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Huzaima Bukhari & Dr. Ikramul Haq
“By withdrawing tax measures through Statutory Regulatory Orders (SROs), the government is subverting the budget”—Dr. Kaiser Bengali, a noted economist and technical member, National Finance Commission from Sindh.
According to a Press report, the fifth meeting of the 9th National Finance Commission (NFC) award held on March 29, 2019 in Lahore concluded without a consensus on the issues which were also discussed during the last in Islamabad but were left unresolved. It says: Given these unresolved issues among the federating units, there are chances that the upcoming budget would be presented under the current NFC formula, the legal mandate of which is valid till June 2020. Absence of Sindh Chief Minister Murad Ali Shah, who holds additional portfolio of provincial finance minister, also raised many questions about inter-provincial harmony and coordination with Islamabad. In the previous meeting, Sindh Chief Mister forcefully raised the issue of lesser fund transfer from Islamabad to all provinces and claimed that in the first six months of the current fiscal year, Sindh was paid Rs. 60 billion less than the corresponding period.
Chairing the meeting, Federal Finance Minister, Asad Umar, laid stress on pushing the 9th NFC award talks forward with consensus among participants. However, crucial issues like strengthening tax base with improvements in the Federal Board of Revenue (FBR), provincial autonomy in taking revenue generating decisions and financial arrangements for the erstwhile Federally Administered Tribal Areas (FATA) after their merger with Khyber Pakhtunkhwa remain unsolved. Asad Umar told media after the meeting that “efforts are under way to complete the process of 9th NFC Award by December 31, 2019, besides improving the federal and provincial governments’ coordination regarding collection of taxes”.
Some time back, the renowned economist, Dr. Kaiser Bengali, in an interview with a newspaper, said that “the giving of tax breaks by the federal government in the middle of the year has started affecting the revenue share of provinces, resulting in a significant reduction in transfers during the first six months of the current fiscal year”. According to Dr. Bengali, whenever the FBR comes under pressure to give a boost to the revenue collection, it starts resorting to “the old tactic of burdening the lower and middle class taxpayers”. The same situation prevails under the present coalition government of Pakistan Tehreek-i-Insaf (PTI). Before coming to the power, it vowed to make the tax system just and fair, but now it is proving even worse than two preceding governments of Pakistan People Party [2008-13] and Muslim League (Nawaz) [2013-18] in shifting the burden of taxes on the less-privileged segments of society on the dictates of powerful segments and the International Monetary Fund (IMF). The PTI Government is hopeful to get a new bail-out package from the IMF by the mid of May, 2019.
Dr. Bengali and many others experts keep on reiterating that lower revenue collection by FBR is bound to jeopardize the federal and provincial budgetary frameworks. The issue is not alone of FBR’s inability to collect projected revenues, but also numerous tax concessions and exemption available to the rich and mighty under the federal and provincial tax laws that no government intends to withdraw. Provincial budgets run into deficits not only due to reduced share from the Divisible Pool but also because of their inaction to tax the rich people, especially the absentee landowners and wealthy property owners. The right to levy progressive taxes like wealth tax, gift tax, capital gain tax on immovable property and inheritance tax after the Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment] is now with the provinces. This became effective on April 19, 2010 but provinces after getting these powers did not bother to levy any progressive tax and also failed to collect agricultural income tax from the rich absentee landlords, many of them are in the provincial assemblies and hold important portfolios in cabinets of all the four provinces.
Dr. Bengali rightly demanded in the interview that “all SROs affecting the revenue share of provinces should be approved by the Council of Common Interests (CCI)—the Constitutional body headed by the prime minister with all chief ministers as its members”. The demand of Dr. Bengali is judicious. Total loss of revenue through SROs issued during the last ten years alone was estimated about Rs. 1200 billion—unprecedented concessions to the rich made the State poorer and the masses indebted enormously.
The Executive (tax officials) as per Constitution of Pakistan has powers to enforce tax laws but they have been varying or modifying them to negate the principles enshrined in Articles 77 and 162 of the Constitution of Pakistan. The Statutory Regulatory Orders (SROs) violate the constitutional command that all the taxes should be enacted by parliaments and their proper enforcement is to be ensured by tax administration. The SROs are the worst example of naked and blatant violation of supreme law of the land. By surrendering their sovereign right of taxation to Executive, the elected members in Pakistan gave them a free hand to fleece the poor and raise taxes primarily for the luxuries of elites—the powerful militro-judicial-civil complex and their cronies in politics.
A very important constitutional provision (Article 162) has escaped everybody’s attention. Article 162 of the Constitution debars even the National Assembly to grant tax exemptions or concessions without prior approval of the President. The power to issue SROs delegated to the federal government by the Parliament is blatant violation of supreme law of the land. How can Parliament delegate a power which cannot be exercised by itself without the prior sanction of the President?
The principle of “no taxation without representation”, embodied in Article 77 read with Article 162 of the Constitution, is perpetually and flagrantly violated—a lamentable act that remains unnoticed at all levels. The prime culprits are members of parliaments who have been delegating their legislative power of levying taxes to the federal government (through FBR) though required to act within the four corners of the Constitution. Authority to issue SROs for extending any kind of exemption or concession in respect of any tax is gross violation of Article 162 of the Constitution which says:
“162. Prior sanction of President required to Bills affecting taxation in which Provinces are interested: – No Bill or amendment which imposes or varies a tax or duty the whole or part of the net proceeds whereof is assigned to any Province, or which varies the meaning of the expression “agricultural income” as defined for the purposes of the enactments relating to income-tax, or which affects the principles on which under any of the foregoing provisions of this Chapter, moneys are or may be distributable to Provinces, shall be introduced or moved in the National Assembly except with the previous sanction of the President.”
The delegated power to an executive authority to issue SROs is in utter violation of Article 162 as parliament itself is not authorised to consider any Bill or amendment that imposes or varies a tax or duty, the whole or part of the net proceeds whereof is assigned to any province, unless the same is first approved by the President. Exercise of delegated powers by FBR to vary a tax or duty through SRO is a blatant violation of Article 162 which has never been challenged and even no suo moto action is taken by the apex court that is to interpret and enforce the Constitution—this confirms our intellectual bankruptcy in understanding and implementing the supreme law of the land.
Enforcement of Rule of Law determines the failure or success of a society. In the context of tax laws, it means that taxes are imposed through parliamentary process, rather than through administrative discretions (SROs). Article 77 of Constitution says that no tax shall be levied for the purposes of the Federation except by or under the authority of the Act of Parliament. Thus delegation of legislative power to the executive to vary a tax or duty renders the entire tax system unconstitutional. The so-called wizards sitting in FBR have been playing havoc with tax laws by issuing infamous SROs and administrative instructions—granting exemptions or modifying the taxes imposed by the parliament or even levying taxes under the garb of rule-making powers.
Dr. Bengali rightly highlighted the malady but has not suggested the right remedy i.e. withdrawal of all provisions delegating powers to the executive to issue SROs in view of Article 162 of the Constitution, taking these to CCI is not the answer. Tax administrators should be given powers to enforce tax laws and not to vary or modify them to negate the principles enshrined in Article 77 and 162 of the Constitution. Tax laws should be framed and enacted through a constitutional process and their proper enforcement is to be ensured by tax administration. All segments of the society should adhere to the rule that nobody is above law. Through these SROs, the government bypassed the Parliament and committed open violation of the latest dictum of Supreme Court in the case ofEngineer Iqbal Zafar Jhagra and Senator Rukhsana Zuberi v Federation of Pakistan and Others 108 TAX 1 S.C. Pakthat says:
“It is well settled proposition that levy of tax for the purpose of Federation is not permissible except by or under the authority of Act of Majlis-e-Shoora (Parliament). Reference in this behalf may be made to the case of Cyanamid Pakistan Ltd. V. Collector of Customs (PLD 2005 SC 495), wherein it has also been held that such legislative powers cannot be delegated to the Executive Authorities. Also see Government of Pakistan v. Muhammad Ashraf (PLD 1993SC 176) and All Pakistan Textile Mills Associations v. Province of Sindh (2004 YLR 192).” [Page 18 , Para 20]
In Pakistan, tax laws are meant only to fleece the poor for the luxuries of the rich. The privileged classes pay no taxes on their collossal incomes and wealth but the poor are subjected to all kinds of oppressive taxes. Adding insult to injury, they get nothing in return—even deprived of protection to their lives and property, what to speak of basic facilities of health, education, transport and housing.
The privileged classes (who are greedy and ruthless) pay no taxes on their collosal incomes and wealth but the poor are subjected to all kinds of oppressive taxes. Adding insult to injury, they get nothing in return—even deprived of protection to their lives and property, what to speak of basic facilities of health, education, transport and housing.
In the wake of expiration of 7th NFC Award, the federal and provincial governments failed to evolve a consensus due to belated start of negotiations for the new NFC Award. Why was the new NFC set up so late? The answer is: our politicians are callous and incompetent. For them, violation of constitutional provisions is not a significant matter. Day and night they give lectures on constitutionalism and rule of law and then keep on betraying their own words while the nation and courts are becoming immune to all this. This apathetic attitude of the civil society is merely encouraging rulers to flout the supreme law of the land with impunity.
While the former Finance Minister, Muhammad Ishaq Dar, now a fugitive, has been toeing the commands of IMF, the Punjab government under the infamous Khadim-i-Aala persuading him “to cut down the cash surplus target for Punjab” to create serious fiscal deficit for the centre. Nobody took note of it.
The extension of the 7th NFC Award, concluded on December 30, 2009 in Gwadar, was not according to the Constitution as there was a time limitation of five years under Article 160(1) which says: “within six months of the commencing day and thereafter at intervals not exceeding five years, the President shall constitute a National Finance Commission consisting of the Minister of Finance of the Federal Government, the Ministers of Finance of the Provincial Governments, and such other persons as may be appointed by the President after consultation with the Governors of the Provinces.”
The 7th NFC Award, termed as “landmark consensus”, was announced after a gap of 19 years. The 7th NFC Award was reached by accommodating major adjustments in vertical as well as horizontal distributions between the centre and the provinces and between provinces themselves. The shares were worked out on the basis of a formula that covered population, incidence of poverty, collection of revenues, and generation of revenues. Population was given a weight of 82 percent, poverty 10.3 percent, revenue collection 2.5 percent, revenue generation 2.5 percent and area 2.7 percent.
The Pakistan People Party (PPP) till today takes a great pride in achieving consensus over 7th NFC Award and 18th Amendment. Unfortunately, there are again indications of tussles between the centre and provinces over the distribution of resources under the new 9th NFC Award. The federal coalition government of PTI has reportedly assured IMF that it would strike a deal with the provinces “to balance revenue and expenditure responsibilities.” The provinces on the other hand are putting up fresh demands for increasing the divisible pool and compensation for hike in the weightage for lack of infrastructure and challenges of uprooting of people and destruction of property and businesses in the aftermath of war against terrorism, which they say is not provincial but national issue. Recently, all the finance ministers of provinces have warned that “any attempt by the federal government to minimise provincial resources or asking it to finance federal expenditures would be resisted.
After the 7th Award, both the federal government and provinces failed to observe strict financial discipline. Monstrous size of governmental departments is causing colossal wastage of resources. The governments are spending recklessly, a tendency that continues under civilian and military regimes, alike since the last many decades.
During the last 10 years, rising debt servicing, defence and security related expenditures have continuously reduced fiscal space for the federation. Cash-stripped government of the Pakistan Muslim League (Nawaz)—PMLN—was pursuing mega projects that could not be implemented without foreign investment and external debt. It also launched many ambitious schemes like youth loans that were abused.
PMLN showed increasing appetite for foreign credit and local borrowings. There was no will to reduce wasteful expenses and revise fancy projects or bring down defence expenses by cultivating friendly relations with neighbours through effective diplomacy. The 7th NFC Award authorised the provinces to raise taxes from agriculture, property and services. It granted 57.5 percent of revenues to the provinces. Expectations that the provincial governments would use the resources efficiently to improve the living standards of their people were never fulfilled. Till today, the provincial Another disturbing area has been non-existence of local governments and lack of fiscal decentralisation. Major fiscal powers are concentrated in the hands of federal government. Even the Constitution denies provinces the right to levy sales tax on goods within their respective territories—a right available to the provinces before the independence. The provinces also have shown apathy to devolve administrative and fiscal powers to local governments.
The fundamental issue of judicious and evenhanded distribution of taxation rights amongst Centre and provinces was not touched by any party in the NFC’s parleys held in Islamabad on August 27-28, 2009 or during the parleys on 18th Constitutional Amendment. The representatives of provinces and Federal Finance Minister showed “satisfaction” over deliberations. There was a mood of jubilation in official quarters over “consensus award.” This exposed the hollowness of our ruling classes which could not comprehend the real issue involved that was how to empower the provinces so that they could enjoy full autonomy in fiscal matters. Resultantly, the provincial governments continue to depend heavily on receivables from the Divisible Pool. Political exigencies stop them from raising provincial taxes. In this scenario, both the federal and provincial governments have failed to reduce their budget deficits, let alone make them prosper.
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Table: Position under 7th NFC Award
| Salient features | Shares | ||||
| * Final share of provinces: Punjab 51.74 percent, Sindh 24.55 percent, Khyber Pakhtunkhwa (KPK) 14.62 percent and Balochistan 9.09 percent. * Federal collection charges to be reduced from 5% to 1% * Sindh to receive additional transfer of Rs. 6 billion from federal government * Provinces in agreement on multiple indicators and respective weights * Sales tax acknowledged as provincial subject * KPK to be given additional 1% from federal divisible pool | Vertical distribution | ||||
| 7th NFC | 6th NFC | Change | |||
| Centre | 44% | 52.5% | -8.5 | ||
| Provinces | 56% | 47.5% | +8.5 | ||
| Horizontal distribution | |||||
| 7th NFC | 6th NFC | Change | |||
| Punjab | 51.74% | 53.01% | -1.27% | ||
| Sindh | 24.55% | 24.94% | -0.39% | ||
| KPK | 14.62% | 14.88% | -0.26% | ||
| Balochistan | 9.09% | 7.17% | +1.92% | ||
| Projected amount (in billions) | |||||
| 2009 | 2010 | 2014 | |||
| Punjab | 419 | 471 | 938 | ||
| Sindh | 197 | 223 | 445 | ||
| KPK | 118 | 133 | 265 | ||
| Balochistan | 53 | 83 | 165 | ||
There is something fundamentally wrong with Pakistan’s constitutional structure of distribution of taxing powers between the federation and the federating units. In all major federations—USA, Canada and India—the federating units have the exclusive right to levy tax on goods and services transacted within their geographical boundaries. In Pakistan, the Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948—none of the provinces has ever raised a voice to take it back.
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, 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 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. Punjab is the only beneficiary of the existing distribution of taxes under Article 160—it gets a lion’s share of 53% (for 2017-18 it was Rs. 1.2 trillion).
The Federal Government has been shamelessly encroaching upon the rights of the provinces by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and excise duty on a number of services. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to reduce the burgeoning fiscal deficit. Had the provinces been allowed to generate their own resources, the present chaotic situation could have been averted.
On the one hand, the provinces have not been allowed to levy taxes on goods generated within their boundaries and on the other, the federal government has utterly failed to tap the real revenue potential, which is not less than Rs. 8 trillion. The failure of FBR on this account adversely and directly affects the provinces as they are wholly dependent on what the Centre collects and transfers to them from the divisible pool. Pakistan is, thus, caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights while itself collecting too little, and in turn the provinces are unable to generate sufficient resources for the welfare of their poor people, who are the real sufferers in the prevalent Centre-Provincial conflict.
FBR’s track record shows remote possibility of collecting even Rs. 8 trillion in the next three years to give fiscal space both to the Centre and the provinces to come out of the present economic mess, thus extending some relief to the poor, trade and industry. Under the given scenario, federation-provinces taxing tangle will continue. Pakistan will remain in debt enslavement and more and more people will be pushed below the poverty line. If we want to come out of this crisis, there is an urgent need to reconsider equitable distribution of taxing powers between federation and the provinces. Provincial autonomy without taxation rights and equitable distribution of income and wealth amongst all the federating units is meaningless. We cannot come out of perpetual economic and political crises unless the provinces are given true autonomy; ownership of all resources; generation of own revenues and exclusive right to utilise them for the welfare of their inhabitants.
Article 160 of the Constitution, dealing with the NFC Award, does not prescribe any particular formula for distributing the net tax proceeds among provinces. It, in fact, requires equitable sharing and distribution of resources among federation and provinces. The issue is thus not that of vertical or horizontal distributions of taxes and resources, for which two committees have been constituted, but giving the provinces complete autonomy that includes exclusive right of levying taxes on goods and services emanating in their respective areas. The Centre, at present, is transgressing on this constitutional right of provinces and then out of so-called divisible pool—comprising unlawfully collected taxes belonging to provinces—gives them peanuts as charity. This is a lamentable act that should be stopped immediately. The ownership of all the resources of a province and its exploitation for the benefit of people of that province is the real issue that our parliament must address on emergent basis before it is too late.
In the recent months, many noted economists and reputed analysts have showed with facts and figures that the 18th Amendment and 7th NFC Award are harming fiscal stability. In a write-up, Federation’s fiscal dismemberment, it is insinuated that “the imbalances triggered by the 7th NFC Award directly and indirectly contributed to a range of macroeconomic problems and turned out to be an unmitigated disaster for the federation”. These concerns, bona fide or otherwise, have been totally ignored by all political parties in their election manifestos of 2018 and in interactions with media in talk-shows/interviews.
It is a fact, as highlighted by Ali Salman in his op-ed, Economic stability put on back burner by major political parties, “Pakistan’s economic progress notwithstanding still faces uphill challenges on its path of development, including sustained economic growth, while creating more jobs through the expansion of private sector. The energy sector does require deeper policy engagement to improve governance. Tax environment remains on the weakest front”.
The issue of NFC Award vis-à-vis provisions of 18th Amendment relating to decentralisation of fiscal powers cannot be examined in isolation. The economic wizard of last government, now a fugitive, in Budget in Brief for 2016-17, stated that 7th NFC Award would remain in practice for the said year. It also adopted for the budget for the current fiscal year 2018-19.This proved the apathy of Parliament towards its constitutional obligations. The last National Assembly during its tenure (2013-18) and Senate as permanent body till today paid no attention to address the issue of a new NFC Award after fresh census. Even the apex court remained oblivious of this constitutional lapse. The 8thNFC Award was constituted on July 21, 2010, but failed to deliver. The 9th NFC, constituted on April 24, 2015, held its 1st meeting on April 28, 2015, and what happened thereafter was just an exercise in futility. Now the PTI Government has reconstituted it and wants to finalise it by December 31, 2019 meaning by the budget 2019-20 will again on the basis of 7th NFC Award.
Since 2009, our economic managers have been following the 7th NFC Award. In 2018, it was followed without taking into account results of the latest census in utter violation of supreme law of the land! The provinces were equally apathetic—in fact happy that in accordance with the framework of the 7th NFC Award, their share in federal taxes and straight transfers is increasing every year. The provincial share in federal revenue receipts was estimated at Rs. 2384 billion during 2017-18, which decreased to Rs. 2316 billion in revised estimates. For 2016-17, it was Rs. 2136 billion showing an increase of 15.3% over revised estimates of fiscal year 2015-16. The provinces were jubilant to know that the provincial share in federal revenue receipts, estimated at Rs 1849 billion in 2015-16, was increased to Rs 1852 billion in revised estimates of fiscal year 2015-16! They failed to notice decline in straight transfers to provinces, from estimated Rs. 102,379 million in 2015-16 to Rs. 100,361 million and further reduction to Rs. 91,738 million in 2016-17!
It is clear that all the federal and provincial governments have never been concerned with the fundamental issue of judicious and evenhanded distribution of taxation rights between Centre and federating units that can help empowerment of masses and ensure prosperity for all. In 2009, the representatives of provinces and federal government showed “satisfaction” over the 7th NFC Award. In fact, there was a mood of jubilation that a consensus had been reached. This confirms the hollowness of our ruling classes as they failed to comprehend the real issue faced by the federation that was how to empower the provinces so that they have full autonomy in fiscal and administrative matters. The issue was not only devising a just and fair formula for distribution of the net proceeds of the taxes—commonly known as Divisible Pool—but the revisiting of Article 142, 160 of the Constitution vis-à-vis bringing the less privileged and under developed areas at par with big sprawling cities where mass influx of people is playing havoc creating ghettos.
Balochistan should have exclusive right to levy sales tax on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This levy can make them rich. Their present share in sales tax from 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. Punjab is the only beneficiary of the existing unjust distribution of taxes. It got a lion’s share of 53% (for 2017-18 over Rs. 1.2 trillion). This perpetual imbalance has created disharmony and animosity between the Centre and the provinces.
The Federal Government has been brazenly encroaching upon the rights of the provinces by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services etc. Way back in 2009, the Sindh Assembly in a unanimous resolution took a strong exception of this malpractice and demanded the federal government to stop collecting sales tax/federal excise on services as this right is exclusively vested with the provinces. This malpractice on the part of federal government continues even till today. Sadly, even after this highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the federal government has miserably failed to reduce the burgeoning fiscal deficit—it has increased to a monstrous level of Rs. 2.5 trillion for the fiscal year ending on June 30, 2018.
The performance of provinces in collecting agricultural income tax is extremely appalling. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich and mighty—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and Centre in fiscal year 2017-18—is lamentable. 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 would help FBR to collect income tax of Rs. 5 trillion as per actual potential and provinces by levying sales tax on goods and services generate sufficient funds for their needs. This is the only way to achieve fiscal stabilisation in Pakistan.
According to a Press report, the IMF has asked the PTI Government to reduce the share of provinces under the NFC Award as a condition for new bailout package. In terms of Article 160(3A), inserted by the 18th Amendment in 2010, “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”. It means that share of provinces of 57.5%, under the 7th NFC Award cannot be reduced.
The IMF even before giving us fresh bailout is behaving like a Neo East India Company. But the fault lies with our parliamentarians and men in power. They have policies of appeasement towards the tax evaders. They get tax amnesties and immunity for the tainted money under obnoxious laws like Protection of Economic Reforms Act, 1992 (still not repealed even after empirical data that it helped in flight of money from Pakistan to the extent of US$ 250 billion in the last 25 years).
We keep on cursing the IMF and others but never try to put our own house in order. The beggars cannot be the choosers. IMF did not invite us for another bailout. During the Decade of Democracy (2008-18), both Pakistan People Party and Pakistan Muslim League (Nawaz) helped the rich industrialists to avoid paying enhanced contributions to Workers’ Welfare Fund by making amendments in the law through Money Bill rather than taking the proposed legislation to both the Houses. Even after the verdict of Supreme Court of Pakistan on this issue, no corrective measure has been taken. In 2013, Income Support Levy was imposed on net moveable assets exceeding Rs. 10 million at the rate of just 0.5% but 99.9% parliamentarians, including the incumbent Prime Minister and his predecessor, did not pay it. The rulers do not pay due taxes and then beg for IMF’s bailouts—obviously the conditions of IMF hit the poor and not them.
The parliamentarians, instead of making Pakistan self-reliant, are keener to increase their salaries, perks and perquisites. On the other hand, the minimum wages notified for the poor workers were a mockery of Article 3 of the Constitution. For such rulers and those who vote for them, subjugation at the hands of foreign investors/lenders is a fait accompli. The stalwarts of Pakistan Tehreek-i-Insaf while sitting in Opposition or now in power never prepared a plan how to avoid this subjugation, though boisterous sloganeering to this effect was their hallmark.
The reconstituted 9th NFC, in its maiden meeting, chaired by Finance Minister Asad Umar, held in Islamabad on February 6, 2019, discussed besides other issues recommendations for improving the distribution of resources among provinces and smooth communication between the centre and provincial administrations. Prior to the meeting, Asad Umar in response to a question whether the Federal Government planned to ask the provinces to give up 7% of their share responded: “We are not starting discussions from a fixed position”. “We will explain to the provinces the economic and financial issues confronting the country and try to reach a consensus on the points that need to be addressed,” he added.
Under the previous government of Pakistan Muslim League (Nawaz), the 9th NFC was constituted on April 24, 2015. In its first meeting of April 28, 2015, four working groups were constituted to undertake thematic studies and put forth their recommendations. What happened thereafter is history—a sad reflection on fulfilling the constitutional obligations by entire political leadership. It went largely unnoticed as the so-called vibrant media (sic) remained busy in Baghdadi-like manazaras (debates) to ignite conflicts among the already highly divided and disturbed nation.
The star Finance Minister of PMLN in 2017 was shamelessly following the NFC Award of 2009 and that too without fresh census required under the supreme law of the land! Yet, he claimed “ours is the best government Pakistan has ever had!” The provinces were also guilty of not agitating the matter—happy to get more money!!
The issue was and still is not only devising a just and fair formula for distribution of the net proceeds of the taxes—commonly known as Divisible Pool—but the revisiting of Article 142, 160 of the Constitution vis-à-vis bringing the less privileged and under developed areas at par with big sprawling cities where mass influx of people is playing havoc with law and order situation besides creating pressure on available civic amenities. Article 160 of the Constitution, dealing with the NFC Award, does not prescribe any particular formula for distributing the net tax proceeds among provinces. It, in fact, requires equitable sharing and distribution of resources among federation and provinces. The matter is, thus, not that of vertical or horizontal distributions of taxes and resources, for which six new working groups have been constituted, but giving the provinces complete autonomy that includes exclusive right of levying harmonised sales tax on goods and services emanating in their respective areas.
Depriving provinces of the right to levy sales tax on goods is the fundamental flaw of our constitution. It was available to them before independence. The Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948 with the promise to give it back as soon as financial position of Centre improved—a promise that remains unfulfilled with none of the provinces ever raising its voice to seek fulfilment.
Balochistan should have exclusive right to levy indirect taxes on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This can make them rich. Their present share in sales tax from 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.
The Centre has been brazenly encroaching upon the rights of the provinces by levying presumptive taxes on services under the Income Tax Ordinance, 2001, sales tax on gas, electricity and telephone services and Federal Excise Duty (FED) on a number of services. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to overcome the burgeoning fiscal deficit. Had provinces been allowed to generate their own resources by levying sales tax etc on goods produced by them, the present chaotic situation on fiscal front could have been averted.
It is regrettable that the provinces have been denied even pre-partition available right of levying sales tax on goods. They have been purposefully made dependent on the federal government—this is a considered policy of control for maintaining hegemony over federating units. On the one hand, the provinces have not been allowed to levy taxes on goods generated within their boundaries and on the other the federal government has utterly failed to tap the real revenue potential, which is not less than Rs. 8 trillion—the roadmap to realise it is available in ‘Towards Flat, Low-rate, Broad & Predictable Taxes’ (PRIME, 2016). Collection to this extent will make the entire Pakistan prosper and not only a few urban areas.
The FBR has reportedly informed Asad Umar that it would be able to collect only Rs. 4.1 trillion this year. It means less than promised share for the provinces. In the Budget 2019, the revenue target of FBR was fixed at Rs. 4435, which was reduced to Rs. 4398 billion by the PTI Government and now FBR wants further reduction of 335 billion vis-à-vis original target slashing substantially the share of provinces promised for 2018-19!
The pathetic performance of FBR affects the provinces as they are heavily dependent on share/transfers from the Divisible Pool. Pakistan is, thus, caught in a dilemma: Centre is unwilling to grant the provinces their legitimate taxation rights and has at 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. In this scenario, the real sufferers are the masses. The taxation rights under the prevalent constitutional scheme needs reconsideration to empower provinces to raise adequate resources which will also help in overcoming overall fiscal deficit faced by the country.
For reforming the outdated and outmoded tax machinery, we need comprehensive structural reforms. The FBR needs to be run by a competent Board as a short-term reform measure before it is finally merged into National Tax Authority [NTA]. In the long-term, Pakistan must have single tax agency that collects taxes as well as disburses benefits like social security, food stamps, universal pension and income support etc. The linkage of database of various bodies with NTA (complete digitization) will be a great step towards e-government model for the country that is presently non-existent. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council (NEC)[Article 156].
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. In this perspective, we should also discuss the idea of NTA. FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential. In fact, FBR has become a tool in the hands of businessmen-turned-politicians in getting enormous tax benefits through the infamous Statutory Regulatory Orders (SRO) system.
The planning, in the post-Eighteenth Amendment period should be federalised rather than centralised. But nobody has raised this issue. 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 Eighteenth Amendment, Article 156 related to the NEC had two clauses.
The 18th Amendment gives provinces equal rights over their natural resources. Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. The subject was earlier held by the federal government. There still exist legal and administrative bottlenecks for implementing this provision.
Federal injustice in tax matters has denied the provinces their constitutional rights besides crippling them financially. The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries—VAT should not be a federal subject at all. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Despite federal highhandedness in levying unjust taxes and denying the provinces their legitimate shares, the Centre has miserably failed to reduce the burgeoning fiscal deficit. Adding insult to the injury, the federal government tax officials have the audacity to claim that provinces lack infrastructure to efficiently collect taxes—an attitude that is reflective of colonial legacy. This issue should be left to sovereign parliaments of provinces.
Presently, many economists and politicians are arguing that 7th NFC Award is harming fiscal stability of federation. Their argument needs consideration. The issue of NFC Award vis-à-vis provisions of 18th Amendment must be examined holistically. The performance of provinces in collecting agricultural income tax is extremely appalling. This is a common issue both at federal and provincial level arising from absence of political will to collect income tax from the rich—the meagre collection of agricultural income tax—less than Rs. 2 billion by all provinces and Centre in fiscal year 2017-18—is lamentable. 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 of Rs. 5 trillion 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 stabilisation in Pakistan without disturbing the 18th Constitutional Amendment.
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The writers, tax lawyers, are members of visiting faculty of Lahore University of Management Sciences (LUMS).