Share this story!            

VIEW: NFC: vital issues ignored —Huzaima Bukhari & Dr Ikramul Haq

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 — the US, Canada and India — the federating units have the exclusive right to levy taxes 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 the provinces in 1948

The fundamental issue of judicious and even-handed distribution of taxation rights amongst federation and federating units has not been touched in the parleys so far held by the National Finance Commission (NFC) in Islamabad, Peshawar, Quetta and Karachi. The representatives of the provinces and the federal finance minister showing “satisfaction” over deliberations are hopeful of having a consensus award this time. It confirms the ineligibility of our ruling classes — they cannot comprehend the real issue involved, i.e. how to empower the provinces to have full autonomy in fiscal and other matters. The issue is no longer that of devising a formula for distribution of the net proceeds of the taxes — commonly known as divisible pool — but the revisiting of Article 142, 160 along with federal and concurrent legislative lists of the Constitution.

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 the federation and the 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 the 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.

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 — the US, Canada and India — the federating units have the exclusive right to levy taxes 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 the provinces in 1948 — none of the provinces has ever raised a voice to take it back. As regards sales tax on services, it is with the provinces, with the Federal Board of Revenue (FBR) assigned the right of collection on their behalf.

Lack of judicious distribution of taxes and perpetual abuse of constitutional provisions by Islamabad has created disharmony and animosity between the Centre and the provinces. Our unanimously-elected prime minister in his maiden speech after winning the “historic” vote of confidence, made a pledge that the Concurrent List in the 1973 Constitution would be abolished within one year. He could have done it immediately — there was consensus on it in both the houses — but deferred it unnecessarily for one year and even failed to fulfil that promise after a lapse of one and a half years.

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. The Sindh Assembly in its unanimous resolution of February 3, 2009 took strong exception to this malpractice and demanded of the federal government to stop collecting sales tax on services as this right exclusively vested with the provinces. It also demanded a refund of Rs 213 billion collected under this head by the FBR on gas, power and telephone services from Sindh province during the fiscal years 2001-02 to 2005-06. No other provincial assembly has made such a claim — perhaps our worthy members never bothered to study the 1973 Constitution.

The provinces also did not agitate that the FBR through them collects tax worth billions of rupees at source without paying any service charges, whereas it charges a 2 percent fee to the provinces for collecting sales tax on services on their behalf. 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 taxes on goods and services within their respective physical boundaries. The right to levy sales 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. Had the provinces been allowed to generate their own resources, the present chaotic situation could have been averted. The FBR has the audacity to claim that the provinces lack infrastructure to efficiently collect taxes. Who has given the authority to the FBR to issue such statements? Are people sitting in the FBR above the Constitution and enjoy the right to belie a sovereign parliament?

It is shameful that the provinces have been denied constitutional rights to levy taxes and that has made them totally dependent on the federal government. This is a considered policy of control for maintaining hegemony over the federating units. What makes the situation more painful is the fact that even under the existing constitutional framework, the provinces are not getting their due shares. The so-called consensus NFC Award for 2010 is not going to meet the budgetary needs of Sindh, NWFP and Balochistan as the total allocations for them would not be more than Rs 300 billion.

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 4 trillion. The failure of the 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: the Centre is unwilling to grant the provinces their legitimate taxation rights and collect 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-provinces conflict.

The FBR’s track record shows remote possibility of collecting Rs 4 trillion in the next three years to give a 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. In the given scenario, the 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 the 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.

The writers, tax lawyers, are visiting Professors at Lahore University of Management Sciences (LUMS)

Home | Editorial

Share this story!