Towards federalised tax apparatus

Dr. Ikramul Haq

The provinces must participate in devising a national tax policy and collection apparatus as their share under 7th National Finance (NFC) Award (57.5%) is greater than the federal government and it cannot be reduced under Article 160(3A) of the Constitution of the Islamic Republic of Pakistan [“the Constitution”]. Article 156(2) of the Constitution after Constitution (Eighteenth Amendment) Act, 2010, [commonly called “18th Amendment”] requires federalised and not centralised economic planning. It reads: 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”. 

In view of conditions contained in  IMF’s Country Report No. 2021/073 of April 8, 2021, the Government of PTI in the coming days, many say, will have to say goodbye to the IMF if it is to ensure survival and revival of businesses adversely affected by Covid-19 pandemic that employ millions having no other source of income. Overwhelming majority of businesses in the wake of lockdown necessitated due to third wave of Covid-19 epidemic is on the verge of closure. These were already suffering due to sluggish economic activities, high utility bills and markup rate.

Tax reforms without a fair and efficient tax administration can never be enforceable. For this purpose, a single national tax agency, is needed not only to collect taxes for federal, provincial and local governments but also to administer various social and economic benefits and incentive programmes, otherwise tax compliance will remain a distant dream. People must get free education, quality healthcare, decent housing/transport plus social security schemes, such as, disability allowance, old age benefits, income support, child support, pension, just to mention a few, in lieu of paying taxes.

Devising a rational policy and revenue mobilisation strategy is the biggest challenge before Shaukat Tarin, the 4thFinance Minister of PTI coalition Government in less than three years of its rule. All agree that we need to adopt economic policies aimed at rapid growth and investment. On taking charge, Shaukat Alam Ahmed Tarin rightly highlighted that his top most priority would be sustainable growth and prosperity for all the citizens. Taxes will increase with growth and not by high taxes and withholding provisions. The contrary prescription by IMF of higher taxes and costly energy will lead to further unemployment and dismal growth.

The following draft plan for federalised tax apparatus with simple tax system, as proposed in two books, ‘Towards Flat, Low-rate, Broad and Predictable Taxes’ (PRIME 2020) and ‘Tax Reforms in Pakistan: Historic & Critical Review’ (PIDE, 2020), is worth consideration:

• On March 12, 2020, National Tax Council [NTC] was formed. The NTC has an executive committee, comprising federal finance secretary, Chairman of Federal Board of Revenue (FBR), provincial finance secretaries and heads of the provincial revenue authorities, namely, Punjab Revenue Authority (PRA), Sindh Revenue Board (SRB), Khyber Pakhtunkhwa Revenue Authority (KPRA) and Balochistan Revenue Authority (BRA).
• The executive committee of NTC must propose All Pakistan Tax Services (APTS) and merge all the tax agencies mentioned above, through amendment in the Federal Board of Revenue Act, 2007, renaming it as National Board of Revenue Act, 2021 [NBR Act, 2021] after consultation and approval from all the provinces to pass resolution under Article 144 of the calling meeting of National Economic Council [Article 156]. FBR to become National Board of Revenue (NRB).
• All serving CSS officers of FBR, PRA, KPRA and BRA will become part of APTS working underNBR. They will have their seniority and other terms of service as before and others can join through Federal Public Service Commission (FPSC) against the posts they are working.
• For collection of harmonised sales tax on goods and services, new law will be needed after resolutions by provincial assemblies under Article 144 of the Constitution. In the same manner, a uniform law for agricultural income tax (AIT) for all provinces and its collection by NBR. In the income tax return form, one page for declaration of AIT will be added. The collection of AIT will be by NBR but shares will be transferred to provinces directly. As regards sales tax on goods and services, the transfer of sales tax on services will be directly to provinces to which it belongs and distribution of sales tax on goods will be strictly under prevalent NFC Award.
• The NRB, unlike FBR, will have no role in framing tax policy. For this a permanent Tax Policy Board should be established with Planning Commission to become its permanent secretariat for federalised economic development. The role of Policy Board will be of a think-tank to recommend policies for equitable and accelerated growth on national level as well as helping all assemblies and Senate for tax legislation to achieve the desired goals.

The above proposed roadmap for harmonisation of fragmented taxes and various tax collection agencies may be presented for debate in public, national and provincial assemblies and Senate and eliciting input from all stakeholders and experts.

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