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Federalisation versus centralisation

2020: Year of Road to Prosperity

Huzaima Bukhari & Dr. Ikramul Haq

The Chairman of Punjab Revenue Authority (PRA), while addressing a conference on ‘Ease of doing business in Pakistan: a case for tax harmonisation’, organised by the Sustainable Development Policy Institute (SDPI) in Islamabad on December 6, 2019 reportedly ruled out “the possibility of creating one organisation—Pakistan Revenue Authority—in the name of the harmonisation of taxes”. According to a write-up [‘Harmonising’ taxes is causing friction, Dawn, December 16, 2019], “While the provinces may have differences of their own, they are united in opposing any proposal to centralise tax collection, which falls in their jurisdiction”.

The issues relating to federalisation of tax collection versus centralisation as well as fragmentation of tax system was raised in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018 and ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, which apparently have been overlooked by all the stakeholders and no meaningful public debate was initiated by legislators in Senate, National Assembly and provincial assemblies. 

The real issue faced by Pakistan is centralisation versus federalisation of economic planning and fragmentation of tax collection, especially in the wake of the Constitution (Eighteenth Amendment) Act, 2010 [“18th Amendment”] that received the assent of the President on April 19, 2010. The stated purpose of amendments relating to taxes in the 18th Amendment was to give the federal and provincial governments well-defined and unambiguous rights to raise revenues, judiciously, fairly and efficiently, ensure ease of doing business and reduce cost of doing business. On the contrary these have created many conflicts and contradictions and made things more cumbersome for the taxpayers. Neither the federation nor the federating units have overcome fiscal deficits and cherished dream of well-being of all the citizens no matter in which area they live remains unfulfilled.

The World Bank in an appraisal paper related to Pakistan Raises Revenue (PRR) has termed “vested interests lobbying for tax exemptions, internal tensions and wariness of change among the Federal Board of Revenue (FBR) staff, and potential disputes affecting provinces’ readiness to collaborate with the FBR as high-risk factors” for tax reforms. The World Bank has estimated “Pakistan’s tax gap at 10% of the GDP or Rs. 3.8 trillion. Our current tax-to-GDP ratio is 12.6% that according to the World Bank should be 23%. Among the 13 federal countries, Pakistan is second to last in the performance of provincial governments on tax collection. The World Bank analysis is that Pakistan has a complex tax system of over 70 unique taxes and at least 37 government agencies administering these taxes”.

The issue of fragmentation of taxes and multiple collection agencies was discussed in detail in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’ [Business Recorder, August 31, 2018] and viable solutions were offered. Strangely, the World Bank has not acknowledged in any of its papers/reports related to PRR the contribution of local writers and presented it as its own recommendation. In fact, a serious of articles was carried out such as, Essential reforms, Business Recorder, March 29, 2019, Challenges for budget-makers, Business Recorder, March 22, 2019, Optimising tax collection, Business Recorder, March 15, 2019, Fixing the ailing tax system, Business Recorder, March 1, 2019, Country needs massive reforms, Business Recorder, January 25, 2019, Time up for fiscal integration, Business Recorder, December 21 & 23, 2018, Tax policy for investment, Business Recorder, December 14, 2018, Productive tax reforms, Business Recorder, October 27, 2018, Overcoming fragmented tax system, Business Recorder, October 19, 2018, PTI & revival of economy, Business Recorder, October 12, 2018, Bridging the tax gap, Business Recorder, October 5 & 7, 2018, Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms, Business Recorder, August 31, 2018, Overcoming debt burden, Business Recorder, August 27, 2018 and PTI and tax reforms, Business Recorder, August 17, 2018.

The pathetic performance of FBR failing to achieve even downward revised budgets for the last many years have affected the provinces as they are heavily dependent on share/transfers from the Divisible Pool—presently under 7th National Finance Commission (NFC) Award. As expected and pointed out in these columns, ultimately on December 23, 2019, the original target of FBR of Rs. 5503 billion was revised downward to Rs. 5238 billion. It was mentioned that it has become a regular feature for the last many years. A report [IMF cuts FBR’s tax target to Rs. 5.238 trillion, The Express Tribune, December 23, 2019] observes:

The International Monetary Fund (IMF) has projected significant fiscal slippages and has finally cut the tax collection target to Rs. 5.238 trillion, which raises questions over claims of bringing fiscal discipline and restoring macroeconomic stability…… Pakistan’s budget deficit will slip from the projected 7.3% of GDP or Rs. 3.2 trillion to Rs. 3.4 trillion or 7.6% of GDP, according to the IMF. But the IMF has kept the primary budget deficit, being calculated after excluding interest payments, unchanged at 0.6% of GDP or Rs. 257 billion. As against the budgetary target of Rs. 5.503 trillion, the IMF has now cut the FBR’s tax collection target to Rs. 5.238 trillion – a reduction of Rs. 265 billion. The FBR faced Rs. 211-billion shortfall in first five months of the current fiscal year and even the Rs. 5.238-trillion target appears unrealistic.

It is obvious that both the IMF and FBR ignored the proposals presented inOptimising tax collection, Business Recorder, March 15, 2019, ‘Budget 2019-20: Essential reforms, Business Recorder, March 29, 2019, ‘Rationalising taxation, Business Recorder, May11, 2018 that could have fetched revenue collection of Rs. 8 trillion and achieve rapid economic growth.

The IMF in its first review of December 19, 2019 [Country Report No. 19/380] has admitted that “more than 40 percent of total tax revenue in Pakistan is collected at the import stage”. This we highlighted many a times in these columns and IMF ignored three recent articles on this issue, ‘2020: main fiscal challenges’, Business Recorder, December 20, 2019, ‘World Bank-funded tax reforms’, Business Recorder, December 13, 2019 and ‘FY 19: FBR’s dismal performance’, Business Recorder, December 6 & 11, 2019] and many others suggesting how to maximize federal and provincial taxes through federalisation of tax system by ending fragmentation, merging various tax collection agencies into National Revenue Authority manned by All Pakistan Unified Tax Service (APUTS)—see details in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018, ‘PTI & revival of economy’, Business Recorder, October 12, 2018, /Bridging the tax gap’, Business Recorder, October 5 & 7, 2018, and ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018 .

Pakistan is caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and on 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 as they also not ready to impose progressive taxes on the rich and mighty that are under their domain now after the 18thAmendment. In this scenario, the real sufferers are the masses, Flawed tax reforms agenda’, Business Recorder, November 15 & 21, 2019.

The taxation rights under the prevalent Constitution of Islamic Republic of Pakistan [“the Constitution”] between the federation and federating units need reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the federal government. For example, Balochistan should get “net proceeds” of Excise Duty, which is presently not the case, 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 NFC Award—commonly known as 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. They should get right to levy sales tax on goods as well as was the case at the time of independence.

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. The planning, in the aftermath of 18th Amendment should be federalised rather than centralised. The 18th Amendment redefined National Economic Council (NEC) on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. The 18th Amendment also through Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. This subject was earlier held by the federal government. It needs to be implemented. Presently, many economists and politicians are arguing that the 18th Amendment and 7th National Finance Commission (NFC) Award are harming fiscal stability of Pakistan. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically.

The provinces should have the exclusive right to levy sales tax not just on services but also on goods within their respective physical boundaries as was the case in British India. It also needs to be highlighted that the performance of provinces in collecting agricultural income tax is extremely appalling. After the 18th Amendment, right to levy wealth tax, capital gain tax on immovable property, gift tax, inheritance tax etc is with provinces but they are not ready to levy such taxes on the rich and mighty. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich classes—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and the Centre in fiscal year 2018-19—is lamentable.

It is also imperative that further amendment should be made after debate and consensus to assign right to levy tax on all kinds of income, including agricultural income, to the federal government. 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 at the federal level. This is the only way to achieve fiscal stabilisation in Pakistan. However, this can only be achieved if we also reform and merge all tax collection agencies at federal and provincial levels for which we need comprehensive structural reforms.

The FBR and all provincial tax collection agencies, after necessary reforms, should ultimately merge into single National Tax Authority [NTA], manned by members of All Pakistan Unified Tax Service (APUTS). The NTA will collect taxes at all levels that would be distributed as per Constitution to respective entities. It will also disburse benefits like pension, social security, food stamps and income support etc. The linkage of database of various bodies with NTA (complete digitization) will be a great step towards e-government model that is presently non-existent, but efforts are now initiated for achieving this goal. The mode and working of NTA can be discussed and finalised under CCI and its control can be placed under (NEC).

It is time that federal and all provincial governments, including the representatives of Azad Jammu & Kashmir and Gilgit Baltistan, sit together under the umbrella of Ministry of Inter- Provincial Coordination and discuss the issues of federalisation of economic planning that is the command of Constitution, pool all the resources under APUTS, and achieve fiscal consolidation to make Pakistan a prosperous country for all the citizens and attractive place for investments—internal and external. This should be a resolve for 2020 which can be named “2020: Year of Road to Prosperity”.


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

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