May 15, 2006	Monday	Rabi-us-Sani 16, 1427

PRIME minister Shaukat Aziz wants the local governments to collect their own tax revenue and be fiscally self-sufficient instead of depending on the provinces.

In fact, he wants all the three tiers of government to be fiscally self -sufficient and depend on their own tax revenues.

Addressing the officials of the Karachi District Government recently he said until recently there were 102 federal, provincial and local taxes and he had promised a substantial reduction in their numbers, beginning with the wealth tax, which has gone off. The KDG officials has sought more financial assistance from him.

The local government has few tax heads of its own. Principal among them was the octroi. The octroi could be high or low in practice, according to the whims of the local officials.

There was a great deal of corruption and the people were complaining they were paying too much, while the local government was getting far less. All that was hurting the exports.

Hence following the demand of trade and industry, octroi was abolished at the time Nawaz Sharif was prime minister and the provinces were directed to finance the local governments.

The provincial governments promised to compensate the loss of the local governments with the financial help from the centre and now the prime minister is advising the local governments to have their own tax resources.

Desperately looking for new avenues, the district government in Karachi recently came up with a parking fee of Rs5-10, depending on the location. As more and more areas came under the parking fee regime, there was a hue and cry from the public as persons who had to visit many places in a day had to pay too much.

There was extensive corruption as well in the awarding the contracts and distribution of the money collected. So that was ended in less lucrative areas and focus shifted to more affluent areas like Chundrigar Road and central Clifton. There is also a parking fee where there is a military cantonment

The overall income from the parking fees is now small compared to the earlier expectations. Less corruption here could mean larger revenues.

One area, which provides a large source of income for the city government, is a high fee for hoardings for advertisements. A few years ago an expert committee set up by the local government had recommended that the size of the hoardings be restricted to four by three feet, but that advice was not heeded because of the influence of the advertisers and the large income for the government from the gigantic hoardings. So far larger hoardings appear on Sharae- Faisal and many other city centres.

But now governor Ishrat ul Ibad has directed that there should be no hoardings on Sharae-Faisal by June 30. That is the right decision, but what about other places like Saddar, Chundrigar Road and Clifton which have a jungle of hoardings.

The major anomaly in the federal taxation policy is in respect of sales tax, in the name of general sales tax. In Pakistan, it is a federal tax, while it is a provincial tax everywhere else including the US where it is a state tax levied at around eight per cent. In East Asia, the rate is around six 6 per cent or less.

The centre does give a share of the GST to the provinces, but that is not the same as the right to collect the sales tax.

Then there is the foreign aid on which the centre can depend while the provinces and local government cannot. But in recent years, the imprudent use of the aid, the donors like the World Bank have begun negotiating directly with the provincial governments, including that of the NWFP, despite their ideological differences. The loans are guaranteed by the federal government.

When it comes to foreign aid, the provincial governments are sore, that the centre borrows money from donors at very low rates of interest, up to 3.4 per cent and lends the same to the provinces at 10 to 18 per cent spread over a long time. And that makes the provincial indebtedness mount and strains their financial resources.

And now when about $2 billion worth of aid has been written off by the donors, will the centre do the same in respect of the loans it has given to the provinces or city governments?

Now with the tax revenue increasing on higher economic growth, this is the time to reduce the number of taxes and earmark the taxes to be collected by the centre, provinces and local governments instead of the centre doing all that on behalf off the provinces and city governments and giving a share to it. That may need a new taxation commission instead of loading the National Finance Commission with it and adding to the stalemate it faces.

If now the prime minister acts and reduces the number of taxes as he had promised when he became prime minister, he should be able to collect more revenues out of the remaining taxes. That can reduce the cost of tax collection and increase the tax revenues per head.

The centre should be fair to the provinces and the local government instead of giving more administrative responsibilities to it without handing over the requisite fiscal resources.

This is all the more essential when the centre does not want to give any share of the Public Sector Development Programme (PSDP) to the provinces as they will be getting Rs52 billion more out of the NFC award than last year.

The PSDP may now rise to Rs340-345 billion from the current year’s Rs272 billion and yet the centre wants to reduce the additional amount, which the provinces can get from the PSDP.

However, the PSDP for next year includes the provincial share of Rs85 billion along with the centre‘s share of Rs235 billion.

If the provinces are to look after education and health exclusively, they would need far more funds, particularly when four per cent of the GDP is to be spent on education from next year from over two per cent. Governor Ishrat ul Ibad has said Sindh would implement all the reforms of the Higher Education Commission and that would mean spending a great deal more money on higher education than done now.

The picture is altogether confusing and we have to see who gets what out from the larger resources and how they make a success of the new distribution of resources between the centre and the provinces and between the provinces and the local governments. The distributive pattern ought to be clarified soon instead of an excess of speculation continuing in this area.