and its inaugural meeting on December 4, 2024, a separate group, chaired by the Finance Minister of Khyber Pakhtunkhwa, has been tasked with improving the tax-to-GDP ratio. This group for its report must seek input from experts, who has been pointing out impediments, entrenched in our target-oriented, rotten, outdated, oppressive, anti-people and anti-growth tax system, both at federal and provincial levels.
There is an urgent need to deconstruct the existing tax systems and at the same time reconstruct a fair, equitable and pro-growth federalized tax system, conforming to Pakistan’s specific needs and future challenges. The prescriptions of International Monterey Fund (IMF), World Bank and other donors/lenders have miserably failed to reform (sic) our tax system—they have now openly admitted this fact in their recent reports, which are not only shallow but also fall short of accepting the blame for their faulty policies!
Unfortunately, the debate about NFC vis-à-vis Article 160 of the Constitution in Pakistan both at official and public platforms misses the point that this provision does not prescribe any particular formula for distribution the net tax proceeds among provinces. It, in fact, requires equitable sharing and/or distributing of resources among federation and provinces. The issue is not that of vertical or horizontal distributions of taxes but giving the provinces full autonomy that includes exclusive right of levying/collecting taxes on goods and services generated in their respective geographical areas.
The provinces in all the previous NFCs have failed to highlight that the federal government in utter violation of Constitution was collecting taxes that fall exclusively in their domain. The provinces till to day have not worked out their actual share in Divisible Pool—70% federal tax collection is on account of indirect taxes (including petroleum/gas levies), even under the garb of Income Tax Ordinance, 2001. The provinces are not even aware of the fact how Centre has been cheating them since 1973.
It is a matter of record that the successive governments in Pakistan—civil and military alike—have never bothered to restore judicious distribution of taxation rights between the federation and the federating units. Lack of judicious distribution of taxes and perpetual abuse of constitutional provisions by Islamabad has created disharmony and animosity between the Centre and the provinces.
The federal government has been collecting huge amount of taxes, which constitutionally belonged to the provinces and then “distribute” it to them under NFC Award. This is adding insult to injury. Many nationalist leaders of smaller provinces have rightly rejected it as ‘charity’. Unfortunately, the rulings elites (installed) in some provinces are accepting it with praise—a disrespect to the rights of their people.
Federal highhandedness even in the wake of Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] in tax matters has not only negated the true concept of provincial autonomy but also crippled them financially—this way the Centre wants to perpetuate its hegemony over provinces.
The Federal Government has been blatantly encroaching upon undisputed right of provinces of levying taxes on goods and services within their geographical. Such taxes levied under the garb of presumptive/minimum taxes are not “taxes on income (which the federal government is empowered to levy under item 47 of the Federal List). This core issue has never touched by any province!
With principal objective of granting greater autonomy to provinces by devolving critical functions, the 18th Amendment substantially transformed federal-provincial relationship. However, even after a lapse of more than 15 years, the provinces have failed to introduce progressive taxes, transferred from the centre to them through the 18th Amendment. The provinces have also miserably failed to implement Article 140A(1) of the Constitution to “devolve political, administrative and financial responsibility and authority to the elected representatives of the local governments”.
In view of above, both the federation and its units have denied the citizens of their fundamental rights by open and blatant defiance of 18th Amendment. It proves that since 2010, none of the political parties in power showed any interest in empowering the masses. Their main interest was obedience of the centrist mindset, praising it and even celebrating their subjugation in the name of hybrid and hybrid plus arrangements.
From 2010 to 2025, our rulers have been relying on 7th NFC Award, signed on December 30, 2009 and notified on May 10, 2010. 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.
When the federal government can impose any tax/levy/cess to meet its needs without sharing proceeds with the provinces, as is the case with petroleum levy, then what is the need for undoing Article 160(3A) through another constitutional amendment? If there is no desire to implement Article 140A, what relevance is of creating more provinces and district governments controlled/run by bureaucrats?
The real challenges are: devolving of political, administrative and financial responsibility and authority to the elected representatives of the local governments [Article 140A] and improving poor collection of taxes by the federal government and the provinces—both are guilty of not collecting taxes from the rich and mighty. This is the real dilemma of Pakistan.
During Decade of Democracy [2008-18] neither Pakistan Peoples Party nor Pakistan Muslim League (Nawaz) made efforts to ensure adequate collection of revenues by Federal Board of Revenue (FBR) so that distribution of their net proceeds could bring fiscal consolidation for the federation. 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 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 proves their utter disrespect for Constitution and complete apathy towards well-being of people and transferring powers at grass root level to empower them. Had they acted prudently, the less-privileged and have-nots would not have been suffering immensely since 2008.
Presently, all broad-based and buoyant sources of revenue are with the federal government. The contribution of Rs. 978.6 billion by all provinces in total tax revenues of the country for fiscal year (FY) 2024-25 at Rs. 12.722 trillion was pathetically low, 0.9 % of GDP. It was merely 5.2% in overall national revenue base (tax and non-tax revenue) of Rs. 17997.45 billion [15.7% GDP] against the total national expenditure of Rs. 24494.3 billion [21.4% of GDP].
The share of provinces in national expenditure was 5.1% of GDP. All provinces together generated non-tax revenues of only Rs. 313.59 billion against the GDP of Rs.114,692 billion.
The federal government in FY 2024-25 spent Rs. 2193 billion on defence and Rs. 8887 billion on debt servicing and after transfer to provinces of Rs. 6854 billion under the 7th NFC Award, these two alone were Rs. 1134 billion higher than net revenue collection of the federal government. This is Pakistan’s real and perpetual fiscal dilemma.
Centre is unwilling to federalize tax policy and tax administration. Resultantly, the size of the cake is so small that it cannot help the country to come out of debt trap and spend adequately for the welfare of the masses. The way forward is introduction of unified sales tax on goods and services and its collection through National Tax Council. The 11th NFC should concentrate on it and devise mutually beneficial formula for distribution under this head, which will be a win-win situation for centre and provinces and substantially improve tax-to-GDP ratio.
Unified sales tax on goods and services can fetch around Rs. 9000 billion as against collection of sales tax on goods at Rs. 3901 billion by the FBR in FY 2024-25 and on services at Rs. 612 billion cumulatively by all provinces. The additional revenue collection of little over Rs. 5000 billion will not only give fiscal space to the federal government to narrow down fiscal deficit but would also enhance distribution amount to the provinces.
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 to improve infrastructure, retire debts and bridge fiscal deficit. This alone can achieve the real purpose behind Article 160 of the Constitution ensuring sustainable fiscal stabilisation and prosperity for all citizens of Pakistan wherever they may be residing.
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Dr. Ikramul Haq, Advocate Supreme Court, Adjunct Faculty at Lahore University of Management Sciences (LUMS), member Advisory Board and Visiting Senior Fellow of Pakistan Institute of Development Economics (PIDE), holds LLD in tax laws. He was full-time journalist from 1979 to 1984 with Viewpoint and Dawn. He also served Civil Services of Pakistan from 1984 to 1996.