All efforts in the name of tax reforms (so-called) undertaken in Pakistan till today have miserably failed. These were nothing but mere patchworks here and there. Restructuring and redesigning of tax system has not been given any serious thought by our policymakers. The Sisyphean task of improving and reforming incorrigible, outdated and outmoded tax machinery, mainly on donors' demand, is a futile and fruitless exercise. We need comprehensive structural reforms as suggested in earlier write-ups published in these columns. After suggesting simplification of tax codes, this week, we are concentrating on the need for a national tax agency that can ensure optimal collection of revenues at all levels - federal, provincial and local - with efficiency. It will also save multiplication of costs and ensure ease of doing business as presently taxpayers have to deal with various departments.
Federal Board of Revenue (FBR) needs restructuring as a short-term reform measure before it is merged in National Tax Authority (NTA). In the long-term, Pakistan must have single tax agency that may collect taxes and disburse benefits like universal pension and income support, etc. The database of NTA and its digitization will be a great step towards e-government model for the country that is presently non-existent. The model of Canadian Revenue Authority (CRA) is worth consideration and adopting after suiting our peculiar needs and requirements.
At present, both at federal and provincial levels, tax collection is highly unsatisfactory. All broad-based and buoyant sources of revenue are with the federal government and contribution of provinces in total tax revenues is only seven percent - in overall national revenue base (tax and non-tax revenue) it is around eight percent. This has made them totally dependent on the federal government for transfers from divisible pool or/and direct grants. The performance of provinces in collecting agricultural income tax is extremely pathetic. This is a common issue both at federal and provincial levels arising from sheer absence of the political will to collect income tax from the rich and mighty - meagre collection of agricultural income tax - less than Rs 2 billion by all provinces together in the fiscal year 2016-17-is dismal.
Pakistan will have to increase collection at all levels to improve tax-to-GDP ratio to a considerable level of 20-25%. This is not possible unless federal government, after consultation with provinces, introduces harmonised sales tax on goods and services and establishes NTA. All existing tax authorities at federal and provincial levels should merge in NTA. The NTA should be modern, automated and efficient, manned by competent personnel and run by an independent Board of Management comprising government officials and representation business and professions. The autonomous status of the NTA can be ensured like that of CRA (its Board of Management is directly accountable to Parliament through Canadian Minister of National Revenue).
NTA, unlike FBR, will not have any role in framing tax policy. For this, a permanent Tax Policy Board should be established in terms of Article 156(2) of the Constitution of Pakistan as economic and financial planning is no more a federal subject alone. The Policy Board should have a permanent secretariat and its role should be that of a think tank [it can be housed in Pakistan Institute of Developmental Economics (PIDE)] to recommend to the federal and provincial governments and assemblies the tax policies for growth and meeting the needs of the country.
There is a need to reconsider the role of the Planning Commission. The website of Planning Commission says:
"The Planning Commission (denoted as PC) is a financial and public policy development institution of the Government of Pakistan. The Commission comes under Ministry of Planning, Development and Reforms. The Planning Commission undertakes research studies and state policy development initiatives for the growth of national economy and the expansion of the public and state infrastructure of the country in tandem with the Ministry of Finance (MoF). Since 1952, the Commission have had a major influence and role in formulating the highly centralized and planned five-year plans for the national economy, for most of the 20th century in Pakistan. Although the five-year plans were replaced by Medium-Term Development Framework, the commission still played an influential and central role in the development of the programme. Furthermore, the Public Sector Development Programmes (PSDP) also placed under the domain of the Planning Commission. The Commission's authoritative figures include a Chairman who is the Prime Minister, assisted by the deputy chairman, and a science advisor."
It is strange that with the devolution of a large number of subjects to the provinces since the 18th Constitutional Amendment in 2010, Planning Commission is still working as an arm of federal government without taking into account the command of Article 162 of the Constitution which says:
"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".
The deletion of the subject of national planning from the exclusive domain of the Federal Government, and the placing of the National Economic Council (NEC) in the list of subjects mandated to be the joint responsibility of the Federal Government and the Provincial Governments remains unnoticed by our parliamentarians and independent experts. Strangely, the provinces have not raised this issue till today.
Centralised planning was an important factor in the dismemberment of the country in 1971. The planning, in the post-Eighteenth Amendment period should have to be federalised rather than centralised. But nobody has raised this issue. The Eighteenth Constitutional Amendment has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of the Chapter 3 of the Constitution entitled 'Special Provisions'. Before the Eighteenth Amendment, Article 156 related to the NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the Eighteenth Amendment. The pre-amendment clause (1) read as follows:
"The President shall constitute a National Economic Council consisting of the Prime Minister, who shall be its Chairman, and such other members as the President may determine:
Provided that the President shall nominate one member from each Province on the recommendation of the Government of that Province."
While the apex planning body, the NEC, has been federalised, Planning Commission continues to be centralised. The spirit of the Constitution can be satisfied by (1) making Planning Commission, in place of the Cabinet Division, the Secretariat of the NEC and (2) by reducing the number of its members to five, one each from the Provinces and the Federal Government. Prime Minister chairs the NEC and there is no need for him to Chair the Planning Commission. The Chairman should be appointed by the CCI to represent the Federation.
PIDE is now a university under the administrative control of the Planning and Development Division. With Planning Commission moving to the CCI/NEC, the Planning and Development Division can continue to deal with the development issues of the Federal Legislative List, Part I. PIDE can play the role of a think-tank for the Planning and Development Division. There is an urgent need for restructuring the planning mechanisms in the provinces. At present, only Punjab has a Planning and Development Board, with members in charge of the main sectors. Other provinces have their respective Planning and Development Departments. An important reason why the centralised role of planning and the Planning Commission continues is the weak capacity of the provincial planning mechanisms.
After the 18th Amendment, the Planning Commission could no more be a centralised body. Federal Legislative List, Part I, contains subjects that lie in the exclusive jurisdiction of the federal government. Before the 18th Amendment, its item 32 related to planning-"National planning and national economic coordination including planning and coordination of scientific and technological research." After the Amendment, the subject was included in the Federal Legislative List, Part II. The last-mentioned list of subjects is neither exclusively federal nor provincial; it is an area of joint responsibility. In the Constitution, a special institution, the Council of Common Interests (CCI), has been created to supervise the affairs of the Federation listed in Part II of the Federal Legislative List.
By abolishing the Concurrent List and deleting certain items from the Federal Legislative List Part-I, the 18th Amendment has substantially increased the quantum of provincial autonomy. Second, the role of provinces in decision-making of the federation has been substantially enhanced by the enlargement of the Federal Legislative List Part-II. Provinces now have more subjects to deal with than was the case before the 18th Amendment. In the first place, they have been given full and effective control of the social sector, especially education, health, population, labour, social welfare, Zakat, Auqaf, environment, tourism, print media and cinematograph films, culture and archaeology, etc. Other than standards of higher education, research and international student's exchange, the provinces are now entrusted with education policy formulation, planning, and curriculum standards.
The 18th Amendment gives provinces equal rights over their natural resources. Article 172(3) confers 50 percent ownership of hydrocarbon petroleum resources to the provinces. The subject was earlier held by the federal government. There still exist legal and administrative bottlenecks for implementing this provision.
Another landmark decision through the 18th Amendment is Article 167(4) providing that: "A Province may raise domestic or international loan, or give guarantees on the security of the Provincial Consolidated Fund within such limits and subject to such conditions as may be specified by the National Economic Council".
Article 167(4) thus ensures provinces to run and administer their own local government systems and enter into direct financial loan or credit arrangements with external and internal lenders.
In view of Article 167(4), the role of NEC has become very important though it has yet not been realised by the centre and provinces. In this perspective, we should also discuss the idea of NTA. FBR has been persistently failing to meet budgetary targets for the last many years what to speak of realising the real revenue potential. In fact, FBR has become a tool in the hands of businessmen-turned-politicians in getting enormous tax benefits through the infamous Statutory Regulatory Orders (SROs) system. FBR is dysfunctional to the extent that the system is not taxing the rich 15 million and income distribution disparities are rapidly widening. There is an urgent need to dismantle and reconstruct FBR.
Budget in Brief, the official document explaining highlights of budget 2016-17, while stating the obvious that "presently 7th National Finance Commission (NFC) Award is in practice", says "the 8th NFC Award was constituted on July 21, 2010, but it did not give any Award. The 9th NFC was constituted on April 24, 2015 and its 1st meeting was held on April 28, 2015. NFC, in its first meeting, constituted four working groups to undertake thematic studies and put forth their recommendations for consideration by the Commission." What happened since then is not made public. This is a sad reflection on meeting the constitutional obligations on the part of the federal government. However, nobody has taken note of it.
The Finance Minister, presently facing charges in the Accountability Court, 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 2017, he is following the Award of 2009 and that too without taking into account the fresh census. Yet, he claims "ours is the best government Pakistan has ever had!" The provinces also showed obedience to the federal government! Within the framework of the 7th NFC Award, their share in federal taxes and straight transfers during fiscal year 2016-17 was higher by 15% over revised estimates of fiscal year 2015-16.
It is clear from above that the federal and provincial governments are not concerned with the fundamental issue of judicious and evenhanded distribution of taxation rights among the Centre and federating units that can help empower 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 Article 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 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-USA, Canada and India-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 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%. 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 of 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, Pakistan International Freight Association & others v Province of Sindh & others [(2016) 114 Tax 413 9h.C. Kar.)], 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.
Below are some recommendations vis-à-vis implementation of Eighteenth Constitutional Amendment from a holistic point of view for better fiscal management and economic growth of Pakistan as well as making the federation a true representative of all and not just a few privileged ones as has been the case for the last 70 years of its existence.
-- First and foremost, there is a need to establish an independent, totally federalised CCI Secretariat that must have equal representation of centre and provinces and must include technical experts to build its capacity and ensure that the CCI mandate can be effectively supervised. On the issue of interpretation of Article 172(3) and its implementation, special attention should be given to allay the fears of the provinces.
-- Immediate problems such as inadequate infrastructure in the backward areas of all provinces and federally-controlled areas, lack of avenues for provincial revenue generation, low electricity generation capacity, and low quantum of representation of Balochistan in the federal services must be resolved in CCI on priority basis.
-- A comprehensive policy along with operational framework needs to be adopted to promote a culture of Inter-Provincial Coordination for developing and coordinating information and communication amongst Federal/Provincial organizations. Research analysis is required by respective sectors/departments to pre-empt the notion that provinces lack fiscal capacity or discipline to tackle social and economic issues. The provinces have to legislate and create the necessary infrastructure to fully utilize the potential of the devolution process for the benefit of provinces and their people.
-- Planning, in the post-18th Amendment period has to be federalised rather than centralised. The Amendment has redefined the NEC on the pattern of CCI.
-- The message of the 18th Constitutional Amendment is that the provinces should take charge of their own planning and development. This needs de-bureaucratization, appropriate investment in human capital and democratic devolution down to districts (Article 140A).
-- The provinces should have the exclusive right to levy indirect taxes on goods and services within their respective physical boundaries. Right to levy any tax on goods should be restored to the provinces as was the case at the time of independence. Right to levy tax on agricultural income tax should be given to federal government. Despite levying taxes that should have been with provinces, the federal government has miserably failed to reduce the burgeoning fiscal deficit that exceeded Rs 2 trillion in fiscal year 2016-17. Had provinces been allowed to generate their own resources, the present chaotic situation could have been averted. Centre and provinces should work together under NTA to improve efficiency in collecting taxes - see details of this in Towards Flat, Low-rate, Broad and Predictable Taxes, Islamabad: PRIME Institute (April (2016).
-- India has recently amended its Constitution and enforced unified Goods and Services Tax (GST) - popularised as 'one nation, one tax'. This law has harmonised the indirect tax regime. GST with broad tax base will result in better tax compliance. Pakistan needs to learn from this move and must also consider introducing harmonised GST as early as possible.
Pakistan needs a paradigm shift in tax policy and revamping of entire tax administration. Establishment of NTA, capable of generating sufficient resources for the federal and provincial governments must be the top priority. Through consensus and democratic process, all the parliaments can enact laws for establishing autonomous NTA, comprising specialists and professionals that would facilitate people to deal with single body rather than multiple agencies at national, provincial and local levels. The mode and working of NTA can be discussed and finalised under Council of Common Interest [Article 153] and its control can be placed under National Economic Council [Article 156].
Tax collection and compliance at national level cannot be improved without establishing NTA and introducing an integrated Tax Intelligence System that can correlate sales tax collections on goods and services with income tax returns and monitor all transactions. A fully automated, professional and efficient NTA would alone be in a position to improve capacity by detecting tax avoidance and evasion through Tax Intelligence System. Before establishing NTA, major information technology and human resource improvements in tax collection methods as well as effective audit techniques should be developed along with development-oriented tax policy. Tax reforms are meaningless without an effective tax administration and rational tax policy. As a medium-term reform measure we must concentrate on debating and finalising the structure of NTA for achieving the goal of a functional, efficient and integrated tax administration. The model of Canadian Revenue Agency (http://www.cra-arc.gc.ca/menu-eng.html) is worth-studying. Further details can be seen in Towards Flat, Low-rate, Broad and Predictable Taxes, available at http://primeinstitute.org/wp-content/uploads/2016/08/Towards-Flat-Low-rate-Broad-and-Predictable-Taxes.pdf
If we want optimum collection of taxes fairly and without hampering growth, it is imperative to abolish the present tax laws and enact new ones. Collection of taxes should be through a single national authority, NTA, as suggested above. NTA should be equipped with modern Tax Intelligence System sending quarterly information to potential taxpayers about their economic activities so that they can be informed in advance as to how their incomes and expenditure should finally look like in their tax declarations. For promoting tax culture it is necessary that there should be prudent spending of public money for welfare of masses through a transparent process.
(The writers, lawyers and partners in Huzaima, Ikram & Ijaz, are Adjunct Faculty at Lahore University of Management Sciences)
Copyright Business Recorder, 2017