Despite all the feel-good impression of better tax collections given from time to time, Finance Minister Abdul Hafiz Shaikh has confessed before the parliament that the objective of the 7th National Finance Commission Award — 15 per cent tax-to-GDP ratio by 2014-15 — would remain a pipe dream.
“The tax collection, both at federal and provincial levels, is not encouraging and if this state of affairs continues it may not be possible to achieve 15 per cent tax-to-GDP ratio by the terminal year i.e. 2014-15,” according to a belated report on biannual (July-December 2010) monitoring of the implementation of NFC award submitted early this month to the Senate Chairman, and the National Assembly Speaker.
Under Article 9 of the award, the federal and provincial governments were required to gradually increase tax-to-GDP ratio by plugging leakages, streamlining taxation system and effectively taxing agriculture and real estate sectors by the provinces.
This did not happen.
The centre could not introduce RGST.
The minister also conceded that the recommended quarterly review meetings of NFC to implement its decisions in letter and spirit also could not be held.
He said the 8th NFCwas constituted in July 2010, pending notification of non-statutory members.
“These members could not be notified yet for want of certain clarifications from the provinces. Due to incomplete composition of NFC, the quarterly meeting of NFC could not be convened so far,” the report said.
Interestingly, the notification of non-statutory NFC members was notified in August but its maiden meeting has not yet been convened. More importantly, the second biannual (January-June 2011) report on implementation of NFC has become due but has not been finalised as yet.
Under Article 160 (3-B) of the constitution, “the federal and provincial finance ministers” are required to “ monitor the implementation of the award bi-annually and lay their report before both Houses of the Majli-e-Shoora (Parliament) and the Provincial Assemblies”.
The Biannual Monitoring Report based on first half (July-December 2010) of the last financial year suggests that revenue collection had remained short of budgeted target, resulting in higher fiscal deficits as the federating units expanded their expenditure profiles, albeit with major cuts in development expenditure, in anticipation of higher revenues.
Against annual revenue target of Rs1667 billion, the Federal Board of Revenue (FBR) was able to collect only Rs621 billion in first half of the last year, which after setting aside some non-divisible items and one per cent tax collection charges, reduced the net divisible pool size to Rs588.7 billion. This was further scaled down to Rs582.8 billion after providing one per cent to KPK for war on terror compensation. The provincial share at 56 per cent came to Rs326.4 billion.
That resulted in 22 per cent lower transfers in first half of the fiscal year out of the federal divisible pool to the provincial governments under the NFC award. The award envisaged 56 per cent share of the divisible pool to the provinces and 44 per cent to the centre, reduced collection charges from five per cent to one per cent, allocated one per cent of total divisible pool to Khyber Pakhtunkhwa. It also allocated 51.74 per cent share to Punjab, 24.55 per cent to Sindh, 14.62 per cent to KP and 9.09 per cent to Balochistan.
Punjab got net transfers of Rs169 billion, Sindh Rs80 billion, KP Rs53.6 including Rs5.9 billion of war on terror expenses; Rs41.50 billion went to Balochistan including Rs11.83 billion of additional compensation against lower gas development surcharge payments in previous years.
The Rs11.83 billion was paid to Balochistan by the federal government in addition to divisible pool share to match the guaranteed figure of Rs83 billion. As such, the federal share in divisible pool dropped down to Rs245 billion against its due share of Rs256.4 billion.
Under Article 5 of the award, the provinces are entitled to a net amount of royalty on crude oil, according to production in each year. Under this head, the provinces got a total of Rs8 billion in first half of the year, including Rs2.2 billion to Punjab, Rs2.9 billion to Sindh, Rs3.1 billion to KP and Rs2 million to Balochistan.
Under Article 6 of the award, provinces are entitled to a share in net proceeds of the gas development surcharge worked out on the basis of average rate per million British Thermal Unit ( MMBTU). This clause also requires that GDS for Balochistan shall be worked out on hypothetically estimated average price since July 2002, an average of Rs10 billion for five years.
The Rs38.4 billion GDS collected in first six months showed that Sindh is becoming the biggest beneficiary of the higher gas production. Of the total, the largest province by population – Punjab – got Rs1.85 billion while Sindh received Rs26.3 billion.
KPK and Balochistan got Rs3.6 billion and Rs6.6 billion, respectively.
Article 6 of the award also required payment of Rs2 billion as arrears to Balochistan on account of GDS of which Rs1 billion have been paid to the largest province by area. Balochistan was paid another Rs5 billion under Aghaz-e-Haqooq-Balochistan Package.
Sindh government is entitled by Article 7 of the award to receive equivalent to 0.66 per cent of the provincial share against Octroi and Zilla Tax (OZT). The federal government has paid Rs2.2 billion to Sindh under this head.
The report said, the Article 8 of the award, NFC accepted that sales tax on services is a provincial subject under the constitution and may be collected by the respective provinces if they so desire. “As the issue is linked with RGST, status quo for its collection has been maintained for the time being by taking the provinces on board”, the NFC report said adding the entire proceeds are however transferred to provinces provisionally on the basis of a formula agreed to by the provincial finance secretaries.
Under this formula, 60.39 per cent share of the provincial GST was paid to Punjab, 50 per cent to Sindh, 15.62 per cent to KPK and 10 per cent to Balochistan, making a total of 136 per cent. The 36 per cent of the additional amount is borne by the federal government on a directive of the President.
The report said that while the federal government froze non-salary current expenditure at last year level, required by law a cabinet approval for more than 10 per cent supplementary grants and reduced PSDP spendings, it failed to restructure Public Sector Enterprises. Punjab also reduced its development plan from Rs193.5 billion to Rs128 billion and imposed 10 per cent economy cut on non-salary expenditure.
Sindh imposed ban on purchase of luxury vehicles and blocked lump sum provisions, the KPK has undertaken to present NIL fiscal deficit in future years while Balochistan was considering imposing infrastructure cess in the province.
Dear visitor, the comments section is undergoing an overhaul and will return soon.