22 February 2005	Tuesday	12 Muharram 1426

The provinces as well as the local governments are starved of resources. Their starvation emanates from the fact that all buoyant and broad-based sources of revenues are assigned to the federal government.

At the same time, whatever residual taxation authority provinces enjoy under the Constitution has been slowly and imperceptibly assumed by the federal government either directly or by imposing federal taxes on provincial tax bases.

In the former category where the federal government has directly assumed tax authority are 'ushr' on agricultural produce, excise duty on hotels and restaurants and capital value tax on imported motor vehicles and international air travel tickets.

In the latter category, where the federal government has started imposing taxes on provincial tax bases are sale tax on services such as electricity energy, telephone, fax, insurance, courier services, shipping and stevedore companies, travel agents, travel agents, domestic travel by air and railways, inland cargo services.

The net result of this concentration of fiscal authority with the government is that contribution of provinces in total revenues realized from taxation is less than five per cent and in overall national revenue bases (tax and non-tax revenue) just around eight percent. This vertical fiscal imbalance is well reflected in the table below:-

The above tables indicate that provincial expenditures are mainly financed from resource transfers from federal government on account of a low share in overall revenue base.

Provincial share in overall revenues was 5.8 percent in 1994-95 which marginally increased to 6.8 per cent in 1999-2000 and to 8.2 per cent in 2004-05 budgetary estimates. The marginal increase in revenues over the period is mainly due to an increase in the provincial share in non-tax revenues.

This compared with share of provinces in expenditures at 22.1 per cent, 21.5 per cent and 26 percent in 1994-95, 1999-2000 and 2004-05 respectively. On account of this fiscal imbalance the provinces had the capacity of financing their expenditures from their own resources to the extent of 19.6, percent 22.9 and 26.2 per cent in 1994-95, 1999-2000 and 2004-05 respectively.

The vertical fiscal imbalance is met by the provinces from transfers from federal divisible pool of federal taxes, straight transfers such as royalty on crude oil and natural gas, excise duty on natural gas, gas development surcharge and general sales tax imposed and realized on services and non- obligatory grants and subventions.

All these transfers from federal government to provinces are determined by the 'Award' made by the National Finance Commission at an interval of five years, as stipulated under Article 160 of the constitution.

The last Award was made in 1996 for five years beginning 97-98 and ending in 2001-02. The constitution of the first NFC was notified in July 2000 which could not make any Award for the next five years. Accordingly, the second NFC beginning from 2002-03 was constituted in 2003. Even the second NFC has so far failed to make any Award.

The centralization of fiscal authority and dependency of the provinces on federal government is further compounded by the parameters of the fiscal reform programme, initiated some five years ago.

The objectives of the fiscal reform programme are aimed at reducing tax rates, broadening the tax base to hitherto untaxed and under-taxed sectors, shifting the incidence of taxes from imports and investment to consumption and incomes.

With a view to achieving the objectives, a number of fiscal measures have been taken. In conformity with the objective of taxing incomes and consumption, the rates of income tax were reduced; tax surveys and documentation was initiated to being new income tax payers into tax net and thus, broadens the tax base and wealth tax was abolished.

Excise duties were systematically brought into sale tax regime; coverage of items under general sales tax was expanded and number of taxes at the federal and provincial levels were reduced. How far these measures have achieved the objective of taxing 'income' and containing 'consumption' is outside the scope of this article.

However, for the purpose of my topic one impact is loud and clear. The tax bases available to the provinces have been reduced under the policy of "putting an end to multiplicity of taxes".

This includes narrowing the provincial base of excise duties by merging them into sales tax regime, thereby depriving the provinces to set rates and administer the duties on a number of items. Again, under the policy reform programme, the provinces were made to abolish capital gains tax which was a buoyant source of revenues for them.

Another contributory factor limiting the necessary flexibility of the provinces in using their fiscal powers is the posting of finance secretaries in the provinces belonging to federal cadre.

Their careers being at stake with the federal government, the finance secretaries posted in the provinces articulate and promote the federal policy rather than coming up forcefully with the provincial views on fiscal issues for shaping the fiscal policy, suited to the provincial needs.

Whatever little fiscal autonomy was available with the provinces under the Constitution has been eroded by direct and indirect assumption of fiscal authority on provincial tax bases and an administrative set-up which promotes federal control over fiscal matters. The issue is whether we are promoting the centralization of fiscal power and authority or decentralization and devolution which we preach and profess.