Huzaima Bukhari & Dr. Ikramul Haq
The fiscal management in the wake of 18th Constitutional Amendment [the “18th Amendment”] has been posing serious challenges for all. The problems diagnosed by experts are ambiguity over taxation rights between federation and its units, weak administrative structures, lack of political will and apparatuses to enforce devolved subjects/laws, issues of capacity, efficiency, rent-seeking and competitiveness, violation of the rule of law, non-acceptance of the norms of fair play in economic matters coupled with ‘reckless’ borrowing and ‘ruthless’ spending amidst dismal tax-to-GDP ratio.
Structural reforms and concrete actions are needed for tapping the real tax potential of the country, which is not less than Rs. 12 trillion at national and provincial levels [‘Towards Flat, Low-rate, Broad and Predictable Taxes’, PRIME, 2016]. Unfortunately, the present tax collection by federal and provincial governments is highly unsatisfactory. The real potential at federal level is not less than Rs. 8 trillion, whereas Federal Board of Revenue (FBR) is not collecting even half of it. The same is the position of provincial tax authorities that have failed to realise the tax potential of Rs. 4 trillion. At present, all broad-based and buoyant sources of revenue are with the federal government while contribution of provinces in total tax revenues is only seven percent—in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool and/or direct grants.
Pakistan, as mentioned in ‘PTI and tax reforms’, Business Recorder, August 17, 2018, needs to increase collection at all levels of governments to bridge monstrous fiscal deficit that reached the level of 6.2% of GDP (Rs. 2.3 trillion) for the fiscal year 2017-18. It was stressed in ‘Overcoming fragmented tax system’, Business Recorder, October 19, 2018 that all the tax collection agencies in Pakistan should be dismantled and merged into single National Tax Authority (NTA), which should effectively enforce tax laws at federal, provincial and local levels, besides providing single window facility to taxpayers. Before establishing NTA, all the four provinces should be consulted and consensus must be reached for establishing an All Pakistan Unified Tax Service (APUTS) as suggested and elaborated in ‘Case for All-Pakistan Unified Tax Service: PTI & innovative tax reforms’, Business Recorder, August 31, 2018, and ‘Doing business under scattered taxation’, Business Recorder, September 7, 2018.
One major hindrance towards optimizing revenue collection is the scattered and haphazard tax collection through multiple authorities at the federal and provincial levels. The trend was further strengthened consequent to the 18th Amendment after which the provinces established their own tax collection agencies at the provincial level. However, these provincial tax authorities still lack skilled manpower, tax collection expertise and other necessary human capital and paraphernalia to collect taxes. To meet these objectives, the services of FBR officers were requisitioned by the provincial authorities for their posting at provincial tax collection agencies on deputation basis. Resultantly, many of the FBR officers were sent to provincial tax agencies such as Sindh Revenue Board (SRB) and Punjab Revenue Authority (PRA).
Although the 18th Amendment was widely appreciated by the provinces, it created fissures in the revenue collection authority of FBR resulting in further decline in tax collection because tax on services fell in the provincial domains. On one side, the move was hailed by the provinces but, on the other, the taxpayers immediately started raising their eyebrows because they had to now face both federal and provincial tax authorities. All major Chambers of Commerce expressed their concerns and showed reservations on the scattered tax collection in the aftermath of the 18th Amendment. It is important to mention that Excise and Taxation (E&T) departments are already working as a separate entity under the provincial governments. The E&T departments have no formal administration connection with SRB, PRA and other provincial tax collection agencies. Unless, all federal and provincial tax agencies are unified and harmonized, the dream of optimum tax collection cannot be materialized. Through consensus and democratic process, all the parliaments can enact laws for establishing an autonomous National Tax Agency that can facilitate people to deal with a single Revenue Authority rather than multiple agencies at national, provincial and local levels. 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 [Article 156].
It is strange that with the devolution of a large number of subjects to the provinces since the Eighteenth Constitutional Amendment in 2010, Planning Commission is still working as arm of Federal Government without taking into account the command of Article 156(2) of the Constitution which says:
“The National Economic Council shall review the overall economic condition of the country and shall, for advising the Federal Government and the Provincial Governments, formulate plans in respect of financial, commercial, social and economic policies; and in formulating such plans, it shall, amongst other factors, ensure balanced development and regional equity and shall also be guided by the Principles of Policy set-out in Chapter 2 of Part II”.
The deletion of the subject of national planning from the exclusive domain of the Federal Government, and the placing of the National Economic Council (NEC) in the list of subjects mandated to be the joint responsibility of the Federal Government and the Provincial Governments remains unnoticed by our parliamentarians and independent experts. Strangely, the provinces have not raised this issue till today.
Centralised planning was an important factor in the dismemberment of the country in 1971. The planning, in the post-Eighteenth Amendment period should have to be federalised rather than centralised. But nobody has raised this issue. The Eighteenth Constitutional 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. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the Eighteenth Amendment. The pre-amendment clause (1) read as follows:
“The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:
Provided that the President shall nominate one member from each Province on the recommendation of the Government of that Province.”
While the apex planning body, the NEC, has been federalised, Planning Commission continues to be centralised. The spirit of the Constitution can be satisfied by (1) making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and (2) by reducing the number of its members to five, one each from the Provinces and the Federal Government. Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.
There is an urgent need for restructuring the planning mechanisms in the provinces. At present, the provincial planning and development boards/departments are not working in harmony with NEC. An important reason why the centralised role of planning and the Planning Commission continues is the weak capacity of the provincial planning mechanisms. After the Eighteenth Amendment, the Planning Commission could no more be a centralised body. Federal Legislative List, Part I, contains subjects which lie in the exclusive jurisdiction of the Federal Government. Before the Eighteenth Amendment, its item 32 related to planning–“National planning and national economic coordination including planning and coordination of scientific and technological research.” After the Amendment, the subject was included in the Federal Legislative List, Part II. The last-mentioned list of subjects is neither exclusively federal nor provincial; it is an area of joint responsibility. In the Constitution, a special institution, the Council of Common Interests (CCI), has been created to supervise the affairs of the Federation listed in Part II of the Federal Legislative List.
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).
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 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 Amendment.
The writers, tax lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS)