THE Finance Minister has said that the second meeting of the highly sensitive National Finance Commission (NFC) was successful and a consensus had been reached on the issue of a new distribution formula. The federation was ready to sacrifice some of its share while the federating units had shown their willingness about what to include in the divisible pool and how the divisible pool was to be distributed.
The NFC award 1996 has extended the criteria for apportioning the provincial share among the various provinces beyond population. But it still had created bitterness and misunderstanding between the centre and the federating units. The NFC award 1996 was controversial because it had changed the basis of apportioning that divisible pool to the disadvantage of the provinces by enlarging the federal share from 20 percent under the 1990 award to 62.5 per cent in 1996 award and the provincial share was reduced from 80 per cent to 37.5 percent. Other sources of resentment of the provinces after 1996 award was the over-ambitious revenue projections. The extent of revenue shortfall is enormous this year. The revised estimate given in the budget 2001-02 fell short by Rs18 billion. It means provincial governments will receive far more less amount that had been promised in the budget 2001-02.
The differences among the partners in the national cake are of special significance. The trust which should have been a guiding force for distribution of resources is almost non-existent. Allegations of either gagging or ignoring the point of view of the federating units by the centre and imposing the award in the past has created bitterness and mistrust among the federating units. The proposed NFC award is likely to accommodate district governments whom the optimistic military government is considering as a catalyst to change everything under the heaven. The new NFC award is also likely to base on population as the primary apportioning criterion and excluding other relevant factors like population density, area, extent of poverty and socio-economic development and revenue generation capability.
The federal government has indulged in the practice of under-estimation of expenditure and over-estimation of revenues. The IMF categorically showed its dissatisfaction over the revenue target of Rs457 billion for 2001-02 and estimated achievement of Rs388 billion for 2000-01. The figures for the first two months (July-August 2001-02) of the current fiscal year also depict a decline of 2 per cent in tax collection over the collection made in the corresponding period of last year.
The dismal performance of the CBR is evident from the fact that only at the time of presentation of federal budget on June 18, it claimed to collect Rs406.7 billion tax revenue while by 30th June it emerges that its collection fell short of revised estimates of Rs406.7 billion by a fair margin of Rs13 billion. By the end of July it made public the figure of Rs388 billion which means another shortfall of Rs5 billion. In a fiscally highly centralized country like Pakistan, the shortfall in revenue has great implications on various counts. The ultimate losers are the provinces, which will now get their share from the divisible pool of Rs388 billion instead of Rs406.7 billion. The revision is huge one in short span of time and the impact on financial position of provinces would be drastic.
There is nothing wrong with the revision because it is normal but only abnormal thing is its huge size. The resource crunch would pinch provinces with more severity. This is the culmination of the poor mechanism of fiscal centralization. The much publicized tax survey has not delivered the desired results; instead it created an environment of harassment in business circles which did greater harm to the investment climate in the country. The attacks on America are likely to affect Pakistan economy in many ways and tax collection is one of the axioms.
The federal government has bestowed upon itself an obligation to collect federal revenues, which are to be divided among provinces under 1973 constitution in accordance with the NFC award along with financing of federal government expenditure. This has created an environment of dependency in which provincial government made virtually no effort to mobilize additional resources as the federal government takes care of their entire deficit. The provincial revenue generation efforts forms only fraction of overall tax collection. The provincial governments often resorted to over-draft and the federal government has to ask provinces to curtail expenditure within limits. Only Sindh government has been paid Rs50 billion plus less than the deserving allocations while for Punjab the figure is closure to Rs100 billion.
The strengthening of fiscal federalism made it obligatory for federal government to distribute the tax revenue in an amicable manner. The successive NFC awards strived hard to block emergence of any controversy among federating units over distribution of resources. However, the authoritarian way of imposing the award was itself controversy prone. The NFC award 1996 made federal government responsible to constitute a divisible pool consists of gross receipts of (a) taxes on income, (b) wealth tTax, (c) capital value tax, (d) Taxes on Sales and Purchase (e) export duties on cotton, (f) custom duties, (g) federal excise duties excluding excise duty on gas charged at well-head and (h) any other tax which may be levied by the federal government.
The shares as recommended by the NFC are distributed as follows. The federal government deducts 5 per cent of such receipts mentioned in (a) to (h) as collection charges, Of the balance, 62.5 per cent goes to the federal government and remaining 37.5 per cent are distributed among provinces according to their population, based on 1981 census which are Punjab (57.88 per cent), Sindh (23.28 per cent) NWFP (13.54 per cent) and Balochistan (5.3 per cent). The provincial share from the divisible pool for the year 1999-2000 has been estimated at Rs138 billion.
The total share is projected to rise by 13.6 percent over revised estimates of federal budget 1998-99. The shares of Punjab, Sindh, NWFP and Balochistan are projected to rise by 15.7%, 11.7%, 15.8% and 5.2% respectively.
The distribution of the revenue cake resulting from increase in tax revenue is not equal across the provinces because these are to be distributed according to the size of the population of the provinces and chunk of royalties on natural resources. Thus, Punjab is the main beneficiary followed by Sindh, NWFP and Balochistan [See Table-1 for details]. It may be noted that every province complain against the federal government for not releasing the budgeted amount during the fiscal year. It is pertinent to mention here that the estimated Rs.190 billion of provincial share is consistent with Rs457 billion of tax collection. If there is a shortfall (and most likely there will be) in tax collection, the provincial share will also decline, therefore, provinces complain against the federal is unjustified. The provinces were asked to keep their budget within Rs. 182.5 billion at the time of presentation of 2000-01 federal budget on basis of budgeted tax collection of Rs.435 billion but by the time of presentation of federal budget 2001-02, the provinces were asked to curtail their budget to Rs. 169.8 billion which was consistent with tax collection of Rs. 4067 billion. Now, by the end of the year it emerged that the actual tax collection is Rs. 388 billion, hence, provinces should reduce their expenditure by further at least Rs.6 billion.
The precarious budget position of the provinces is evident from the fact that they have hardly enough resources to finance unavoidable non-development expenditure and they are important to finance development needs of the provinces. The so-called devolution plan have exerted burden on provincial exchequers. The financial limitations of the district government are not yet clear but one thing is crystal clear and that is likely rift between districts and the concerned provincial governments. There are statements from mentors of district governments in the national press that the districts would be given some financial powers to levy certain taxes. The idea is right but the centre has not yet given powers to provincial governments to levy certain taxes than how it is possible to grant fiscal autonomy to district governments. It is early to say whether new NFC award will give enough funds to the district governments or they will suffer funds starvation like provincial governments. If past is any indication than the district government setup is likely to create more wastage of funds than provincial governments.
The centre has already discotined practice of octroi collection-the only source of revenue generation in the local councils. On the other hand roads in all the country are encroached with toll tax collection points which are unjustified. Only fraction of entire amount collected through octroi and toll tax is netted in the national exchequer while major portion of collections goes to bank accounts of contractors. New tax levies by the local councils would extra pressure on poor citizens while the government will get small fraction. This is in sheer contradiction with the federal government will get small fraction. This is in sheer contradiction with the federal government’s policy of reduction in number of taxes. This country needs judicious levy of taxes by all levels of governments including local councils, district councils, provinces and the center. The provincial governments also needs to break begging bowl and instead made serious tax collection efforts. All provincial government are accustomed to nourish un-necessary army of employees. Therefore, they also need rationalization of expenditure, especially, on salaries head. The element of waste in provincial governments expenditure is enormous and to be curtailed at once.
The cost structure attached to the revenue collection is also need to be reviewed. The cost of collecting provincial land revenue is probably one of the highest in the world. If new taxes are levied, the cost element should be the primary focus because new levies are likely to be more disastrous and benefits would be merger one.
