June 30, 2008	Monday	Jamadi-us-Sani 25, 1429

The provinces are cash-starved because they do not have the authority to levy any rich revenue-yielding tax and also because of the improper use of the resources with no accountability.

The combined provincial taxes yield only one per cent of the national income while the centre disproportionately collects tax revenue of 10-11 per cent of the GDP.

It would be advisable to distribute equitably the authority among the three tiers of the government to tax citizens within their jurisdiction and be responsible to the tax-payers on how the tax revenue is utilised. The right to tax should be determined by the needs of the district, provincial and federal governments and the responsibility entrusted to them. To begin with, the levy of sales tax should be equitably shared by the three tiers of the government.

The present system of centralising collection and distribution is not a very efficient way of doing things as indicated by a very low tax-to-GDP ratio. The tax payers can see palpable outcomes when their money is spent on development at the grass root or provincial levels. This would encourage people to pay taxes.

To make things somewhat manageable, the Planning Commission wants equal division of tax resources between the centre and the provinces under the NFC Award. It has also recommended doing away with the concurrent list which can end duplication of efforts in the field of education and health and could also economise on the expenditure.

In most democratic countries, sales tax is a provincial or state subject. In most of South East Asia, sales tax is between three and six per cent, while in Japan it is closer to three, in America, it is a state tax at eight per cent. But in Pakistan, taxation is almost the centre’s monopoly.

When Shaukat Aziz became finance minister, he said the centre should have three taxes: income tax, customs and sales tax only. When it was pointed out that sales tax was a provincial tax, he agreed to split it initially. But hardly any splitting took place, instead the sales tax shot up to 15 per cent, although the maximum of penal taxation was reduced from 22.5 to a standard 15 per cent. Now the sales tax has been increased by one per cent and 16 per cent is a very high rate of taxation when it covers food , children’s clothes and other items. Shaukat Aziz said that the Central Excise would be gradually abolished. This has not happened. Instead the sales tax is a growing tax and its revenues exceed those of income tax collection.

In their first informal meeting, the provincial finance ministers demanded that the sales tax on services be handed over to the provinces. The list of services on which the provinces can levy taxes needs to be enlarged gradually. The subjects in the concurrent list should be reduced so that the federal government’s spending can be cut and the funds so saved are given to the provinces.

More money has to be directed towards development and the local governments must have a say in the regional development. We ought to have a rational order and a rational approach to borrowing and utilisation.