The honourable Finance Minister has informed the nation that in budget 2016-17, "the shares of the provinces in the divisible pool have been worked out in accordance with the 7th NFC Award, 2009". In 2016, he is following the Award of 2009 and that too without fresh census required under the supreme law of the land! Yet, he claims "ours is the best government Pakistan ever has"! The provinces are, however, happy that in accordance with the framework of the 7th NFC Award, their share in federal taxes and straight transfers is estimated at Rs 2135.881 billion for fiscal year 2016-17, showing an increase of 15.3% over revised estimates of fiscal year 2015-16. They are also jubilant to know that the provincial share in federal revenue receipts, estimated at Rs 1849.4 billion in 2015-16, is increased to Rs 1851.9 billion in revised estimates of fiscal year 2015-16! Perhaps, they have not noticed decline in straight transfers to provinces, from estimated Rs 102,379 million in 2015-16 to Rs 100,361 million and further reduction to Rs 91,738 million in 2016-17!
It is clear that the federal and provincial governments are not concerned with the fundamental issue of judicious and even-handed distribution of taxation rights amongst Centre and federating units that can help empowerment of masses and ensure prosperity for all. In 2009, the representatives of provinces and federal government showed "satisfaction" over the 7th NFC Award. In fact, there was a mood of jubilation that a consensus had been reached. This confirmed the hollowness of our ruling classes as they failed to comprehend the real issue faced by the federation that was how to empower the provinces to have full autonomy in fiscal and administrative matters. The issue was not only devising a just and fair formula for distribution of the net proceeds of the taxes-commonly known as divisible pool-but the revisiting of Articles 142, 160 of the Constitution vis-à-vis bringing the less privileged and under developed areas at par with big sprawling cities where mass influx of people is playing havoc with law and order situation besides creating pressure on available civic amenities.
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 federation and provinces. The matter is, thus, not that of vertical or horizontal distributions of taxes and resources, for which four working groups have been constituted for the 9th NFC Award, but giving the provinces complete autonomy that includes exclusive right of levying taxes on goods along with services emanating in their respective areas.
The Centre, at present, is transgressing on this constitutional right of provinces by levying income tax on gross value of some services and then out of 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 the people of that province with further allocation from the divisible pool is the real issue that our parliament must address on an emergent basis if we want to satisfy the needs of less-privileged people living in remote and underdeveloped areas of all provinces.
Depriving provinces of the right to levy sales tax on goods is the fundamental flaw of our constitution. It was available to them before independence. The Constituent Assembly took away the right of levying sales tax on goods from provinces in 1948 with the promise to give it back as soon as financial position of Centre improved-a promise that remains unfulfilled with none of the provinces ever raising its voice to seek fulfilment. In all major federations, the federating units have the exclusive right to levy tax on goods and services transacted within their geographical boundaries. In Pakistan, as regards sales tax on goods it is with the Federal Board of Revenue (FBR) which is collecting far less than its actual potential-Need for new tax model, Business Recorder, April 29, 2016.
Balochistan should have exclusive right to levy sales tax on natural gas and Khyber Pakhtunkhwa on electricity, just to mention two for illustration. This levy can make them rich. 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 unjust distribution of taxes. It gets a lion's share of 53% (for 2016-17 over one trillion rupees are expected!). This perpetual imbalance has created disharmony and animosity between the Centre and the provinces.
The federal government has been brazenly 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 federal excise duty (FED) on a number of services. The Sindh Assembly in its unanimous resolution of February 3, 2009 took a strong exception to this malpractice and demanded the federal government to stop collecting sales tax/federal excise on services as this right exclusively vested with the provinces. The malpractice on the part of federal government continued till June 30, 2016 when after an authoritative judgement by Sindh High Court, it decided to withdraw FED on the same services that have already been taxed by provinces.
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 provinces been allowed to generate their own resources by levying sales tax on goods produced by them, the present chaotic situation on fiscal front could have been averted.
It is regrettable that the provinces have been denied even pre-partition available right of levying sales tax on goods. They have been purposefully made dependent on the federal government-this is a considered policy of control for maintaining hegemony over federating units. 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 8 trillion-see 'Towards Flat, Low-rate, Broad & Predictable Taxes', published by Prime Institute, a public policy think tank. This study is available on http://primeinstitute.org/.
The failure of 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: Centre is unwilling to grant the provinces their legitimate taxation rights. It collects too little to meet the national demands. Since the size of cake (divisible pool) is small, the provinces lack sufficient resources for the welfare of their people. In this scenario, the real sufferers are the masses. The taxation rights under the prevalent constitutional scheme need reconsideration to empower provinces to raise adequate resources which will also help in overcoming overall fiscal deficit faced by the country.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences (LUMS).)