Economic reforms

November 20,2018

Part - XXXVBy Waqar Masood KhanAfter the Raisman Award 1951, the next important development was the constitution of 1956. In many ways, for fiscal federalism, the 1956 constitution was a significant...

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Part - XXXV

By Waqar Masood Khan

After the Raisman Award 1951, the next important development was the constitution of 1956. In many ways, for fiscal federalism, the 1956 constitution was a significant advance. It filled the gap in the Government of India Act 1935 of not providing, within the constitution, a mechanism for the distribution of revenue between and among the centre and the provinces.

In the 1949 constitution of India, the concept of National Finance Commission (NFC) was already introduced, which was charged with the responsibility for making recommendations in respect of revenue distribution within the taxation framework elaborated in the constitution, which was effectively along the lines as was provided in the 1935 Act.

The interim constitution of Pakistan had also adopted the same classification. As we have seen, this was a highly restricted list of taxes to be shared vertically. Hence, the divisible pool, comprising vertically shared taxes, was limited.

In a major departure, the 1956 constitution jettisoned the old scheme and formulated its own classification, even improving on the Indian constitution. Although it reserved the right for the centre to include selected taxes in the divisible pool, it made an advance by simply saying all “taxes raised under the authority of parliament”. The uncertainty regarding if and when the central government would make a law that would provide for prospective taxes to be shared, inherent in 1935 act, was thus removed.

Article 118 of the new constitution provided for the establishment of NFC, every five years, to be headed by the federal finance minister and comprising finance ministers of provincial governments and technical members to be appointed in consultation with governors. The functions of NFC were to recommend: (a) the distribution between the federation and the provinces of the net proceeds of the taxes (mentioned below); (b) the making of grants-in-aid by the federal government to the governments of the provinces; (c) the exercise by the federal and provincial governments of the borrowing powers conferred by the constitution; and (d) any other matter relating to finance referred to the commission by the president.

The divisible pool for vertical distribution was as follows: (a) export duty on jute and cotton, and any other specified export duty; (b) taxes on income other than corporation tax; (c) specified duties of federal excise; (d) taxes on sales and purchases; and (e) any other specified tax.

In the first instance, it would appear that this was similar to the listing as contained in the 1935 act. However, the new mechanism of fiscal federalism was now more simplified and compactly formulated as opposed to running through many articles and sub-articles.

Furthermore, there was no room left for overstepping constitutional provisions as was done under the interim constitution, using extraordinary powers of the governor-general, which even suspended the division of income tax during the formative years of Pakistan. It was also incumbent on the president to approve and pass an order for implementation of the award once the recommendations to this effect have been received by the commission.

Undoubtedly, there was still considerable discretion available to the federal government in deciding which of the taxes, besides those provided for sharing under the 1935 act, be included in the divisible pool. But at the same time, the door was left ajar for the provinces to negotiate with the federal government to include more taxes in the divisible pool, as would eventually happen in the course of time.

Two significant taxes require a special mention. First, the export duties on cotton were not included in the 1935 act, and even the duties on jute exports were left for the centre to decide what share would be given to the province making the export. The Raisman Award had set the provincial share at 62.5 percent for this purpose. Now, it was left to the NFC to recommend the sharing of export duties on both cotton and jute.

Second, the sales tax was a provincial subject but was given to the centre in exceptional circumstances. The Raisman Award made it permanent. The new constitution provided an opportunity to rethink this subject. However, it was retained at the centre, but included manifestly within the divisible pool taxes.

It may also be noted that the 1956 constitution was based on the principle of parity between the eastern and western wings of the country. Therefore, instead of six provinces and units previously in existence (Bengal, Punjab, Bahawalpur, NWFP, Sindh and the remainder) there were now only two units. In some ways, this was a simpler arrangement for division, but would have created a great deal problems within the units, particularly in the West where the previously well-established provincial governments were abolished.

Regrettably, the 1956 constitution had a very short life. It was abrogated in 1958 after the imposition of martial law in the country. The NFC under the constitution could not be constituted as envisaged. Hence, the Raisman Award continued to occupy the field in the matter of revenue distribution. However, it left behind a new formulation of the division that would help later generations to reach a more equitable arrangement.

Let’s also note some important issues that remained unresolved as a consequence. The horizontal distribution among provinces, in the Niemeyer Award under the 1935 act, was primarily based on population, even though he claimed to have also taken into consideration relative collections. The Raisman Award was ostensibly more concerned with collections, at least between the eastern and western wings.

The population of Pakistan in 1948 was estimated at 75.7 million people, with Bengal having 42 million and western Pakistan having 33.7 million. This gave Bengal a population share of 55 percent. And yet, only 45 percent of the divisible pool was assigned to Bengal.

The new constitution would have improved this ratio, but an NFC could not be constituted. This becomes more worrying when one realises that only 12.8 percent of federally-collected taxes were transferred through the divisible pool to provinces. It is, therefore, not surprising that inter-provincial disaffection was fuelled by the inequitable sharing of national resources both between and across the centre and the provinces.

To be continued

The writer is a former finance secretary.



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