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Revenuecracy & provincial budgets

Dr. Ikramul Haq

The budgets of Punjab and Sindh for fiscal year 2020-21, announced on June 16 and 17, 2020, respectively, have highlighted a pivotal point that all their projections on revenue side depended on the performance of Federal Board of Revenue (FBR)—Revenuecracy, an apt term coined by renowned economist Dr. Pervez Tahir. This is a fundamental issue, as bulk of the spending side depends on projected amounts provinces will get from the federal government on the basis of formula contained in 7th National Finance Commission (NFC) Award [commonly called Divisible Pool] concluded before Constitution (Eighteenth Amendment) Act, 2010 [commonly called the  “18th Amendment”].

It is pertinent to highlight that Dr Abdul Hafeez Shaikh, Adviser to the Prime Minister on Finance and Revenue, in a statement on June 13, 2020, “advised the provinces not to make their budgets on the basis of proposed Rs. 4.963 trillion tax collection target fixed for FBR for fiscal year 2020-21”. He further added: “The provinces should make their budgets while keeping in mind the Federal Board of Revenue’s past performance and difference between performance, projections and reality”.   

The failure to tap actual tax potential by the federal and provincial governments is the real issue rather than the 18th Amendment vis-à-vis NFC Award as reiterated by Prime Minister on June 17, 2020 during his two-day visit of Sindh. Dismal performance byFBR, it never collected even Rs. 4 trillion, adversely affects the provinces, as they overwhelmingly depend on their shares under NFC Award. Provinces are also failed to collect taxes wherever due e.g. agricultural income tax from the rich absentee landlords and fair property tax from owners of palatial houses/bungalows/farm houses etc. Since the passage of 18th Amendment on April 19, 2010, they have also not devolved political, administrative and most importantly, fiscal powers, to local governments as envisaged in Article 140A of the Constitution of Islamic Republic of Pakistan [“the Constitution”].

In the Punjab budget for fiscal year (FY) 2020-21, out of total resources of Rs. 2.24 trillion, share from Divisible Pool is estimated at Rs. 1.43 trillion (43.7%). According to a report: “….Since FBR tax revenue target is elusive, the share of Punjab will be short… Development spending could be compromised and provincial surplus of Rs.125 billion would only be on paper…The federal shortfall is to cascade to the provinces…”

This is where the problem lies. Punjab is the most populous [110 million as per 2017 census] province but has failed to raise sufficient revenues [tax and non-tax] and accelerate pace of development, having a negative impact on overall national growth and resource mobilisation.

For the last many years, the performance of Punjab in tax collection is abysmal. Even much before the impact of Covid-19 epidemic, the Punjab managed to collect only Rs. 104.6 billion in the first half of current fiscal year (barely 35.5% of the target). This exposed the tall claims of the coalition government of Pakistan Tehreek-i-Insaf (PTI) that it would substantially increase tax receipts after coming into power! The performance, after negative impact of coronavirus epidemic, as per budget documents shows that the original tax target of Rs. 295 billion is revised downward to Rs. 191 billion and next year’s target fixed at Rs. 220 billion.

The performance of tax collection of Sindh is better as compared to Punjab having less population [47.88 million as per 2017 census], fewer big cities and smaller industrial/agriculture output. The original tax target of Rs. 267 billion is revised to Rs. 235 billion (short by only Rs. 32 billion) despite Covid-19 economic toll and for FY 2020-21, tax target is fixed at Rs. 264 billion that is Rs. 44 billion more than Punjab!      

Every year the federal government first fixes a high tax target and then fails to achieve the same, even after downward revision(s), due to FBR’s incapacity and/or irrational fixation. The provinces prepare their budgets on original tax target of FBR and their share shown in federal budget. It leads to fiscal quandary, and real casualty is drastic cut in development expenditure than in non-productive/wasteful expenses due to paucity of funds with federal government and less than projected share to provinces. Unfortunately, no serious attempt is made to remedy this perpetual/persistent malady. Where does the problem lie? As regards, FBR, various distortions in tax policy and weak enforcement highlighted in these columns, now endorsed in recent Policy View [17:2020] of PIDE, Doing Taxes Better: Simplify, Open & Grow Economy, quoting Towards Flat, Low-rate, Broad and Predictable Taxes [PRIME Institute, 2016].

Under the 18th Amendment, progressive taxes e.g. wealth tax, capital gain tax on immovable property, estate duty (inheritance tax) and gift tax are with the provinces but none of them has shown inclination to levy any of these during the last ten years. Meager collection of agricultural income tax by all provinces also proves that they protect the rich and mighty, mostly sitting in assemblies or financing the parties.

The provincial governments have not even undertaken fundamental structural reforms to merge all tax departments, namely, Revenue Boards, Excise & Taxation Departments and revenue bodies exclusively established to collect sales tax on services. They could have provided one-window facility to the citizens ensuring ease of doing business and efficient collection, besides avoiding multiplication of expenses. No such move is made till today, causing loss to public exchequer and creating hardships for the citizens to deal with numerous departments. 

The provincial governments while not taxing the rich/wealthy rely mainly on FBR’s collection. For the FY 2019-2020, FBR is going to miss massively target of Rs. 5555 billion originally fixed, revised twice and now stands at Rs. 3900 billion. The same trend of missing target by big margin will continue as target of Rs. 4963 billion, fixed for FY 2020-21 is unrealistic due trembling economy under Covid-19 epidemic.

In the existing circumstances, the fiscal management at federal and provincial levels needs fresh thinking. The federal government, having all buoyant and broad-based taxes, is not tapping the real tax potential and the country is heavily indebted. On the other hand, provinces, mainly dependent on share from Divisible Pool, lack sufficient resources to meet the needs of the ever-growing population. For overcoming this dilemma, the federal and provincial governments need to find out a solution through National Economic Council [NEC] as mandated in Article 156(2) of the Constitution.

We must move towards a national tax agency, run by All Pakistan Unified Tax Services (APUTS). It can be done by resorting to Article 144/149 of the Constitution. A highly professional/automated agency and competent APUTS are the viable solutions. The provinces must be given due role in framing national tax policy and participation in national tax agency as their share in Divisible Pool is larger than that of the federal government. Presently, they have no say in policy and role in collecting taxes, in which they have substantial interest. The federalised model with simplified/low-rate/broad-based taxes will help in economic revival, creating much-needed ease-of-doing climate, boosting domestic/foreign investment, enhancing revenues, and meeting the challenges arising from Covid-19 epidemic.


The writer, Advocate Supreme Court, is Adjunct Faculty at Lahore University of Management Sciences (LUMS)

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