11 September 2004	Saturday	25 Rajab 1425

KARACHI, Sept 10: The Sindh government has suggested devolution of some taxes from the centre to enable provinces to generate a part of their revenue through their own efforts.

The suggestion has been made in a document prepared on fiscal policy and resource mobilization for five-year plan 2005-10. The document mentions that the tax base of the provinces continue to be narrow because of the highly centralized tax structure with almost all the buoyant taxes with the federal government.

Against a small low yielding taxation with the province, which contributes to 23 per cent of expenditure, their salaries and pension liabilities absorb over 50 per cent of the recurrent expenditures. If the debt servicing are included, the expenditures cross over 68 per cent leaving very little for maintenance and development expenses, the report states.

The document recalls that a decade ago provincial expenditure on development and other operations including maintenance used to be in excess of 30 per cent of total expenditures which has reduced to below 18 per cent.

It further recalls that a large part of the federal tax base of levies as income tax, sales tax, custom duties and excise duties are being collected from Sindh which is almost 65 per cent of the national income tax and sales tax, 80 per cent of custom duties and 36 per cent of federal excises.

Despite its contribution of over 68 per cent to the divisible pool the share in revenue transferred to Sindh is about 23 per cent, the document adds. Attributing to the limited fiscal base of provincial taxes to lack of provincial fiscal autonomy, the report states due to retention of highly buoyant sources of local revenue generation with the federal government it is not possible for the provinces to increase their revenue without reviewing the existing fiscal policy.

In view of the over-riding fiscal gap in the revenue generation, powers and expenditure responsibilities of the provincial government, it is no longer feasible to depend upon such magnitude of transfer system alone.

Therefore, the document states, it is proposed that the federal government should consider devolution of some taxes to the provincial governments by allowing provinces to generate a part of their revenue through own efforts which would facilitate in reducing the huge fiscal gap. This will also be in conformity to the economic principles of providing services to the tax payee according to the tax paid, it adds.

The paper suggests that the federal government may retain two-third of sales tax and allow provinces to levy remaining one- third of sales tax (non-adjustable). Alternatively, one-third of total sales tax may be distributed on the basis of origin.

It states that the general sales tax on services is exclusively a provincial domain and the revenues generated from the GST on services should in no way be pooled in the divisible pool.

It has also been suggested that the federal government should in principle vacate tax bases falling under the purview of the provincial governments as it is important for the financial autonomy and long-run sustainability of the provincial governments.

The federal government must vacate the preempted service base by withdrawing federal excises from services such as telecommunication, travel, electricity etc so that the provincial governments are able to levy sales tax on these services.