There is something fundamentally wrong with Pakistan's constitutional structure of distribution of taxing powers between the federation and the federating units.
The Centre has always usurped the right of the provinces to levy tax on goods and services within their territorial jurisdiction. Assignment of taxes is a vital constitutional and political issue and it is high time that proper attention is given to solve the State's taxing predicaments that are perpetual source of disharmony between the Centre and the provinces.
Assignment of a tax means transfer of taxation power from a higher level to a lower level government.
Taxation power includes the following: right to levy tax, collect tax and appropriate the proceeds from such tax. Thus, there can be three interpretations of assignment of a tax. Firstly, higher-level government may levy and collect a tax but handover the entire proceeds to lower level governments. Secondly, the higher-level government may levy a tax but allow the lower level governments to collect it and retain fully the proceeds there from. Finally, the higher-level government may transfer a tax to lower level governments, a situation which defines assignment of a tax in its strictest sense.
In Pakistan, the opposite and the worst has happened. Federal highhandedness in tax matters (by using both federal and concurrent lists) has destroyed the financial and economic rights of provinces. The provinces should have the exclusive right to levy taxes on goods and services within their respective physical boundaries, but the Federal Government blatantly encroached upon their undisputed right by levying tax on goods and services under the garb of presumptive taxes in Income Tax.
Such taxes cannot be termed as taxes on income (which the federal government is empowered to levy under item 47 of the Federal List) but tax on goods and services. It is a great tragedy that this argument was not presented in the Supreme Court when the constitutionality of such provisions was challenged in 1991 and the debate merely revolved around academic discussions over the concept of income.
If the Federal Government can treat tax on goods and services as tax on income, as upheld by the apex court per incuriam (a mistaken judgement) in Elahi Cotton case PLD 1997 SC 582, then what will be sanctity of division of fiscal powers provided in the Constitution of Pakistan between the Federation and the provinces.
Generally, the purpose of tax assignment is to augment the resources of lower level governments. The assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower level government to levy tax assigned to it. Not only this, the lower level government may not have powers to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing tax rates within a minimum and maximum range prescribed by the higher-level government.
Our tragedy is that on the one hand we have too many taxes in the country (federal, provincial and local, although the last two only generate a negligible nation's revenue) and on the other the benefit of revenue collection is not reaching the poor masses.
The few rich are the real beneficiaries of every luxury that is available. Fiscal gap is increasing every year despite IMF-World Bank's bitter prescriptions bringing more miseries for the common people of Pakistan. We have utterly failed to reform our tax system, a process initiated as early as 1990s.
The prime reason for this failure is that provinces have not been given any meaningful role in the process and since 1947 our rulers at the Centre have been treating them in the same way as the British imperialists. The Central Board of Revenue (CBR), an apex revenue collection authority at federal level, has emerged as Neo East India Company, its role being fulfilment of the agenda of foreign masters.
It is simply impossible to improve tax administration when tax officers serving in provinces are not accountable to provincial governments and instead behave as "rulers" imposed by Islamabad. The generally accepted principles of taxation are efficiency (explained by reduction in distortions in the allocation of resources), equity (requiring the more able to bear burden of paying tax at higher rates) and effectiveness of the administrative machinery. How can these principles be enforced in Pakistan when the tax administrative machinery presents the worst reminiscent of colonial era, both in thinking and practice?
We should get ourselves free from the figure game of the IMF.
The existing tax policies have failed to reduce the fiscal deficit, and on the contrary are destroying our industry and business as well as pushing large segment of society towards poverty line. If we manage to formulate a rational tax policy and implement it through consensus and not coercive measures, there is every possibility to get rid of IMF in a short span of time.
However if we will keep on following their prescription, we will never achieve the cherished goal of self-reliance through resource mobilisation. Our tax potential is not less than Rs 800-900 billion provided the tax base is made wider and equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged sections of society are withdrawn.
Shahid Hafeez Kardar, a leading economist and ex-finance minister of Punjab, very rightly observed: "In our case tax administration weaknesses with regard to enforcement arise because of an ineffective legal system and the lack of effective accountability of government employees.
Greater publicity should be given to cases of tax evasion (only those upheld by courts or conceded to by taxpayers) in the hope that public shame would serve as one of the deterrents to tax evasion. Good governance in a structure of transparent taxation cannot be achieved with the same ease as computerisation of the taxation system through purchase of equipment and supporting software. These essentials will continue to elude us as long as the governing political system nurtured and supported by the elite is financed by black money through institutionalised instruments and mechanisms for evading taxes.
How does one overhaul such a system through the transformation of the political structure is a million-dollar question that defies easy answers as to the need for tax reform built around transparent and simpler systems of taxation. However, the reality is that there are no quick fixes.
Exercises to simplify tax laws and to ensure effective enforcement can take several years, as the experience of even developed countries shows - for instance, it took Canada 10 years to implement the proposals of the Carter Commission."
Shaukat Aziz on becoming Finance Minister (first time) claimed that the Centre would retain only three taxes - income tax, customs duty, and sales tax. But he never mentioned that in most parts of the world sales tax is a provincial levy with a rate ranging between 3% to 8%. In Pakistan it is a federal tax (a worst example of constitutional highhandedness), which is shared, to a negligent extent, with the provinces.
The provinces also promised to curtail total number of taxes from about 25 to 5. As the Centre failed to collect even Rs 700 billion as tax revenue and could only distribute Rs 239 billion to all the provinces in the fiscal year 2004-2005, the provinces could not consequently reduce the total number of their taxes.
Now the local bodies are demanding more taxes to function effectively, so the chances of reducing the tax burden from the masses is fast diminishing. We are caught in a dilemma where the Centre is unwilling to grant the provinces their legitimate right and in turn the provinces are unable to reduce the ever-increasing burden of taxes. The real sufferers in this Centre-province conflict of interest are the voiceless masses.
The Centre might have given away some of the federal taxes to the provinces, most likely sales tax as is the case in India, if the federal revenues had increased substantially, but tragically despite all kinds of oppression, highhandedness, negative tactics, withholding of refunds and what not the CBR took four years [1998-99 to 2001-02] to cross from Rs 307 billion to Rs 401 billion -- an average increase of Rs 24 billion a year.
From 2002-03 to 2004-05 it increased revenue from 460 billion to 590 billion-average increase of less than 25%. CBR's track record shows little possibility of achieving Rs 750 to 900 billion mark in next five years to give a fiscal space both to the Centre and the provinces to come out of the present mess and extend some relief to trade and industry for growth.
Unless some revolutionary steps are invoked and a new constitutional taxing contract is negotiated between the Centre and the provinces there is little hope for mobilising a bench mark of Rs 700 billion tax revenue. The way things are this appears wishful thinking thus in the near future our federation-provinces taxing impediments will continue, country will remain dependent on the foreign donors 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 in Pakistan to reconsider equitable distribution of fiscal and taxing powers between federation and the provinces.
True provincial autonomy can only be guaranteed if a fair assignment of tax is followed in letter and spirit. By electing some people under the local body elections and asking them to dislodge the District Management, provincial autonomy cannot be achieved. Let the provinces have exclusive right over their resources and finances and transfer taxes to local governments so that grass root democracy and funds for public services can be guaranteed.
DISTRIBUTION OF TAXING POWERS BETWEEN CENTRE & PROVINCES:
Pakistan is a federal state, and power to impose taxes is shared between the centre and the provinces. The current constitution, adopted in 1973, assigns separate revenue jurisdictions to the federal and provincial governments for the purposes of imposition of taxes [Art. 70(4) read with Art. 142(c)].
THE FEDERAL GOVERNMENT HAS THE RIGHT TO LEVY A VARIETY OF TAXES, INCLUDING:
-- taxes on income other than agricultural income;
-- taxes on the capital value of assets excluding values of immovable property;
-- duties in respect of succession to property;
-- taxes on corporations.
-- (Entry Nos. 45-48 inclusive of The Federal Legislative List, Schedule IV to the Constitution.)
PROVINCIAL GOVERNMENTS MAY LEVY THE FOLLOWING:
-- a tax on agricultural income;
-- an urban immovable property tax;
-- a land revenue tax; and
-- certain taxes on professions, trades and vocations.
-- The provinces are also empowered to levy a capital gains tax on land and buildings; however, there are currently no such taxes in force.
A LIST OF EXISTING FEDERAL TAXES IS AS FOLLOWS:
-- income tax: income tax under Income Tax Ordinance, 2001;
-- Worker's Welfare Fund;
-- recurrent taxes on property or wealth: wealth tax (abolished since 1 July 2001), capital value tax (on purchase of specified assets);
-- registration and licence duties: stamp duties, registration duties and licence duties;
-- taxes on goods and services: sales tax, excise duties, customs duties, federal insurance fee.