THERE is something fundamentally wrong with Pakistan’s constitutional structure of distribution of taxing powers between the federation and the federating units. The centre has always usurped the right of the provinces to levy tax on goods and services. Imposition of presumptive taxes under the Income Tax Law is the worst example of federal highhandedness, as in substance, these are taxes on goods and services, which fall in the domain of the provinces.
And the power to collect sales tax, a provincial subject at the time of independence, was transferred to the Centre temporarily in 1948 by the Constituent Assembly, but since, then remains with the federal government.
The provinces as well as the local governments are resource starved because that all buoyant and broad-based sources of revenues are assigned to the federal government. On the top of it, whatever residual taxation authority provinces enjoy, has been imperceptibly assumed by the federal government, either directly or by imposing federal taxes on provincial tax bases.
First, the federal government has directly assumed tax authority for ‘ushr’ on agricultural produce, excise duty on hotels and restaurants and capital value tax on imported motor vehicles and international air travel tickets.
Taxes imposed on provincial tax bases are sale tax on services such as electricity energy, telephone, fax, insurance, courier services, shipping and stevedore companies, travel agents, domestic travel by air and railways, inland cargo services.
With fiscal authority concentrated at the centre, the shares of the provinces in total tax revenues is less than five per cent and in overall national revenue bases (tax and non-tax revenue) just around eight per cent.
Provincial share in overall revenues was 5.8 in 1994-95 which marginally increased to 6.8 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, 21.5 and 26 per cent 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, 22.9 and 26.2 per cent in 1994-95, 1999-2000 and 2004-05 respectively.
The provinces, at the moment are contesting distribution of taxes from divisible pool under the National Financial Commission (NFC) on the basis of population, which is a way to deprive the less-populated provinces of their right to due share despite the established fact that they contribute nearly 70 per cent in taxes on income and goods. Assignment of taxes is a vital constitutional and political issue and it is high time that proper attention is given to solve the state’s taxing predicaments that are perpetual source of disharmony between the centre and the provinces.
Assignment of a tax means transfer of taxation power from a higher to a lower level government. Taxation power includes the following: right to levy tax, collect tax and appropriate the proceeds from such tax. Thus, there can be three interpretations of assignment of a tax. Firstly, higher-level government may levy and collect a tax but handover the entire proceeds to lower level governments. Secondly, the higher-level government may levy a tax but allow the lower level governments to collect it and retain fully the proceeds there from. Finally, the higher-level government may transfer a tax to lower level governments, a situation which defines assignment of a tax in its strictest sense.
In Pakistan, the opposite and worst has happened. Federal highhandedness in tax matters (by using both federal and concurrent lists) has destroyed the financial and economic rights of provinces. The provinces should have the exclusive right to levy taxes on goods and services within their respective physical boundaries.
Presumptive tax is for all practical purposes sales tax on goods and services and not income-tax. If the federal government can treat tax on goods and services as tax on income, then what will be sanctity of division of fiscal powers provided in the Constitution between the federation and the provinces.
Generally, the purpose of tax assignment is to augment the resources of lower level governments. Assignment of tax may be conditional. Thus, it may be obligatory on the part of a lower level government to levy tax assigned to it. Not only this, the lower level government may not have powers to alter the basic structure of the assigned tax. It may enjoy flexibility in fixing tax rates within a minimum and maximum range prescribed by the higher-level government.
The tragedy is that on the one hand we have too many taxes (federal, provincial and local) and on the other the benefit of revenue collection is not reaching the poor. The few rich are its real beneficiaries.
Distribution of taxing powers between centre and provinces: Pakistan is a federal state, and the power to impose taxes is shared between the centre and the provinces. The current constitution, adopted in 1973, assigns separate revenue jurisdictions to the federal and provincial governments for the purposes of imposition of taxes [Art. 70(4) read with Art. 142(c)].
The federal government has the right to levy a variety of taxes, including: taxes on income other than agricultural income; taxes on the capital value of assets excluding values of immovable property; duties in respect of succession to property; taxes on corporations. (Entry Nos. 45-48 inclusive of The Federal Legislative List, Schedule IV to the Constitution.)
Provincial governments may levy the following: a tax on agricultural income; an urban immovable property tax; a land revenue tax; and certain taxes on professions, trades and vocations.
The provinces are also empowered to levy a capital gains tax on land and buildings; however, there are currently no such taxes in force. A list of existing federal taxes is as follows: income tax: income tax under Income Tax Ordinance, 2001; Worker’s Welfare Fund; recurrent taxes on property or wealth: wealth tax (abolished since 1 July 2001), capital value tax (on purchase of specified assets); registration and licence duties: stamp duties, registration duties and licence duties; taxes on goods and services: sales tax, excise duties, customs duties, federal insurance fee.
The Central Board of Revenue (CBR) has emerged as neo- East India Company. It is simply impossible to improve tax administration when tax officers serving in provinces are not accountable to provincial governments and instead behave as “rulers” imposed by Islamabad. The generally accepted principles of taxation are efficiency (explained by reduction in distortions in the allocation of resources), equity (requiring the more able to bear burden of paying tax at higher rates) and effectiveness of the administrative machinery. The CBR performance leaves much to be desired.
Our tax potential is not less than Rs800-950 billion provided the tax base is made wider and equitable, tax machinery is completely overhauled and exemptions and concessions available to the privileged are withdrawn.
Mr Shaukat Aziz on becoming the fnance minister claimed that the Centre would retain only three taxes - income tax, customs duty, and sales tax. But he never mentioned that in most parts of the world sales tax is a provincial levy with a rate ranging between 3-8 per cent. In Pakistan it is a federal tax (a worst example of federal highhandedness), which is shared, to a negligent extent, with the provinces.
The provinces also promised to curtail total number of taxes from about 25 to 5. As the centre failed to collect even Rs800 billion as tax revenue and could only distribute Rs192 billion to all the provinces in the fiscal year 2003-2004, the provinces could not consequently reduce the total number of their taxes.
Now the local bodies are demanding more taxes to function effectively, so the chances of reducing the tax burden from the masses is fast diminishing. We are caught in a dilemma where the centre is unwilling to grant the provinces their legitimate right under NFC and in turn the provinces are unable to reduce the ever-increasing burden of taxes. The real sufferers in this centre-province conflict of interest are the voiceless masses.
The centre might have given away some of the federal taxes to the provinces, most likely sales tax as is the case in India, if the federal revenues had increased substantially. CBR’s track record shows little possibility of achieving Rs800 to 950 billion mark in the coming three years, which is necessary to give a fiscal space both to the Centre and the provinces to come out of the present fiscal deficit crisis and extend some relief to trade and industry for growth.
Unless some revolutionary steps are invoked and a new constitutional taxing contract is negotiated between the centre and the provinces, there is little hope for mobilizing required tax revenue.
