Overcoming fiscal woes

Merging all tax collection agencies into single National Tax Authority (NTA) can effectively enforce tax laws at federal, provincial and local levels

Overcoming fiscal woes

Prime Minister Imran Khan, once an admirer of fiscal devolution under Constitution (Eighteenth Amendment) Act, 2010 [18th Amendment], has now criticised it by saying that it "has made the federation bankrupt". No doubt, the federation is facing serious fiscal challenges in the wake of 18th Amendment. The issues highlighted by experts include fragmentation of tax collection agencies and weak enforcement, lack of political will and ability to enforce devolved subjects/laws, issues of capacity, efficiency, rent-seeking and competitiveness, violation of the rule of law, non-acceptance of fair play in economic matters, coupled with ‘reckless’ borrowing and ‘ruthless’ spending amidst dismal tax-to-GDP ratio.

Addressing a rally at Khangarh in Ghotki on March 30, 2019, the premier said that "at the start of every fiscal year the centre has to face fiscal shortfall to the tune of Rs600 billion due to debt servicing, federal transfers to the provinces, and defence budget that leaves nothing for development." He added that "out of money collected by the centre every year in taxes, Rs2,500 billion are transferred directly to the provinces". What the prime minister did not mention was a need of structural reforms and concrete actions for tapping the real tax potential of the country, which is not less than Rs12 trillion at national and provincial levels [‘Towards Flat, Low-rate, Broad and Predictable Taxes’, PRIME, 2016].

Unfortunately, the present tax collection by federal and provincial governments is highly unsatisfactory. The real potential at federal level alone is not less than Rs8 trillion, whereas Federal Board of Revenue (FBR) is not collecting even half of it. The same is the position of provincial tax authorities that have failed to realise the tax potential of Rs4 trillion collectively. At present, all broad-based and buoyant sources of revenue are with the federal government while 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 and/or direct grants.

Pakistan needs to increase collection at all levels of governments to bridge the monstrous fiscal deficit that reached a level of 6.2% of GDP (Rs2.3 trillion) for the fiscal year 2017-18 and situation for the current year is equally appalling. The biggest challenge is that of overcoming fragmented tax system by merging all tax collection agencies into single National Tax Authority (NTA), which can effectively enforce tax laws at federal, provincial and local levels, besides providing a single window facility to taxpayers and disburse all payment under newly-formed initiative of Ehsaas. The NTA should be formed by consulting all the four provinces, AJK and Gilgit Baltistan. A consensus must be reached for establishing an All Pakistan Unified Tax Service (APUTS). This will not only help in efficient and enhanced tax collection at national level but also improve Pakistan’s ranking in World Bank’s Ease of Doing Business Index -- presently Pakistan is at 173 out of 190 countries.

One major hindrance in optimising revenue collection is the scattered and haphazard tax collection through multiple authorities at the federal and provincial levels. The trend was further strengthened in the wake of the 18th Amendment after which the provinces established their own tax collection agencies. Although the 18th Amendment was widely appreciated by the provinces, it created fissures in the revenue collection authority of FBR resulting in further decline in tax collection because tax on services fell in the provincial domain. On one side, the move was hailed by the provinces but, on the other, the taxpayers immediately started raising their eyebrows because they had to now face both federal and provincial tax authorities.

All trade and professional bodies have been expressing their concerns on the scattered tax collection in the aftermath of the 18th Amendment. They have rightly pointed out that the goal of optimising tax collection cannot be achieved unless all federal and provincial tax agencies are unified. It can be done within the existing constitutional framework. All the parliaments by just passing resolutions under Article 144 of the Constitution can assign tax collection to NTA. It would facilitate people to deal with a single revenue body rather than multiple agencies. 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].

Prime minister was not properly briefed that since 2010, the Centre is violating the command of Article 156(2) 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 remain unnoticed by our parliamentarians and independent experts. Strangely, the provinces have not raised this issue till today.

Planning after 18th Amendment should have been federalised, but it remained centralised. It is worth mentioning that the 18th Amendment has redefined NEC on the pattern of Council of Economic Interests (CCI). The NEC forms part of Chapter 3 of the Constitution entitled ‘Special Provisions’. Before the 18th Amendment, Article 156 related to NEC had two clauses. Clause (1) described the composition and clause (2) its functions. These clauses have undergone important changes after the 18th 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. The prime minister chairs the NEC and there is no need for him to chair the Planning Commission. The chairman should be appointed by CCI to represent the federation.

There is an urgent need for restructuring the planning mechanisms in the provinces. At present, the provincial planning and development boards/departments are not working in harmony with NEC. An important reason why the centralised role of 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 which 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, this 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.

The taxation rights under the prevalent constitutional scheme needs reconsideration allowing provinces to raise adequate resources that will also help in overcoming overall fiscal deficit faced by the Centre. For example, Balochistan should get "net proceeds" on natural gas and Khyber Pakhtunkhwa on electricity, as envisaged in Article 161(1)(a) & (b) of the Constitution. 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.

For fiscal stabilisation, it is imperative that the right to levy tax on income, including agricultural income, should be given to the Centre. In return, the Centre should hand over sales tax on goods to the provinces. This will help FBR to collect income tax as per actual potential and the provinces by levying sales tax on goods in addition to services will generate sufficient funds for their needs. Both the Centre and provinces should also levy assigned taxes/fees/cess/levies to meet the requirements of debt servicing according to respective share in borrowed funds and fund the social services at grass root level. It will reduce overall fiscal deficit of the country. This is the only way to achieve fiscal stabilisation in Pakistan without disturbing the 18th Amendment.

Overcoming fiscal woes