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Local governments & taxes

Huzaima Bukhari & Dr. Ikramul Haq

In Pakistan, the poor are subjected to heavy and oppressive taxes, whereas the members of militro-judicial-civil complex, absentee landowners and businessmen-turned-politicians enjoy numerous tax breaks, unprecedented perks and perquisites, benefits, including allotment of expensive plots, free or at concessional price, at prime locations. The way they waste and plunder the taxpayers’ money is no secret. No serious effort since independence has been made to dismantle our elitist economic structure and reform indomitable colonial-stylemilitro-judicial-civil apparatus that has miserably failed to deliver, yet the politicians, who have been targeting by them as corrupt, feel honoured to act as their henchmen. Due to sheer incompetence and apathy of the ruling elites, the country is pushed towards near economic collapse. The monstrous fiscal deficit of over Rs. 2.5 trillion, record trade deficit of US$ 34 billion and fast depleting foreign reserves have also forced the six-month-old government of Pakistan Tahreek-i-Insaf (PTI) to borrow heavily—externally and internally.

So long as the elitist structures exist and Raj-days Bureaucracy/Revenuecracy controls the State, Pakistan will remain in debt enslavement with more and more people pushed below the poverty line. If we want to come out of this state of affairs, the Parliament will have to revisit the prevailing social contract between federation and the provinces. Provincial autonomy and local self-governance without taxation rights and equitable distribution of income and wealth is meaningless. We cannot overcome perpetual economic and political crises unless the provinces and local governments are given sufficient resources and rights to generate own revenues to be utilised exclusively for the welfare of the residents who pay the same and not for the luxuries of the elites.

The dire need in today’s Pakistan is to dismantle the culture of plots and perquisites of the ruling classes, boost growth, improve governance, crack down on the corrupt,  stop wasteful, unproductive expenses, cut the size of cabinet and government machinery, make government-owned corporations profitable, accelerate industrialisation, increase productivity, improve agriculture sector, bring inflation down, reduce inequalities through a policy of redistribution of income and wealth and make the country a self-reliant economy.

Pakistan is in dire need of fiscal decentralisation—presently major fiscal powers are concentrated in the hands of federal government. On the one hand, federal government has usurped the right of provinces to levy sales tax on goods within their respective territories. On the other, the provinces have shown apathy to devolve administrative and fiscal powers to local governments. Resultantly democratic polity has failed to take roots in Pakistan. Since all broad-based and buoyant sources of revenue are with the federal government, contribution of provinces in total tax revenues is just around eight percent. This has made them totally dependent on the Centre for transfers from divisible pool.

We can learn a lot from countries that have successfully achieved the goal of fiscal decentralisation. For example, municipalities in Finland enjoy complete fiscal independence through their elected residents. These municipalities have the right to levy municipal tax in accordance with the Local Government Act 1995. Local authorities perform the functions that they are responsible for by virtue of their autonomy and as required by law. This type of governance is totally missing in our democracy.

Fiscal decentralisation involves the transfer of taxing and spending powers to sub-national levels of government. In our case, local governments that are still not empowered as envisaged in Article 140A of the Constitution. Fiscal decentralisation and local self-rule should essentially be linked with a social policy based on the principle of universal entitlements for all residents in terms of access to social benefits and social services. Taxation without representation also means denial of spending for the essential entitlements guaranteed in the Constitution—‘Municipal self-governance’, Business Recorder, July 19, 2013. 

The principle of universal entitlements, as practiced in Finland through municipalities, is worth studying. It seeks to prevent the formation of inequalities and the foundation of the poor as a separate social group, whereas residualism/marginalism takes the form of assisting the poor and the needy, and thus implicitly defining them as certain types of social groups. “However, in practice, the system of universal entitlements is not the only one in place in Finland: Some social benefits, such as income support and housing allowance, are allocated on the basis of certain threshold criteria to those most in need, and therefore selective positive discrimination is being practised. Similarly in terms of social services, the national Social Insurance Institution remits some of the costs from service fees which nevertheless first have to be purchased by the patient. Therefore, in practice the principle of universalism means that a relatively larger share of social benefits and services function according to this principle when compared with the situation in other countries”—‘Promoting wellbeing for municipal residents in Finland’.

The provincial parliaments in Pakistan should revisit local government laws on the basis of social policy discussed above—they have so far just copied the previous outdated enactments with patchwork here and there. The ruling classes do not want to empower people through self-governance. They want to enjoy total control over resources. The local governments will not be meaningful unless entitled, within national economic policy, to have adequate financial resources of their own, of which they may dispose freely within the framework of their powers and for public welfare.

One of the central constitutional principles regarding municipal self-governance in Finland is that, when allocating new functions to municipalities, the State has also to ensure that they have the necessary resources to carry them out. Finland has a well-functioning relationship between the State and the local authorities, as well as a state-subsidy system which ensures municipal resources and residents’ equal access to services. We can learn from this great innovation. It can change the fate of Pakistan in a short span of time. We have resources but system for self-governance as in vogue in Finland and elsewhere is non-existent. Resultantly, power vests with the privileged classes instead of the people. Like Finland, we must move to welfare state model, largely based on the idea of the municipalities being the producers and providers of services.

In Finland, extensive functions that fall within the specific sphere of authority include education, health care and social welfare services. Furthermore, the municipalities are responsible for matters related to the residents’ free-time, recreation, housing, and management and maintenance of their living environment (i.e. roads, streets, water supply and sewerage), as well as land-use planning and functional municipal structures. Tax revenues have a critical role in municipal finances. The power to levy and collect taxes is one of the cornerstones of municipal self-governance as it ensures that the municipalities can manage the functions that they have undertaken to execute or which they are responsible for by law. The most important is municipal tax, which amounts to almost 22.8 billion Euros in 2017. The total tax collection in Finland was 94 billion Euros (44% of GDP) in tax revenue in 2017.

In a nutshell, for achieving the goal of fiscal decentralisation, financial resources for local governments must commensurate with the responsibilities to ensure the welfare of the people and ensure sustainable growth at grass root level. Part of the financial resources of local authorities could be derived from local taxes and spent for providing universal entitlements and development. If a country of 5.5 million people (Finland) can achieve a higher level of taxation at municipal level alone then we, a nation of over 210 million can do much more, provided there is a will for much-needed reforms.

The PTI Government, if really committed to make Pakistan a welfare state, must implement Article 140A in letter and spirit. Economic equality, prosperity, peace and social tranquility can never be achieved unless we dismantle the elitist structures completely and empower the elected institutions at grass root level. We need political, fiscal and administrative decentralization where taxes are collected for education, health care and social welfare services through local governments working on the principle of self-governance—utilising the funds for the benefit of entire population.  


The writers, tax lawyers and partners in HUZAIMA, IKRAM & IJAZ, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).

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